Oct. 3 – The Bank Bailout

Gay Lynn HillBell Ringers, Economics(BR)

Oct. 3, The Emergency Economic Stabilization Act of 2008

The financial crisis of 2008 and the ensuing recession shook the American financial system to its very core. In the years leading up to the Great Recession, the stock market and housing industry seemed to be on an unstoppable rise from which everyone was benefiting.

At the time, regulations requiring banks to offer low down payments to people with poor credit ratings, along with corruption among lending agents, encouraged people to take out mortgages they could never pay back. On Wall Street, these loans were put into packages called mortgage-backed securities, separating the circumstances of individual borrowers from those investing in their mortgages. Few people, as a result, realized that so many mortgages were being given out to unqualified borrowers.

The ensuing housing bubble burst when these loans weren’t paid back and thus the “Great Recession” had begun.

Millions of Americans lost their homes. While some relief was offered to homeowners, the largest part of the bailout of the financial system benefited the big banks that had overseen the creation of the bubble in the first place. Most of these banks, and those who ran them, were unpunished for their role in the fiasco. Some argue that this has prevented the implementation of any true reforms in the banking system, and instead allowed banks to grow even bigger than they once were.

While most investors took large losses when the stock market crashed, a clever few realized that mortgage-backed securities were incredibly inflated and destined to fail sooner rather than later. The film, The Big Short, illustrates how these individuals “shorted” the securities and made millions when the system came crashing down.



Questions:
  1. What would have been the short-term consequences of not “bailing out the banks”?  The long term?
  2. Is “shorting” morally wrong (betting that the price of stock will go down)? Can you think of benefits to the market of allowing shorting?
  3. Why did big banks get bigger after the bailout?

Image Citation:

23, July 2018, The Rescue Plan. [Digital image]. Retrieved from <philebersole.wordpress.com>.