The quick trigger of the financial crisis of 2008 was the bursting of the United States housing bubble, which crested in between 2004 (Krugman 43). High default rates on "subprime" and flexible rate mortgages (ARM), started to rise rapidly from that point. An expansion in loan motivations, for example, simple starting terms and a long haul pattern of rising lodging costs had urged borrowers to expect troublesome home loans in the conviction they would have the capacity to rapidly refinance at better terms (Brink, Lowe and Victoravich 101). Once financing costs started to rise and housing costs began to drop respectably in 2006–2007 in numerous areas of the U.S., refinancing turned out to be more troublesome. Defaults and dispossession activities rose drastically as simple beginning terms terminated, home costs neglected to go up as expected, and ARM loan fees reset higher (Sorkin 56). By the time the government decided to take decisive actions to counter the crisis, damage was already done. The government embarked on a healing process to prevent the economy from going further downhill and also ensuring that the economic situation in the United States was regaining its glory.
Short-term response
The first thing that the government of the United States did is to increase money in the economy to avoid the risk of deflationary spiral. When the wages offered in the economy are low and the levels of unemployment are growing, there is expected reduction in the spending power of the households in the economy (Evanoff and Moeller 78). Decrease in the spending power eventually causes the levels of consumption in the market to decrease and hence slowing trade and performance of the economy. To avoid this, the federal government of the United States through the Federal Reserve pumped more money into the economy to stimulate business and growth of the economy, hence preventing the occurrence of a deflationary spiral.
Credit freezing as a resultant of the crisis threatened to down not only the American economy but also the global economy (Keaney 68). As a measure to try and heal the economy, the Federal Reserve started to purchase government debt from banks and also to bail out troubled public institutions from financial institutions. This measure helped in injecting approximately one trillion into the economy, the figure representing the all-time highest injection into the credit market. The government of the United States acted to assure foreign lenders of the security of their money by acting as guarantor of the national bank. The government purchase close one trillion worth of newly issued preferred stock in the national bank.
Joseph Stiglitz alluded that the government was also using money minting as another way of avoiding the liquidity trap that was likely to come in the wake of the financial crisis. The government of the United States created $600 billion dollars and pushed the money directly into the financial institutions such as banks (Keaney 68). To help the spending power of the households in the economy, the government intended to allow banks more money to loan to individuals. This step was also meant to allow more people to refinance mortgages and hence reducing the numbers of bad-debts in the country. However, this attempt to increase the cash flow in the economy of the United States as many banks, driven by the urge to make more profits decided to invest much of the money in the more profitable international markets.
Another of the responses of the government and probably the most controversial one is the bailing out of firms that were deep in debts (Sorkin 46). The controversy surrounding the bailouts lies in the procedures employed in selecting which institutions were bailed out and which were left run into bankruptcy. The controversy led to development of a decision-making structures which would prove essential in helping balance contradictory interests in the event of another financial crisis.
Long term policies and procedures of curbing the effects of the crisis
The Dodd-Frank Wall Street Reform and Consumer Protection Act
This Act was signed into federal law by Pres. Obama in 2010 as one of the long-term responses to the financial crisis of 2008. The Act was formulated to help revolutionize the financial administration in the United States of America and has been hailed by pundits to be the second most radical act in the history of the United States financial system since the reforms that were implemented in the aftermath of the great depression (Evanoff and Moeller 79). The Dodd-Frank Act touches almost all the aspects of public finances in the United States and the financial markets of the country.
The oasis of the Dodd-Frank Act is the recommendation by President Obama in 2009 that there was urgent need for an overhaul of the US fiscal monitoring system, to give a new breath of life in the economic functioning of the country (Kaal). The original bill that was brought by the president to the floor of the Congress contains the following major parts: 1. the amalgamation of regulatory organizations, abolition of the national thrift center, and the formation of a new oversight council to assess systemic risk; 2. Inclusive directive of fiscal markets, comprising of augmented transparency of derivatives; 3. Customer protection restructurings; 4. Tools for fiscal crises; 5. Different procedures focused on raising global standards and cooperation in case of financial crises (Brink, Lowe and Victoravich 90).
Another part of the Dodd-Frank Act was the execution of roughly 250 new fiscal regulations. Also, the Act provided that research be conducted to break down the reason for the Great Recession. Laws ought to be more ground breaking, instead of only just rectifying the errors of the past (Keaney 67). An illustration of this was the 1980s reserve funds and advance emergency, which was a side effect of faulty home loan loaning practices. Mortgage banks made a marketable strategy for private home loans that depended on rising financing costs. Contrastingly to the Great Recession, each of these crises was created by flawed loaning practices, most eminently identifying with home loans (Mertzanis 290). The new laws enacted under the Dodd-Frank Act seek to avert the occurrence of another crisis by sealing the glaring loopholes.
The reason for the enactment of this law is to advance the monetary steadiness of the United States by enhancing responsibility and straightforwardness in the money related framework, to end the "too big to fail," to assure the American citizen by completing bailouts, to shield customers from harsh fiscal services practice, and for different roles (Sorkin 45). While the law authoritatively made it less demanding for whistle-blowers to inform government agencies to fraud, the law itself can be seen as retrogressive, instead of dynamic.
Extortion can cost a general organization five percent of their yearly incomes, which makes the recognition of such misrepresentation a need for all partners. Preceding the Dodd-Frank Act, workers could just report occasions of extortion to members within the organization, which set off an association to explore the tip. This could bring about an irreconcilable situation between members of the staff (Zywicki). Favorable position of the Dodd-Frank Act was the Whistleblower Rule, which intended to enhance this practice by offering an extra boulevard for individuals to report suspected misrepresentation. In that capacity, the Securities and Exchange Commission (SEC) made another office, the Office of the Whistleblower, which is in charge of overseeing and regulating the informant program. Alongside the making of the new office, the act founded a prize framework for people that give data on suspected misrepresentation. The prize, as the law gives informants somewhere between 10% and 30% of any sums got in an effective regulatory with assets of $1 million or more brought as an aftereffect of the tip. Informants can at present formally document a grievance inside at their association the demonstration gives an additional choice (Evanoff and Moeller 76).
Studies and past experiences indicate that when people are compensated for offering to give information about a subject, they are more tempted to do so as they aim at the reward. The False Claims Act is a rule designed to make people and organizations obligated for swindling the legislature. False Claims Act was revised in 1986 to give a monetary prize to informants who reports activities that defraud the government. Before 1986, there was approximately six reported cases of fraud in the entire USA per year. After the law was revised to allow for rewarding of whistleblowers, the average of fraud reporting incidences in the country has risen to an average of 166 per annum.
Growing real-estate costs have brought on numerous people to accept a home loan note with banks so as to acquire the cash to purchase a home. Before 2008, numerous banks and other home loan loaning foundations would offer and repackage contracts that people could not stand to pay. Subsequently, banks and foundations would earn expansive benefits. To place this in context, in 1975, people held a home loan equivalent to $0.55 for each one dollar of their pay, a number that rose to $1.23 by 2008 (Brink, Lowe and Victoravich 100). This implied people were acquiring more cash to pay for a home loan than they were earning. Resultant from the high borrowing, the business sector began to notice that these home loans were not fluid, which brought about the economy to plunge. To prevent such an occurrence in the future, the Dodd-Frank Act requires loaning organizations to ensure that shoppers can sensibly pay for their home loans before giving the credit.
The Volcker Rule
The Volcker Rule is a part of the Dodd-Frank Act that was previously excluded from Obama's introductory June 2009 proposition, but rather Obama proposed the principle later in January 2010 after the House bill had passed (Evanoff and Moeller 79). The guideline, which disallows depository banks from restrictive exchanging was passed just in the Senate bill, and the conference board of trustees sanctioned the regulation in a debilitated structure, with Section 619 of the bill, that permitting banks to contribute up to three percent of their Tier 1 capital in private value and flexible investments and also exchange for supporting purposes.
The Durbin Amendment
The Durbin Amendment is a provision in the last bill meant for checking credit card trade expenses and expanding rivalry in installment handling. The procurement was not in the House bill, and it started as a correction to the Senate bill from Dick Durbin and prompted campaigning against it. The law applies to keeps money with over $10 billion in resources, and these banks would need to charge credit card trade expenses that are sensible and relative to the real cost of handling the exchange (Evanoff and Moeller 81). The bill meant to limit competition-killing practices, empower rivalry, and included procurements which permit retailers to decline to utilize credit card for little purchase and offer motivating forces for utilizing money or another sort of card.
The Durbin Amendment likewise gave the Federal Reserve the ability to manage credit card exchange expenses, and on 2010, the federal bank proposed a most extreme trade charge of 12 cents for each debit card transaction, which is likely to cost big banks $14 billion annually. On June 2011, the Federal Reserve issued its last decision, which holds that the largest exchange charge a guarantor can get from a solitary platinum card exchange is 21 cents in addition to 5 basis points increased by the measure of the transaction (Evanoff and Moeller 83). This principle additionally permits issuers to raise their exchange charges by as much as one penny in the event that they execute certain extortion counteractive action measures. A backer who is qualified for this change, could in this manner get a trading expense of as much as 24 cents for the normal debit card transaction as indicated by the Federal Reserve. This cap—which became effective on October 1, 2011, as opposed to July 21, 2011, as was beforehand declared—will lessen expenses by approximately $9.4 billion yearly.
In conclusion, the great recession of 2008 is only bettered by the great depression in the list of the worst financial crises in the world history. The crisis threatened to wreck not only the American economy but also the global fiscal policies. In a bid to avert the crisis, the federal government through the Federal Reserve made short-term and long-term operational policies to reduce the effects of the recession and protect the economy from such occurrences in the future. The short-term fixes include expanding the money supply in the economy, enactment of stimulus packages, purchasing of government debts and minting of more cash. All the short-term acts were aimed at preventing the economy of the country from plunging into further turmoil. The long-term policies include the Dodd-Frank Act, the Volker Rule, and the Durbin Amendment. The long-term policies are aimed at trying to avert such a crisis in the future by bringing credibility in the financial market of the country.
Works Cited
The Dodd-Frank Wall Street Reform and Consumer Protection Act, 124 U.S.C §§ 1376-2223 (2012).
Evanoff, D. D., Moeller, W. F. (2012). Dodd-Frank: Content, purpose, implementation status, and issues. Federal Reserve Bank of Chicago, 75-84.
Brink, Alisa G., D. Jordan Lowe, and Lisa M. Victoravich. "The Effect of Evidence Strength and Internal Rewards on Intentions to Report Fraud in the Dodd-Frank Regulatory Environment." AUDITING: A Journal of Practice & Theory 32.3 (2013): 87-104. Web.
Kaal, Wulf A. “What Drives Dodd-Frank Act Compliance Cost For Private Funds?” SSRN Electronic Journal (2015): n. pag. Web.
Keaney, Michael. "Tackling the Financial Crisis." Political Studies Review 10.1 (2012): 63-72. Web.
Keaney, Michael. "Tackling the Financial Crisis." Political Studies Review 10.1 (2012): 63-72. Web.
Krugman, Paul R. The Return of Depression Economics and the Crisis of 2008. New York: W.W. Norton, 2009. Print.
Mertzanis, Charilaos. "Risk Management Challenges after the Financial Crisis." Economic Notes 42.3 (2013): 285-320. Web.
Sorkin, Andrew Ross. Too Big To Fail. New York: Viking, 2009. Print.
Vasudev, P. M. "Credit Derivatives And The Dodd-Frank Act – Is The Regulatory Response Appropriate?". SSRN Electronic Journal (2012): n. pag. Web.
Zywicki, Todd J. "The Dodd-Frank Act Five Years Later: Are We More Stable?". SSRN Electronic Journal (2015): n. pag. Web.
