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Financial Crisis 07-08

Friday, September 8th, 2017

Financial crises have persistently occurred throughout history originating back to the creation of early empires and formation of colonies. Their appearances can sometimes be unanticipated. Nevertheless, crises can be controlled from escalating into more threatening and severe situations such as depressions by implementation of rules and regulations. The global economic crisis of 07-08 mainly arose as a result of a significant reduction of financial regulations that were implemented during the Great Depression era with the intent to stabilize the economy and prevent future economic disasters from reoccurring. Its origins can be traced in the United States to the low interest rate policies enforced by the government itself to encourage home ownership, and the introduction of many risk-taking techniques such as derivatives, which were bets made on the creditworthiness of a specific company. Other countries such as Iceland, Japan, Spain, U.K and many more also adapted these tactics, which later resulted in unfavorable outcomes to their economies.

In 1999, congress passed the “Gramm-Leach-Bliley Act” which inverted the Glass-Steagall Act. The Glass-Steagall Act was passed in 1933 in order to prevent banks from engaging in risky activities such as speculating with depositors’ savings and affiliation with other firms. This change in regulations enabled many investment banks to operate profusely as they started entering a new global financial liberalization era. Greed and dissatisfaction were the early stimulators that contributed in the attrition of confidence that profits will remain at low levels. As a result of deregulation, products such as derivatives were invented and quickly introduced to the market to which Warren Buffett refers as weapons of mass destruction. Credit default swaps and collateralized debt obligations were the most common ones. This led into the development of the securitization process, where the party who makes the loan does not get affected if there is a failure to repay by the borrower. This was mainly because the lenders sold the mortgages to Investment banks. The investment banks then combined these mortgages with other loans such as car loans, credit card loans, and student loans.

This resulted in the formation of the collateralized debt obligation or CDOs, which were sold to investors around the world. Since all these products were rated triple A or the highest investment rating from rating agencies, many investors perceived them as risk free safe investments. Lenders started making riskier loans since they had no liability in terms of them going bad. Investment banks on the other hand ignored the instability of the loans since their primary focus was to maximize their profits by selling more CDOs, which ultimately contributed to a higher increase in predatory lending. Credit default swaps were another form of derivatives. They were insurance for investors regarding their purchased CDOs. Insurance companies like AIG were the main service providers and promised to pay any losses to investors in case the CDOs went bed.

Another important fact to keep in mind is that in the derivatives market other speculators can also buy insurance for a CDO they do not own. This put the insurance companies in greater risk after they became responsible for covering the losses of more than one party. Many investment banks started betting against their CDOs indicating that they were going to go bad. As a result of the derivative market being unregulated, insurance companies were not obligated to report any amounts of money set aside in order to cover the losses if any were incurred. This exposed AIG and many other insurance companies to high levels of risk, which later translated into a catastrophe. In early 2007, the situation intensified and panic started to gain ground on a high scale. As credit strains became atrocious, the economic activity started to deteriorate. Lenders’ cautiousness and not extending additional credit was followed by massive defaults on loans and bankruptcy filings since many institutions worldwide started facing liquidity issues and became unable to pay their obligations. A GDP decline was quickly noticed in many countries especially in Europe and East Asia. This was mainly due to the collapse in consumer confidence, low demand for goods, and a decline in production worldwide. Unemployment quickly skyrocketed, as many companies tried to mitigate the threat of bankruptcy by laying off large amounts of their employees. Unemployment rate reached an all time high in certain european countries where it passed the 27% mark.

On the other hand, China, the second largest world economy was mainly impacted by a decline in world trade considering its high exporting role. The financial crisis of 07-08 is recognized as one of the most severe and painful financial crisis to have attacked the world economy in the years post Great Depression. Currently, many governments worldwide have taken pre-cautious actions toward regulation and many new policies are implemented in order to stabilize the economy and prevent future crisis. The United States of America, the epicenter of 07-08 financial crisis, is now following a more regulated approach with the intent to substantially ameliorate the consequences that is currently facing.

What’s Wrong With American POLITICS?

Friday, September 8th, 2017

Nearly every public poll, whether conducted by a liberal/ progressive, moderate or conservative media, indicates, the vast majority of Americans, regardless of party affiliation, and/ or political beliefs, believes/ perceives something is wrong, and dysfunctional, in the present political system. They witness lots of rhetoric and promises, from both sides of the spectrum, but little ever gets done and/ or achieved! When a major, well – respected C.E.O., like Jamie Dimon, of Chase Bank, appears so frustrated, he recently lashed – out, against the politics – as – usual, way our politicians are behaving, and describes it as embarrassing the United States, it should indicate, there’s obviously, something wrong with how we are proceeding! Let’s review, using the mnemonic approach, what is wrong with American POLITICS!

1. Priorities; planning; polarizing: Shouldn’t our politicians serve and represent the needs, priorities, etc, of their constituents, while doing what’s best for the country? Too often, these elected officials merely make a lot of noise, and articulate a blame – and – complain, negative message, which polarizes, rather than unifies! Look at how the two major parties, appear to disagree, on nearly every issue, rather than seeking a meeting of the mind, which focuses on common ground, and common sense!

2. Options; optics; opportunities: Imagine how many quality opportunities have been squandered, and/ or lost, rather than taken advantage of! Why can’t the politicians consider the best options, and realize, how others perceive them, and the negative optics, involved?

3. Listen; learn; leadership: Don’t we deserve leaders who focus on learning what’s needed and necessary, and learn what’s needed and necessary? Now, more than ever, this nation needs, and deserves, genuine, quality leadership!

4. Integrity: Why does it seems, there is so little integrity, exhibited by our political leaders? What does it say about our system of government, when the fact – checking websites, have shown, our top politician, cares so little about articulating the truth?

5. Timely: By the time most issues are addressed, it’s either no longer relevant, or too late! Wouldn’t it be better, if we were governed, in a timely, well – considered manner.

6. Imagination: Demand politicians prioritize service, rather than party politics – as – usual! We deserve to be represented by individuals with a relevant imagination, and a focus on seeking solutions!

7. Creative; character: Creative solutions, rather than empty rhetoric, should be our leader’s emphasis! Unfortunately, far too of these individuals, seem to have the quality of character, to pursue a change, for the better!

8. Sustainable system: More poor decisions have been made, because of expedience, rather than thorough consideration. Look at longer – term needs and priorities, and demand, a well – developed, focused, sustainable system!

Perhaps the title of this article is somewhat of an oxymoron, because, it often appears, there is far more wrong, than right, about the direction of our governance! The items discussed in this article only touch – the – surface, in terms of what is dysfunctional, with American POLITICS.