Mar. 16 – Bear Market

Gay Lynn HillBell Ringers, Economics(BR)

On Mar. 16, 2008, Bear Stearns collapsed, setting the stage for the financial crisis and Great Recession of 2008-09.

The Bear Sterns Company was a New York investment bank that specialized in “asset-backed securities.” These were largely tradeable financial instruments based upon mortgages. They made it possible to own a share of the housing market, without an obvious direct connection to a particular property. When the housing market collapsed in 2007, the value of asset-backed securities plummeted, and Bear Stearns went bankrupt.

The financial crisis of 2008 arose because many people took out mortgages for homes they could not afford. They were encouraged to do so through a variety of government programs, which both encouraged home ownership on the one hand, and required that lenders give money to high risk buyers, on the other. These two factors created a bubble in the price of homes. With rising prices, people could buy homes they couldn’t afford, yet still make money by selling them after the price went up. This all worked for a short time – until the bills started coming due.



Questions:
  1. The (fictional) movie clip implies that investment professionals understood the fragility of the market, yet did nothing to stop it. Indeed, many saw it as an opportunity to profit. Normally, people make money by providing things of value to consumers. How does this example contradict that claim?
  2. At the end of the day, the government determined that the entire economy would collapse if the banks that had caused the crisis were not bailed out by taxpayers. Ordinary citizens, therefore, ended up paying for the mistakes of bankers and politicians. What steps do you think might be taken to assure that this doesn’t happen again?
  3. When government regulations incentivize businesses to make unwise decisions that affect the overall economy, do you see this as an example of government failure, or of market failure?

Image Citation:

Matson, St. Louis Post Dispatch.  7, Mar. 2018, Cartoon depiction of Financial Crisis [Digital image]. Retrieved from <google.com>.