Up
until now I have spoken of the need to learn about what economists actually do
in their day to day jobs and what type of people they are. Now I am going to
shift gears and talk about another potential problem you may face when
transitioning from the academic world of economics to the career world of
economics, and that is the issue of new trends. It is very possible that the
economics profession you learned about in school could have undergone a change
and as a result is now different from the profession you are trying to enter.
Because of this it is important to stay up to date on new trends occurring in
economics while you are still in school so you can adapt your education to meet
the new demands of your future profession. The financial crisis of 2008 has
already changed and will continue to change both economics as a whole and the
careers of economists.
First
it is necessary to discuss what caused the financial crisis of 2008, and as
Gary B. Gordon professor at the Yale School of Management and Researcher on the
US Financial Crisis Inquiry Commission points out, “U.S. financial history is
replete with banking crises and the predictable political responses. Most
people are unaware of this history, which we are repeating”. (Gordon 1) This
particular crisis (2008) was caused mainly by the belief that regulation of the
financial system was burdensome and unnecessary, that financial institutions
were capable of self-regulation, and that regulators should not interfere with
investment practices that were profitable. Large commercial banks, such as
Wachovia that had significant exposure to risky mortgage assets were subject to
panics and subsequent “runs” by creditors and depositors. The Federal Reserve
realized far too late the systemic danger inherent to the unregulated
over-the-counter (OTC) market and did not have the information needed to act.
The financial crisis in a broad sense can be defined as
occurring from mid-2007 to June 2009 which marked the official end of the 18
month long recession. Beginning when housing prices started to decline
after their 2005 peak, mortgage backed financial securities (allow ownership of
underlying asset without taking possession meaning easily tradable aka liquid)
which in many cases were securities based on subprime residential mortgages
began to experience huge losses. According to the final report of the Financial Crisis Inquiry Commission, by
early 2008, losses on these securities were estimated to be on the order of
$500 billion dollars (53). This lead to a series of runs on financial
institutions specifically the shadow banking system which unlike runs on
consumer banks occur without any public or media knowledge. The run occurred
because the institutions short term liabilities that were in the form of
short-term borrowing, like repurchase agreements (or repos), which used
mortgage-backed securities as collateral could no longer back the same amount
of borrowing due to the reduced value of the mortgage backed securities. This resulted
in deleveraging
As
devastating as the effects of the collapse of the housing market sound that was
really only the beginning and could have been dealt with by the FED. The crisis
really occurred in September of 2008 when Lehman Brothers filed for bankruptcy,
Merrill Lynch was taken over and within 24 hours AIG was bailed out by the
government. This caused widespread fear from creditors and investors that many
other large financial institutions were on the verge of collapse (353). CEO of
Morgan Stanley told the FCIC that Morgan Stanley and other institutions faced a
“classic run on the bank” and “the entire investment banking system came under
siege”. Most striking were the statements made to the FCIC by JP Morgan CEO
Jamie Dimon who said, “The markets were very bad, the volatility, the
illiquidity, some things couldn’t trade at all, I mean completely locked, the
markets were in terrible shape”(353). Ben Bernanke the current chairmen of the
FED and expert on the Great Depression believed that September and October of
2008 marked the worst financial crisis in global history even including the
Great Depression (354) The cause of these company failures did stem from the
loss in value of the mortgage securities and collateral but it is the greed,
extensive risk taking and the manipulation of financial instruments that is
most concerning. (371-386)
Here is the link to the final report of
the Financial Crisis Inquiry Commission, which I reference several times in
this post and is a accurate, understandable account of how the 2008 financial
crisis unfolded.
http://fcic.law.stanford.edu/report
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