The U.S. as well as the World experienced an economic crisis that stemmed from many imbalances. It was not the work of one particular group nor was it due to one particular industry. The economic crisis was the source of several different events. Home prices rose to extraordinary levels too quickly. The financial services industry was leveraged too high; for instance, in late 2007 Lehman Brothers was at a leverage ratio of 30 to 1(Gasparino 400). Other nations around the world were slowing. And Fed policy, that is, interest rates were too low for too long. This was the macroeconomic environment that turned a cyclical recession into a near depression for not only the US but most likely for the world. As the US economy recovers as well as economies around the world, policy makers are attempting to identify the root causes and to implement new legislation which will have lasting impacts on their respective economies.
An economic system such as the US’s is cyclical in nature and recessions happen periodically. But to combine a so called typical slow-down with these other pieces caused a dramatic decline in equities, prices, confidence, etc. Recessions are normal, but combined with the macroeconomic events that were associated with this slowdown, the US financial system and likely the world financial system was close to freezing up. This realization among Wall Street has shattered confidence and risk taking. Moreover, people on Main Street are not confident in the financial services sector, so continued risk taking has diminished.
While our economic system was in a crisis, the economy is now recovering albeit at lower levels than desired. The impacts of the crisis are widespread. Firms from Wall Street to Main Street were drastically affected. Arguably one of the most drastic effects of the crisis was the impact on the jobs market. The unemployment rate remains stubbornly high at 9.6% (Nelson 1). Both Congress and the Federal Reserve have acknowledged this major problem and are continuing to provide support for the economy to improve the jobs market.
Firms are particularly wary of the future prospects of the economy, so hiring is virtually nonexistent. This is stemming from many areas, but one major field and that is confidence is undermining the progress of the jobs market and the economy. This major impact stemmed from the enormous bailouts of near-collapse firms as well as the failure of the prominent firm Lehman Brothers.
The extraordinary pressures on financial firms during the crisis were not confined to the United States only: For example, U.K. mortgage lender HBOS was forced to merge with Lloyds TSB. The governments of Belgium, Luxembourg, and the Netherlands effectively nationalized Fortis, a banking and insurance firm. Moreover, Swiss authorities announced a rescue package for UBS, one of the world’s largest banks that consisted of a capital injection and a purchase of assets. (Bernanke 1). There were a multitude of government capital injections or takeovers of firms. This crisis stretched not only through the streets of the US, but through the regions abroad as well.
The textbook makes the point that revolutions occur when change is needed. Maybe this can be considered an economic revolution. Leverage and capital reserves were a definite problem, so Congress passed new banking regulations to better manage bank’s risk. On an international level, the Basel Committee also placed restrictions on banks with their Basel III accord, so bank’s capital requirements would be higher resulting in less risk. With bank’s risk profile being reduced, more stability is being created in the economies. These lasting impacts hopefully will prevent the global financial system from ever coming as close to collapse as it did. Now, of course the financial crisis we experienced was much more intricate, but these are the broader events. One could cite certain financial products or financial accounting rules that contributed to the crisis, but these are de minimis in relative terms.