essay 4 - first draft

 Scott Johnson                                                                                                                                    

 Dr. Kerr       

 EN101-12

 13 May 2013

Could the 2008 Financial Crisis Have Been Avoided?

The 2008 to 2009 financial crisis was a catastrophe so devastating it triggered a recession. This crisis is still fresh in people’s minds as everyone, rich or poor, felt its impact. The crisis resulted in many alarming events during the financial meltdown, such as the government’s 700 billion dollar bailout to the some of the nation’s largest financial companies that went bankrupt like Fannie Mae and AIG in 2008, or the stock price drop of banking giant, Citigroup, from 60 dollars a share to 97 cents a share in 2009 (Amadeo; Lenzner). Even though this economic mayhem resulted from the immediate crisis, factors that helped lead to the crisis began contributing to the problem years before it occurred. According to the article “Causes of Economic Recession”, it all started when the Fed began lowering interest rates in 2001 in response to the recent recession caused by the decrease in technology and dot com stocks. By 2004 the economy had recovered enough to the point where it started to boom again. Interest rates are usually increased in times of economic boom, but the rates were kept low in 2004 and in 2005. This is one factor that added to the irrational exuberance in the housing market (Amadeo). With help from low interest rates, lending standards were lowered and lowered until people with no proof of income, no assets, and no job were able to get large mortgages for no money down (Montana). This is where the problem of subprime mortgages began, which are high risk home loans where the person paying the loan has bad credit (“recession”). In the article “What caused the great recession of 2008-2009?”, Sam Montana explains that because it was so easy for people with bad credit to get mortgages, there was a big increase in subprime mortgages and an irrational exuberance in the housing market began to emerge. Banks were looking to make money and began selling mortgage backed securities. Mortgages in a certain area were put together and then sold to investors in pieces, but the credit worthiness of each mortgage in the group was unknown to the investors. This unregulated, risky type of mortgage backed security is called a collateralized debt obligation or CDO. Because of the growing housing bubble at the time, there was a large demand for these CDO’s. The major problem with these CDO’s is that the banks had an alarming leverage of thirty to one, which meant that for every one dollar of their own money they invested, they also invested thirty dollars of borrowed money (Montana). Eventually, the large amount of subprime mortgages began to take a toll on the economy when the housing bubble burst in 2006 (Amadeo). Many of the homeowners with subprime mortgages began to foreclose when they fell behind or couldn’t make payments (“recession”). As a huge amount of homeowners began to foreclose, banks and hedge funds with a large amount of mortgage-backed securities began to panic because they were facing huge losses (Amadeo). Some banks had been reporting CDO’s with inflated prices in their books because of the housing bubble, but when it burst and many began to foreclose the actual value of the CDO’s began to drop dramatically (Montana). Because the financial industry and banks are interconnected and lend to each other, all felt the impact and suffered losses even if they didn’t own any mortgage backed securities (“recession”). By the summer of 2007, banks were afraid to lend to each other because of the impact of the toxic mortgage backed securities (Amadeo). The financial situation continued to worsen until it became a full blown crisis by 2008. In the summer of 2008, two of the nation’s biggest finance companies, Fannie Mae and Freddie Mac, were on the verge of collapse because of their exposure to mortgage backed securities (“Recession”). The government then took control of the two companies as it extended a 300 billion dollar credit line to stabilize them. It was only ten days later that the international finance company, Lehman Brothers, declared bankruptcy, which was the largest bankruptcy in U.S. history. Days after, the federal government authorized the buyout of insurance giant, A.I.G., for 85 billion dollars. Larger banks that had not gone bankrupt struggled to stay in business and were forced to completely restructure, such as Citigroup and Merrill Lynch. Smaller financial institutions also suffered as many went bankrupt or sought government bailouts for economic security (“recession”). The economy was so damaged by the crisis the government was forced to step in even further with the Troubled Asset Relief Program in October 2008, which authorized 700 billion dollars in rescue funds for suffering banking firms (“recession”). By December 2008 It was obvious a recession had already started, but to make matters worse, employment was falling faster than It had during the 2001 recession (“Amadeo”). This financial crisis sent the economy tail spinning into a recession, but one is forced to wonder if something could have done something to prevent it. The 2008 financial crisis could have been avoided if the Federal Reserve had better regulated new financial instruments, if the government hadn’t kept interest rates and lending standards so low, and if finance companies hadn’t taken on a large amount of risky securities.

The major cause for the 2008 recession was massive deregulation by the government because they failed to notice the risky actions being taken by financial institutions. According to the New York Federal Reserve website, the entire Federal Reserve System works to “Foster the safety, soundness and vitality of our economic and financial systems”. The same website also lists “supervising and regulating depository institutions” as one of their major responsibilities. This means that it is a responsibility of the Federal Reserve to regulate banks and the actions they take. The Federal Reserve should have seen the risky moves by banks and prevented the toxic mortgage back securities (Chan). The Financial Crisis Inquiry Commission states that, “The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation” (Chan). The Federal Reserve is responsible for regulating and reacting to bank’s actions (“What We Do”). Because toxic mortgages were a major cause of the crisis, then the financial crisis could have been prevented had the Federal Reserve better regulated banking firms. The Financial Crisis Inquiry Commission goes further into detail, criticizing “the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans”. The Commission finds Alan Greenspan, who was the Federal Reserve chairman before and during the financial crisis, mostly at fault because he advocated deregulation. Greenspan is also criticized by the commission for a “pivotal failure to stem the flow of toxic mortgages” and says that he is an example of negligent leadership (chan). Economist and Nobel Laureate, Paul Krugman, notes that Federal Regulation did not keep with the system, especially because of new unsupervised financial instruments, like the collateralized debt obligations that ruined many large finance companies (Weisburg). In the article “The credit bubble, the recession and what the Federal Reserve should have done”, the author states that there were many warnings of a housing bubble collapse that the Federal Reserve should have heeded, but they did not because of the policies of deregulation advocated by the federal Reserve chairman during the crisis, Alan Greenspan, and his successor, Ben Bernanke (Lowenstein).

Low interest rates, due to the 2001 recession, led to lowered lending standards, which caused the housing bubble to grow until it peaked in 2008. According to the article “Causes of Economic Recession”, the 2001 recession plays a role in the 2008 financial crisis because it is the reason interest rates were so low around 2005 and after. The 2001 recession was similar to the 2008 financial crisis because it was caused by irrational exuberance in the tech market rather than the housing market. When recession hit in late 2000, the Federal Reserve began to lower interest rates by half a point each month until they were as low as 1.75 percent in December of 2001. High interest rates can cause recession because they limit liquidity, so they need to be lowered so that lending standards will also be lowered, which makes it possible for small businesses to get loans. However, when the economy began to pick up again in 2004, the Federal Reserve did not raise interest rates to match. When the economy had picked up even more in 2005, low interest rates allowed people to get loans on houses they couldn’t afford. This led to the irrational exuberance in the housing market and, subsequently, the housing bubble collapse (Amadeo). Analysts of the 2008 financial crisis continue to find Federal Reserve chairman, Alan Greenspan, at fault because he kept keeping interest rates too low between 2003 and 2005 as the housing and credit bubbles inflated (Weisburg). While it is impossible to know for sure, Banks may not have made so many questionable loans had the Federal Reserve raised interest rates around 2004 and 2005 because lending standards would not have been so low (Lowenstein).

Even though all financial institutions felt the impact of the recession, the few that went under lost because they unwisely bought large amounts of mortgage backed securities that were extremely risky. Even though the Federal Reserve and other agencies regulate the financial industry, financial companies themselves are responsible for their own actions. In its report, the Financial Crisis Inquiry Commission documents that many mortgage lenders’ practices were questionable and that banks were making careless bets on securities; however, the commission focuses on the pure incompetence of many large finance firms. The commission’s report quotes executives from Citigroup admitting that they did not pay attention to their mortgage related risk and explains that “Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans”. Managers of the banking firm, Merrill Lynch, also admitted to being surprised when the mortgage investments, that appeared to be secure, started suffering huge losses (Chan). Furthermore, Mortgage companies that allowed the subprime loans were not concerned because they sold most of the mortgages they wrote, so they wouldn’t be in any trouble if the mortgage defaulted (Montana).

Those who believe that the financial crisis of 2008 was unavoidable base their argument on the policies and actions of Alan Greenspan, the Federal Reserve chairman during the crisis. In his article “The Financial Crisis Could Not Have Been Prevented”, Economist, Robert Lenzner, explains that Alan Greenspan was in control of monetary policy for 18 years, but that Greenspan personally felt that deregulation was best for the financial industry. Despite being warned about the easy money policies, he continued deregulation and failed to notice the numerous toxic mortgages because of it (Lenzner). The opposing view is arguing that Greenspan was the only one who had the power to prevent the crisis, but he made no attempt to do so, even after he was warned; therefore, the crisis was unavoidable because nothing would have swayed Greenspan against his policy of deregulation. This argument is valid in that Greenspan was warned about deregulation, but still did not change his policy. The fault with this argument lies in that, Even though Greenspan was in control of the Federal Reserve as its chairman, he is just one man who could not have denied dangers of a flooding of subprime mortgages into the financial system had the entire Federal Reserve watched banks more closely. Greenspan may have advocated deregulation and gave banks more freedom than they should have had, but the hazardous amount of toxic mortgages should not have gone unnoticed by the Federal Reserve, a regulatory agency with responsibilities that include reacting to bank’s actions and fostering the soundness of the nation’s economy (“What We Do”). Robert Lenzner is saying that because Greenspan didn’t take action to prevent the crisis, he would never have prevented the crisis; however, Greenspan and the Federal Reserve as a whole, could have prevented the crisis, had they paid more attention to banks and investment firms.

The financial crisis of 2008 wrecked the economy, impacting everyone due to the some of the largest banking firm collapses in history. When one wonders if the crisis could have been avoided, it is important to understand exactly what happened and what could have been done. Government agencies, like the Federal Reserve, have been under fire because of its failure to notice the dangerous actions of banks it is supposed to regulate (Chan). The companies like Bear Stearns and Lehman brothers are also at fault themselves for failing to notice their own dangerous levels of risk. Placing blame does not determine whether the crisis was avoidable, but if the government agencies and companies responsible acted more wisely, the crisis would not have occurred. The Financial Crisis Inquiry Commission explains that “The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done...If we accept this notion, it will happen again” (Chan).

Works Cited

Amadeo, Kimberly. "Causes of economic recession."about.com. About.com, 06 Jul 2012. Web. 27 Apr 2013. <http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm>.

Weisburg, Jacob. "What Caused the Economic Crisis."Slate.com. Slate group, LLC., 09 Jan 2010. Web. 27 Apr 2013. <http://www.slate.com/articles/news_and_politics/the_big_idea/2010/01/what_caused_the_economic_crisis.html.>

"Recession." American Decades: 2000-2009. Ed. Eric Bargeron and James F. Tidd, Jr. Detroit: Gale, 2011. 221-223. Gale Virtual Reference Library. Web. 27 Apr. 2013. <http://go.galegroup.com.ezproxy.frederick.edu/ps/i.do?id=GALE%7CCX1929800107&v=2.1&u=fred30208&it=r&p=GVRL&sw=w>

Chan, Sewell. "Financial crisis was avoidable."NewYorkTimes.com. The New York Times Company, 25 Jan 2011. Web. 27 Apr 2013. <http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=2&>.

Montana, Sam. "What caused the great recession of 2008-2009?." Knoji.com. Social Commerce Labs., 26 Apr 2013. Web. 27 Apr 2013. <http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/>.

Lenzner, Robert. "The Financial Crisis Could Not Have Been Prevented." Forbes.com. Forbes.com LLC, 29 Jan 2011. Web. 7 May 2013. <http://www.forbes.com/sites/robertlenzner/2011/01/29/heres-why-the-financial-crisis-could-not-have-been-prevented/2/>.

Lowenstein, Roger. "The credit bubble, the recession and what the Federal Reserve should have done."Washingtonpost.com. The Washington Post, 02 May 2010. Web. 10 May 2013. <http://www.washingtonpost.com/wp-dyn/content/article/2010/04/30/AR2010043001103.html>.

"What We Do." newyorkfed.org. Federal Reserve. Web. 10 May 2013. <http://www.newyorkfed.org/aboutthefed/whatwedo.html>.

essay 4 - outline

Intro:

·         The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 point each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages.

One of the causes of the 2008 recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans. – (amadeo)

·         Throughout the mid 2000s, we all heard the ads on the radio; get a mortgage for no money down. Lending standards were lowered and lowered until people with no jobs, no income, no assets and no credit rating were able to get huge mortgages for no money down and no proof of income. (Montana)

·         Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market wide open to lending. Subprime mortgages (high-risk home loans) began to take their toll on the economy as homeowners defaulted or fell behind on payments.- (“Recession”)

·         . In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses. – (amadeo)

·         These mortgages were securitized or turned into mortgage backed securities that people could invest in. For example, take a 10 block area around your home. Put all those mortgages into an envelope. You don’t know the credit worthiness of those mortgages. Cut up the envelope into smaller pieces all holding all kinds of mortgages and then sell those pieces to investors. These pieces were called tranches.

These were called collateralized debt obligations (CDOs). Those who owned them would get paid when each person in that certain tranche paid their mortgage and did not get paid when the mortgages were not paid and the defaults and foreclosures started.

There was such a huge demand for these CDOs and not enough mortgages that the banks invented CDOs, these were called synthetic CDOs.

Two big problems caused the banks to live in their dream world during this housing “bubble”. How they listed their assets on their books. They listed these CDOs at inflated prices when in reality they were dropping like a rock. When they had to list them properly at current market value, everyone could see the banks didn’t have nearly the assets they claimed to have.

The second problem was leverage. Many of these banks had leverage of 30 or more to 1. Meaning for every dollar of their own they invested in these mortgages, they used $30 borrowed dollars to invest.

Other bank problems that led to the Great Recession include shadow banking, the unregulated derivatives market and the repo market or repurchase agreements. – (Montana)

·         In the summer of 2008, both institutions were on the verge of collapse. A $300 billion credit line was extended to stabilize Fannie Mae and Freddie Mac, but ten days later Lehman Brothers, an international financing firm, declared bankruptcy, the largest in U.S. history. The next day, the federal government authorized an $85 billion buyout of A.I.G. Financial Products, an insurance group closely related to Goldman Sachs, another financial behemoth specializing in investments. Citigroup, Merrill Lynch, and other companies teetered on the brink of bankruptcy and were forced to radically restructure. A general alarm sounded as the healthy financial institutions shut down credit lines and less-fortunate companies scrambled for economic security through mergers, buyouts, and federal bailouts. (“recession”)

·         Bush signed the Troubled Asset Relief Program (TARP) on 3 October, authorizing $700 billion in rescue funds to beleaguered banking firms. More than $17 billion was carved out to save the auto industry. (“recession”)

·         By December 2008, employment was declining faster than in the 2001 recession. – (amadeo)

Thesis: the 2008 recession could have been avoided if the Federal Reserve had better regulated new financial instruments, if the government hadn’t kept interest rates and lending standards so low, and if finance companies hadn’t taken on a large amount of risky securities.

First Section: The major cause for the 2008 recession was massive deregulation by the government because they failed to notice the risky actions being taken by financial institutions

·         The 2008 financial crisis was an “avoidable” disaster caused by widespread failures in government regulation, - (Chan)

·         The commission that investigated the crisis casts a wide net of blame, faulting two administrations, the Federal Reserve and other regulators for permitting a calamitous concoction: shoddy mortgage lending, the excessive packaging and sale of loans to investors and risky bets on securities backed by the loans.

“The greatest tragedy would be to accept the refrain that no one could have seen this coming and thus nothing could have been done,” the panel wrote in the report’s conclusions, which were read by The New York Times. “If we accept this notion, it will happen again.” – (Chan)

·         The majority report finds fault with two Fed chairmen: Alan Greenspan, who led the central bank as the housing bubble expanded, and his successor, Ben S. Bernanke, who did not foresee the crisis but played a crucial role in the response. It criticizes Mr. Greenspan for advocating deregulation and cites a “pivotal failure to stem the flow of toxic mortgages” under his leadership as a “prime example” of negligence. – (Chan)

·         It also criticizes the Bush administration’s “inconsistent response” to the crisis — allowing Lehman Brothers to collapse in September 2008 after earlier bailing out another bank, Bear Stearns, with Fed help — as having “added to the uncertainty and panic in the financial markets.” – (Chan)

·         The pithiest explanation I've seen comes from New York Times columnist and Nobel Laureate Paul Krugman, who noted in one interview: "Regulation didn't keep up with the system." In this view, the emergence of an unsupervised market in more and more exotic derivatives—credit-default swaps (CDSs), collateralized debt obligations (CDOs), CDSs on CDOs (the esoteric instruments that wrecked AIG)—allowed heedless financial institutions to put the whole financial system at risk. "Financial innovation + inadequate regulation = recipe for disaster is also the favored explanation of Greenspan's successor, Ben Bernanke, who downplays low interest rates as a cause (perhaps because he supported them at the time) and attributes the crisis to regulatory failure. – (Weisburg)

·         Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market – (“Recession”)

Second Section: Low interest rates because of the 2001 recession led to lowered lending standards, which caused the housing bubble to grow until it peaked in 2008.

·         Most analysts find former Fed Chairman Alan Greenspan at fault, though for a variety of reasons. Conservative economists—ever worried about inflation—tend to fault Greenspan for keeping interest rates too low between 2003 and 2005 as the real estate and credit bubbles inflated. This is the view, for instance, of Stanford economist and former Reagan adviser John Taylor, who argues that the Fed's easy money policies spurred a frenzy of irresponsible borrowing on the part of banks and consumers alike. – (Weisburg)

·         High interest rates are also a cause of recession. That's because it limits liquidity, or the amount of money available to invest. In spite of the stock market decline in March 2000, the Federal Reserve continued raising interest rates to a high of 6.25% in May 2000. The Fed didn't start lowering rates until January 2001, and lowered them about 1/2 point each month, resting at 1.75% in December 2001. This kept interest rates high when the economy needed low rates for cheap business loans and mortgages.

·         One of the causes of the 2008 recession was that the Fed was also slow to raise interest rates when the economy started to boom again in 2004. Low interest rates in 2004 and 2005 helped created the housing bubble. Irrational exuberance set in again as many investors took advantage of low rates to buy homes just to resell. Others bought homes they couldn't afford thanks to interest-only loans. – (amadeo)

Third section: even though all financial institutions felt the impact of the recession, the few that went under lost because they unwisely bought large amounts of mortgage backed securities that were extremely risky.

·         Though the report documents questionable practices by mortgage lenders and careless betting by banks, one striking finding is its portrayal of incompetence.

It quotes Citigroup executives conceding that they paid little attention to mortgage-related risks. Executives at the American International Group were found to have been blind to its $79 billion exposure to credit-default swaps, a kind of insurance that was sold to investors seeking protection against a drop in the value of securities backed by home loans. At Merrill Lynch, managers were surprised when seemingly secure mortgage investments suddenly suffered huge losses.

By one measure, for about every $40 in assets, the nation’s five largest investment banks had only $1 in capital to cover losses, meaning that a 3 percent drop in asset values could have wiped out the firm. The banks hid their excessive leverage using derivatives, off-balance-sheet entities and other devices, the report found. The speculative binge was abetted by a giant “shadow banking system” in which the banks relied heavily on short-term debt. – (Chan)

·         Other analysts look to the underlying mindset that supported the meltdown. People like to say that the crisis was caused by shortsightedness, stupidity, and greed. But those are weak explanations, unless you think human nature somehow changed in the final decades of the 20th century to make people greedier or more foolish than they were previously. This isn't impossible, but it's hard to support. A subtler psychological argument is that the economy fell prey to recurring delusions about risk and bubbles, which economists Carmen Reinhart and Kenneth Rogoff describe in their book This Time Is Different. – (Weisburg)

·         Countrywide and a host of other mortgage companies started lending money for homes to anyone and everyone, regardless of their income or credit rating. Throughout the mid 2000s, we all heard the ads on the radio; get a mortgage for no money down. Lending standards were lowered and lowered until people with no jobs, no income, no assets and no credit rating were able to get huge mortgages for no money down and no proof of income.

Mortgage writers were not checking the information on mortgage applications and even encouraged applicants to lie on the mortgage applications. These loans were known as sub-prime, Alt-A and NINJA loans (No income, no job or assets). These mortgages came with low initial teaser rates and were ARMs (Adjustable Rate Mortgages) and in two years they would reset to a much higher payment. Some people were actually defaulting on their first mortgage payment.

The thinking was home prices would never go down and continue upward. This caused increased speculation with people buying numerous houses. Flipping was buying a home, waiting a short amount of time and selling it for a profit while others were buying numerous homes and renting them.

Mortgage companies didn’t really care since they sold most of these mortgages they wrote, so they would not be on the hook if these mortgages defaulted. – (Montana)

·         These mortgages were securitized or turned into mortgage backed securities that people could invest in. For example, take a 10 block area around your home. Put all those mortgages into an envelope. You don’t know the credit worthiness of those mortgages. Cut up the envelope into smaller pieces all holding all kinds of mortgages and then sell those pieces to investors. These pieces were called tranches.

These were called collateralized debt obligations (CDOs). Those who owned them would get paid when each person in that certain tranche paid their mortgage and did not get paid when the mortgages were not paid and the defaults and foreclosures started.

There was such a huge demand for these CDOs and not enough mortgages that the banks invented CDOs, these were called synthetic CDOs.

Two big problems caused the banks to live in their dream world during this housing “bubble”. How they listed their assets on their books. They listed these CDOs at inflated prices when in reality they were dropping like a rock. When they had to list them properly at current market value, everyone could see the banks didn’t have nearly the assets they claimed to have. – (Montana)

The second problem was leverage. Many of these banks had leverage of 30 or more to 1. Meaning for every dollar of their own they invested in these mortgages, they used $30 borrowed dollars to invest.

Other bank problems that led to the Great Recession include shadow banking, the unregulated derivatives market and the repo market or repurchase agreements.- (Montana)

essay 4 - research

http://useconomy.about.com/od/grossdomesticproduct/a/cause_recession.htm

Economic recessions are caused by a decline in GDP growth, which is itself caused by a slowdown in manufacturing orders, falling housing prices and sales, and a drop-off in business investment. The result of this slowdown is falling employment, and rising unemployment, which causes a slowdown in retail sales.

Irrational exuberance in the housing market led many people to buy houses they couldn't afford, because everyone thought housing prices could only go up. In 2006, the bubble burst as housing prices started to decline. This caught many homeowners off guard, who had taken loans with little money down. As they realized they would lose money by selling the house for less than their mortgage, they foreclosed. An escalating foreclosure rate panicked many banks and hedge funds, who had bought mortgage-backed securities on the secondary market and now realized they were facing huge losses.

By August 2007, banks became afraid to lend to each other because they didn't want these toxic loans as collateral. This led to the $700 billion bailout, and bankruptcies or government nationalization of Bear Stearns, AIG, Fannie Mae, Freddie Mac, IndyMac Bank, and Washington Mutual. By December 2008, employment was declining faster than in the 2001 recession.

In 2009, the government launched the economic stimulus plan. It was designed to spend $185 billion in 2009. And in fact, it halted a four-quarter decline in GDP by Q3 of that year, thus ending the recession. However, unemployment continued to rise to 10%, and many business leaders still expected a W-shaped recession by the end of 2010. High unemployment rates still persisted into 2011.

http://www.slate.com/articles/news_and_politics/the_big_idea/2010/01/what_caused_the_economic_crisis.html

In 2007, the housing bubble burst, leading to a high rate of defaults on subprime mortgages. Exposure to bad mortgages doomed Bear Stearns in March 2008, then led to a banking crisis that fall. A global recession became inevitable once the government decided not to rescue Lehman Bros. from default in September 2008. Lehman's was the biggest bankruptcy in history, and it led promptly to a powerful economic contraction. Somewhere around here, agreement ends.

Most analysts find former Fed Chairman Alan Greenspan at fault, though for a variety of reasons. Conservative economists—ever worried about inflation—tend to fault Greenspan for keeping interest rates too low between 2003 and 2005 as the real estate and credit bubbles inflated. This is the view, for instance, of Stanford economist and former Reagan adviser John Taylor, who argues that the Fed's easy money policies spurred a frenzy of irresponsible borrowing on the part of banks and consumers alike.

The pithiest explanation I've seen comes from New York Times columnist and Nobel Laureate Paul Krugman, who noted in one interview: "Regulation didn't keep up with the system." In this view, the emergence of an unsupervised market in more and more exotic derivatives—credit-default swaps (CDSs), collateralized debt obligations (CDOs), CDSs on CDOs (the esoteric instruments that wrecked AIG)—allowed heedless financial institutions to put the whole financial system at risk. "Financial innovation + inadequate regulation = recipe for disaster is also the favored explanation of Greenspan's successor, Ben Bernanke, who downplays low interest rates as a cause (perhaps because he supported them at the time) and attributes the crisis to regulatory failure.

http://go.galegroup.com.ezproxy.frederick.edu/ps/retrieve.do?sgHitCountType=None&sort=RELEVANCE&inPS=true&prodId=GVRL&userGroupName=fred30208&tabID=T003&searchId=R3&resultListType=RESULT_LIST&contentSegment=&searchType=BasicSearchForm&currentPosition=3&contentSet=GALE%7CCX1929800107&&docId=GALE|CX1929800107&docType=GALE

Though the economic recession seemed to hit the nation with a sudden fury in 2008, the storm had been gathering force for years. Deregulation and stability had afforded Wall Street traders a self-confidence that encouraged them to take significant risks, many centered on America’s growing number of homeowners, who took advantage of relaxed credit restrictions and a market wide open to lending. Subprime mortgages (high-risk home loans) began to take their toll on the economy as homeowners defaulted or fell behind on payments. When Henry Paulson reluctantly accepted the position of secretary of the treasury in 2006, he immediately began to reach out for economic reform. Paulson initially focused on Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation), two government-sponsored mortgage institutions responsible, either directly or indirectly, for nearly one-half of the nation’s $12 trillion in mortgages. Facing a war of economic ideology between a Democratic congress and a conservative white house, Paulson failed to achieve a compromise to address concerns about fannie mae and Freddie mac’s continued viability and, more broadly, the volatility of subprime mortgages.

 In the summer of 2008, both institutions were on the verge of collapse. A $300 billion credit line was extended to stabilize Fannie Mae and Freddie Mac, but ten days later Lehman Brothers, an international financing firm, declared bankruptcy, the largest in U.S. history. The next day, the federal government authorized an $85 billion buyout of A.I.G. Financial Products, an insurance group closely related to Goldman Sachs, another financial behemoth specializing in investments. Citigroup, Merrill Lynch, and other companies teetered on the brink of bankruptcy and were forced to radically restructure. A general alarm sounded as the healthy financial institutions shut down credit lines and less-fortunate companies scrambled for economic security through mergers, buyouts, and federal bailouts. By late September, the Bush administration began lobbying for a massive bailout of Wall Street firms. The crisis hijacked the 2008 presidential election as both candidates, Republican senator John McCain and Democratic senator Barack Obama, flew back to Washington, D.C., to attend an emergency meeting at the White House. Despite the hysteria of bipartisan fights, with Republicans blocking legislation and McCain suspending his campaign, Bush signed the Troubled Asset Relief Program (TARP) on 3 October, authorizing $700 billion in rescue funds to beleaguered banking firms. More than $17 billion was carved out to save the auto industry.

The political fallout was immediate, but the recession continued to deepen, provoking further federal action. While fiscal conservatives condemned the bailouts for using taxpayer money to rescue corrupt or incompetent companies, the newly elected Obama administration stepped in with a federal stimulus package to save failing state governments that were struggling to meet payrolls and to continue welfare and unemployment programs. In February 2009, the American Recovery and Reinvestment Act offered $787 billion in federal funds for domestic spending to help struggling homeowners and state and local governments. A month later, news reports revealed that parting CEOs from Wall Street firms that had benefited from bailouts received shocking severance packages. These “golden parachutes,” as they were labeled in the media, along with Obama’s stimulus package, elicited a mammoth response from conservatives and liberals alike. In particular, a new group of activists, the Tea Party, organized against federal spending. A series of conservative governors tried to block their states’ access to the stimulus. By early 2010 the economy had stabilized, but unemployment remained high. The Tea Party widened its platform to become the anti-government party, distancing itself from earlier attacks on CEOs and even endorsing golden-parachute recipient Carly Fiorina, former CEO of Hewlett-Packard, in the Senate race in California

. http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=0

http://economics-the-economy.knoji.com/what-caused-the-great-recession-of-20082009/

essay 4 - what i need to know

could the 2008 recession have been avoided?

what i need to know

• What factors led to or caused the recession
• what warning signs were there, ways it could have been detected earlier
• what actions against the recession were taken (besides the recovery act)
• what could have been done earlier, what solutions were proposed

essay - 4 what i already know

Could the 2008 recession have been avoided?

What I know

• Recession caused by many economic factors
• one attempted solution to fix recession after it had already happened was the Recovery act or stimulus under president Obama
• resulted in many banks closing or going under
• many people lost a large portion of their savings
• many companies went out of business or had to be bailed out by the government 

essay 3 - final draft

Scott Johnson                                                                                                                                     

 Dr. Kerr       

 EN101-12

 11 April 2013

The Invisible Crime of Money Laundering

The crime of money laundering is becoming an increasingly larger problem in the world with rise of modern financial markets. There were almost 900 convictions of money laundering in 2001 alone, and it is likely that there are many money launderers that were not convicted or went completely unnoticed (Layton). Many people have heard of the crime of money laundering, but are unaware of what it actually is. The U.S. Department of the Treasury summarizes it as “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities”. The specific details of money laundering are complicated, but the entire process can be broken down into the three general steps of placement, layering, and integration.

The first step in the money laundering process is the placement of dirty cash into the financial system. Before this stage, criminals have large amounts of “dirty” cash on hand that they have acquired from illegal activity. They then need to insert the money into the legitimate financial system to unload the burden of guarding large amounts of cash (Layton; “Three-Stage Process”). According to the article “How Money Laundering Works”, the most common way of inserting the money into the financial system is depositing it into a bank or other financial institution. This is the riskiest stage of the process because the money has not yet been “cleaned”, and it is suspicious to deposit large amounts of cash into a bank without identifying a legitimate source for the money (Layton). The U.S. department of Immigration and Customs Enforcement explains that criminals can move the money “by employing complex and sometimes confusing documentation associated with legitimate trade transactions”. Another way that money launderers often avoid suspicion from law enforcement at this stage is by using a technique called “smurfing”, where they have many different people deposit small amounts of money into different accounts at the bank so that it can be acquired in full after it has been cleaned (“A Three-Stage Process”). Other ways of inserting the money into the financial system include using the illegal money to purchase chips at gambling institutions or using it to repay loans from banks or money lending businesses (“A Three-Stage Process”).

In the second step of the money laundering process, the money is “layered” through many transactions to make it difficult, if not impossible, to trace. The money launderer starts this process by sending the money that has been deposited to many different offshore accounts (Layton). The money is then continuously transferred to different accounts and other financial instruments in many different countries (A Three-Stage Process”). According to Billy Steel, the author of “Money Laundering: the Stages of the Process”, the purpose of this stage is “to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds”. This is the most complex stage because the more “layered” the money is, the more difficult it will be to trace back to the illegal source (Layton). Ways that money launderers conceal the money even further include changing the currency, investing in overseas stock markets that record only a small amount of transactions, or purchasing high valued items such as diamonds or yachts (Layton).

The final step in the process is integration, where the money is “cleaned” and returned to the criminal through an apparently legitimate source. At this stage, the money launderer can use the money without being caught because it is extremely difficult to trace it back to the illegal source (Layton). However, according to the money laundering prevention specialist company, About Business Crime Solutions Inc., the criminal must still complete this stage “in a manner that does not draw attention and appears to result from a legitimate source”. Money launderers often do this by taking advantage of other countries’ bank secrecy laws and granting themselves loans that have guaranteed secrecy, investing in legitimate business like casinos and check cashing institutions, or transferring the money by wire from a bank in a different country that the launderer owns (Layton; Steel). Another method includes the sale of high priced items like artwork or jewelry (“A Three-Stage Process”).

The complicated process of money laundering results in criminals benefiting from illegal activity, while law enforcement attempts to unravel the mystery to put the criminals behind bars. While some criminals who commit money laundering get away with the crime, recent crackdowns by law enforcement have put some of the large scale money launderers in prison. In 2005, Texas congressman Tom Delay was indicted on money laundering charges after it was discovered that he had illegally accepted corporate donations and used them for campaigning (Layton). Delay and his conspirators had funneled the funds through the national republican committee, which then sent equal amounts to Texas for use in his campaign (Layton). With large scandals like this alerting law enforcement to the seriousness of money laundering, efforts will certainly be made to punish more criminals who commit this crime.

Works Cited

"A Three-Stage Process." MoneyLaundering.ca. Business Crime Solutions Inc.. Web. 6 Apr 2013. <http://www.moneylaundering.ca/public/law/3_stages_ML.php>.

Layton, Julia. " How Money Laundering Works."HowStuffWorks.com. HowStuffWorks, inc., n.d. Web. 3 Apr 2013. <http://money.howstuffworks.com/money-laundering.htm>.

"Money Laundering." ICE.gov. Department of Immigration and Customs Enforcement. Web. 8 Apr 2013. <http://www.ice.gov/money-laundering/>.

"Money Laundering." Treasury.gov. U.S. Department of the Treasury, n.d. Web. 6 Apr 2013. <http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/Money-Laundering.aspx>.

Steel, Billy. " Money Laundering - Stages of the Process."Laundryman.u-net.com. Billy Steel, n.d. Web. 6 Apr 2013. <http://www.laundryman.u-net.com/page5_mlstgs.html>.

essay 3 - first draft

 Scott Johnson                                                                                                                                    

 Dr. Kerr       

 EN101-12

 8 April 2013

The Invisible Crime of Money Laundering

The crime of money laundering is becoming an increasingly larger problem in the world with rise of modern financial markets. There were almost 900 convictions of money laundering in 2001 alone, and it is likely that there are many money launderers that were not convicted or went completely unnoticed (Layton). Many people have heard of the crime of money laundering, but are unaware of what it actually is. The U.S. Department of the Treasury summarizes it as “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities”. The specific details of money laundering are complicated, but the entire process can be broken down into the three general steps of placement, layering, and integration. Any way money laundering

The first step in the money laundering process is the placement of dirty cash into the financial system. Before this stage, criminals have large amounts of “dirty” cash on hand that they have acquired from illegal activity. They then need to insert the money into the legitimate financial system to unload the burden of guarding large amounts of cash (Layton; “Three-Stage Process”). According to the article “How Money Laundering Works”, the most common way of inserting the money into the financial system is depositing it into a bank or other financial institution. This is the riskiest stage of the process because the money has not yet been “cleaned”, and it is suspicious to deposit large amounts of cash into a bank without identifying a legitimate source for the money (Layton). The U.S. department of Immigration and Customs Enforcement explains that criminals can move the money “by employing complex and sometimes confusing documentation associated with legitimate trade transactions”. Another way that money launderers often avoid suspicion from law enforcement at this stage is by using a technique called “smurfing”, where they have many different people deposit small amounts of money into the bank so that it can be acquired in full after it has been cleaned (“A Three-Stage Process”). Other ways of inserting the money into the financial system include using the illegal money to purchase chips at gambling institutions or using it to repay loans from banks or money lending businesses (“A Three-Stage Process”).

In the second step of the money laundering process, the money is “layered” through many transactions to make it difficult, if not impossible, to trace. The money launderer starts this process by sending the money that has been deposited to many different offshore accounts (Layton). The money is then continuously transferred to different accounts and other financial instruments in many different countries (A Three-Stage Process”). According to Billy Steel, the author of “Money Laundering: the Stages of the Process”, the purpose of this stage is “to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds”. This is the most complex stage because the more “layered” the money is, the more difficult it will be to trace back to the illegal source (Layton). Ways that money launderers conceal the money even further include changing the currency, investing in overseas stock markets, or purchasing high valued items such as diamonds or yachts (Layton).

The final step in the process is integration, where the money is “cleaned” and returned to the criminal through an apparently legitimate source. At this stage, the money launderer can use the money without being caught because it is impossible to trace it back to the illegal source (Layton). The cleaned money must be legitimately assimilated into the financial system so that the criminal has access to it (Steel). Money launderers often do this by taking advantage of other countries’ bank secrecy laws and granting themselves loans that have guaranteed secrecy, investing in legitimate business like casinos and check cashing institutions, or transferring the money by wire from a bank in a different country that the launderer owns (Layton; Steel). Another method includes the sale of high priced items like artwork or jewelry (“A Three-Stage Process”).

The complicated process of money laundering results in criminals benefiting from illegal activity, while law enforcement attempts to unravel the mystery to put the criminals behind bars.

Works Cited

"A Three-Stage Process." MoneyLaundering.ca. Business Crime Solutions Inc.. Web. 6 Apr 2013. <http://www.moneylaundering.ca/public/law/3_stages_ML.php>.

Layton, Julia. " How Money Laundering Works."HowStuffWorks.com. HowStuffWorks, inc., n.d. Web. 3 Apr 2013. <http://money.howstuffworks.com/money-laundering.htm>.

"Money Laundering." ICE.gov. Department of Immigration and Customs Enforcement. Web. 8 Apr 2013. <http://www.ice.gov/money-laundering/>.

"Money Laundering." Treasury.gov. U.S. Department of the Treasury, n.d. Web. 6 Apr 2013. <http://www.treasury.gov/resource-center/terrorist-illicit-finance/Pages/Money-Laundering.aspx>.

Steel, Billy. " Money Laundering - Stages of the Process."Laundryman.u-net.com. Billy Steel, n.d. Web. 6 Apr 2013. <http://www.laundryman.u-net.com/page5_mlstgs.html>.