September 17, 2008: a most grievous and infamous Wednesday for the men and women who thrive on Wall Street. The usual bell rang to mark the closing of the New York Stock Exchange, sending defeated stockbrokers out into the streets. The ticker above the entrance to the venerable NYSE spoke loud and clear: the United States of America was facing the most devastating financial crisis since the Great Depression, and no solution was in sight. The legends of Wall Street – Lehman Brothers, Merrill Lynch, Bear Stearns – were dropping like flies. More financial stalwarts like Morgan Stanley and Goldman Sachs threatened to follow. Soon, the entire country was riveted as the worst economic crash on American soil unfolded before their eyes.
To say that the financial crisis began only with the downfall of investment stalwarts last September 2008 is not entirely accurate. As early as August 2007, Wall Street found itself suffering under the weight of its own actions. Frenzied and rampant speculations, as well as the real estate boom during the country’s wealthier years, were finally taking their toll on the country’s economic health. The International Monetary Fund explains that, "the US sub-prime mortgage market was derailed by the reversal of the housing boom and has spread quickly and unpredictably to inflict extensive damage on markets and institutions at the heart of the financial system".
The past two decades had been kind to the United States, economically speaking. It was this largely positive and financially vibrant atmosphere that allowed banks to go ahead and implement a “loose monetary policy and excessive capital flows” , particularly in response to a bubble that began with technology stocks and turned swiftly towards other areas such as real estate and other commodities. With little to no regulation, banks allowed so-called “ninja” mortgage loans for the “no income, no job and no assets” sector. Now, though, with the economy slowly coming back down to earth after its speculative period, banks realized that a significant number of the mortgage loans they handed out have gone underwater, signaling the beginning of the financial crisis.
It may be said that the financial crisis is a result of the country’s past excesses, particularly in ignoring real economic development and focusing instead on speculative investments. Given the current situation, however, the United States government has taken it upon itself to respond to the panic at Wall Street. Congress approved a bailout bill that would allow the government to purchase problematic mortgage loans with a budget of US $700 billion. The bailout bill is to be combined with more stringent credit approval measures that were designed to counter the over-borrowing that had caused the real estate slide in the first place. Moreover, US Secretary of Treasury Henry Paulson viewed the bailout as a vote of confidence for the economy, as well as a boost to the ailing market’s condition.
Globally speaking, the bailout was highly anticipated in other countries watching as the United States grappled with its toughest economic problem ever. In fact, Congress’ initial rejection of the bailout caused massive drops in markets in Asia and Europe as these countries feared the worst given the United States’ economic influence. The failure of the bailout ensured much panic in stock markets throughout the world. Though internally problematic, other stock market watchers from around the world are viewing the bailout as at least some sort of cure that would lighten or minimize the current crisis.
Interestingly, stock prices in the United States drop upon the approval of the bailout bill. The fall comes as a response to the “band-aid” solution that the government has proposed. If anything, this is a solution that can solve a few problems. US $700 billion is not a small amount and should be able to keep a few investment and banking companies out of the red. However, the bailout plan is obviously a band-aid solution that will provide a temporary fix. The effects on the world may be direr than imagined. The United States still remains one of the most influential economic players in the world. The crisis and the resulting rise in unemployment rates, not to mention the drop in consumer expenses, would most certainly affect the rest of the world. The bailout is a simple and quick solution that may suppress the problem at this point, but it is certainly not capable of negating the global effects of the US financial crisis.
