...4/27/12 Analysis of Ben Bernanke Lecture Pt. 3 There were many parts of the financial crisis of 2008-09 that I did not fully understand until listening to this lecture. Bernanke very succinctly and informatively laid out both the context of the recession, as well as the macroeconomic causes and responses to it. Many of the points he made in the lecture were relatable to concepts learned in this class. The role of the Fed was also illustrated in a more in depth way than I had learned before. The causes of the recession were clearly defined in this lecture, and because of this I was able to more fully grasp the context of the situation, as opposed to trying to clarify all of the buzzwords that are used on the news. Applications of macroeconomic principles also helped me to understand his lecture. His discussion of subprime mortgages, mortgage backed securities and their effects on investors, especially money mutual funds, helped to illustrate how both monetary policy, lending practices, as well as attitudes of investors can all contribute to both crisis and economic growth. The sloppy banking practices, coupled with the demand for mortgage backed securities and real estate helped drive the pre-recession situation into the black; it was a very welcome environment for all parties. This was of course until housing prices rose and homes were foreclosed on. This created a domino effect of pessimism among investors, as well as the devaluation of mortgage-backed securities...
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...Ken Lewis’ Ethical Dilemma by Kristen Carmichael Professor Kelly Global/Ethical Issues in Business August 20, 2010 Two years ago, Ken Lewis, the former CEO of Bank of America, was confronted with an enormous predicament when Ben Bernanke and Henry Paulson requested that his company immediately acquire Merrill Lynch to save them from declaring bankruptcy. With the financial system of the United States on the verge of collapsing, how do you say no to the Federal Reserve Chairman and the Secretary of the U.S. Treasury? Thus, Lewis agreed. Now fast forward one year later to September 2009. At this time, Lewis has agreed to step down as CEO. He has also been indicted for fraud for “deliberately misleading his shareholders about the ballooning losses at Merrill Lynch” before the bank bought the firm, which includes failing to disclose the year-end bonuses that were paid out to Merrill executives (Fitzpatrick and Eckblad). Furthermore, this begs two questions: what ethical dilemma was Lewis facing during this crisis and how could he have better handled the request from Bernanke and Paulson? Assuming I was Ken Lewis when Bernanke and Paulson requested me to acquire Merrill Lynch, I believe I would have gone through with the acquisition as well. According to House Republican staffers in a memo obtained by Bloomberg, “the Federal Reserve and U.S. Treasury overstepped their authority and pressured Bank of America to complete its Merrill Lynch purchase” (Lanman and Torres). The memo...
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...Whispers from within the multi-billion pound luxury goods sector suggests that the Avon lady is about to be taken over. For donkey's years the catchphrase 'Avon calling', accompanied by door chimes, has been associated with sales reps who went from door-to-door hawking the US cosmetic giant's products. It has been a highly lucrative business for many 'local' agents and Sunderland-based Debbie Davis recently became the first Avon rep to earn more than £1million by knocking on doors. Avon Products Inc's shares have been in strong demand in New York of late and improved a further 1.2 per cent to $33.33 early yesterday amid hot gossip that it is attracting the attention of several big industry players. L'Oreal, the world's largest cosmetics and beauty company, is rumoured to be lining up a cash offer in excess of $44 a share. More... Live market data {thisismoney.co.uk} Share tips round-up {thisismoney.co.uk} Canadian pension fund plan rival Potash Corporation bid Procter & Gamble and Anglo-Dutch giant Unilever, 20p off at 1794p, are both believed to be keeping a close eye on the Avon situation. Dove-to-Aviance beauty group Unilever recently agreed to acquire Alberto Culver, the world's sixth largest hair care manufacture, for £2.3billion, so looks to have enough on its plate. But dealers hear that chief executive Paul Polman could still be interested in Avon, whose boss Andrea Jung is one of the longest tenured female chief executives in the US. Recently boosted...
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...their investment. It is also revealed the Dick Fuld was offered many deals that he denied because he believed that Lehman Brothers was worth much more then was being offered. Hank Paulson is then put into the position to decide whether to offer Lehman Brothers a bailout or force them into declaring bankruptcy. Paulson soon realizes that a snow ball effect is in occurrence. Once the investment banks start failing, so do other companies such as AIG, who depended on the investment banks, and GE, who is also failing on daily obligations. Soon enough the whole economy is at risk, as Paulson is trying to solve the investment banks issues. Ben Bernanke, Chairman of the Federal Reserve, advises Paulson that legislation must be passed through Congress that allows the Department of Treasury to continue intervening in this economic downfall. Bernanke is convinced that if Congress does not step in and help, this crash will be worse than The Great Depression. With...
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...What caused the global economic crisis, and what could have been done (by governments or the private sector) to prevent this? Also, give your personal thoughts on this issue. My personal thoughts on this issue: After watching all five parts of the movie, I think the global economic crisis key factor was caused by deregulation which began since Reagan administration, because it contributed to the real estate bubble and allowed greedy and overpaid banks to go on unreasonable leverage. Regulatory bodies allowed privatization of the banks, dropped the regulations that limiting the investments of the banks and amounts they could borrow. The banks, Wall Street traders and investors and mortgage lenders failed to look at what they bought and ignored risk management. When the going is good, they pocket more than their fair share. The banks borrowed more than several times of their value. Derivatives allowed the lender to repackage the loan and sell to investment banks, which in turn repackage and sell them to investors without considering if the customer ever pays the loan back, since they have their money. Banks and greedy lending groups were showered with incentives to give loans to anyone for exorbitant interest rates, and since nobody cared if the loans were repaid, the commission alone was all that mattered. The massive amount of liquidity in the system and the hunger for mortgages resulted them to repackaged the loans into collateralized debt obligations (CDOs), with numerous...
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...The Great Depression Thomas Clay Forrest Economics 510 Professor Don Waldron February 6, 2011, 2011 The Great Depression The Great Depression was the deepest, longest and most widespread economic calamity of the twentieth century, and is the most common standard of how far things in the world’s economy can decline. Beginning with the First New Deal, which put into effect a host of relief and recovery measures designed to improve economic conditions and stimulate recovery, myriad other steps were taken to prevent another catastrophe of this magnitude from ever occurring again. Are these measure enough, though, and could the world ever experience another Great Depression? How do the events of the Great Depression era compare to recent economic downturns, including the current deep recession the world is experiencing? This essay will provide answers to these questions and provide an analysis of the causes and events that led to the Great Depression. It will also present the reasons why another Great Depression is unlikely to occur again. Debates vary as to the causes of the Great Depression, with many well-respected economists offering differing opinions to what they believe led to the historic event. British economist John Maynard Keynes felt that the Depression was driven by demand, and in his book the General Theory of Employment Interest and Money, Keynes argued that lower aggregate expenditures in the economy contributed to an enormous...
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...following their investment. It is also revealed the Dick Fuld was offered many deals that he denied because he believed that Lehman Brothers was worth much more then was being offered. Hank Paulson is then put into the position to decide whether to offer Lehman Brothers a bailout or force them into declaring bankruptcy. Paulson soon realizes that a snow ball effect is in existence. Once the investment banks start failing, so do other companies such as AIG, who depended on the investment banks, and GE, who is also failing on daily obligations. Soon enough the whole economy is at risk, as Paulson is trying to solve the investment banks issues. Ben Bernanke, Chairman of the Federal Reserve, advises Paulson that legislation must be passed through Congress that allows the Department of Treasury to continue intervening in this economic downfall. Bernanke is convinced that if Congress does not step in and help, this crash will be worse than The Great Depression. With many...
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...Literature Review: Do Markets Work Or Do They Just Work Until They Don’t? “One of the most constant aspects of American life is change – and nowhere is it more evident than in our financial markets.” – Henry Paulson, in his remarks on Blueprint for Regulatory Reform (3/31/2008) It is hard to believe that we have had so many market crashes throughout history and yet there exist so many people that claim they can guarantee certain returns. This fallacy is one of the main components of economics as a study. So called experts have been known to praise certain theories while they unknowingly march into a market crash. In order to understand how market crashes happen, it is critical to understand the beliefs that were held leading up to past crises. In Olivier J. Blanchard’s paper published in 2008 by the National Bureau of Economic Research, he declares that “the state of macro is good” (Blanchard 2008, 2). Blanchard, of MIT, was expressing his contempt with the way in which the macroeconomy appeared to be operating and the ability of economists to explain the operations. He was not alone. Alan Greenspan, former Federal Reserve Chairman, admitted in October of 2008 to the House Committee on Oversight and Government Reform that he was “shocked because [he had] been going for 40 years or more with very considerable evidence that [the economy] was working exceptionally well.” What had led these renowned experts to believe all was well while the markets were wildly deviating from their...
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...Bumpy Ride for Stocks Post-Fed By JONATHAN CHENG Stocks bounced in and out of positive territory and the dollar and the 10-year Treasury note fell after the Federal Reserve said it would buy $600 billion in longer-term securities by the middle of next year as part of its latest effort to prime the domestic economy. The Dow Jones Industrial Average was down 11 points, or 0.1%, to 11178, while the Standard & Poor's 500-stock index fell less than one point to 1193 and the Nasdaq Composite fell less than one point to 2533. [pic]Getty Images A financial professional looks over at his screen on the floor of the New York Stock Exchange in the middle of the trading day Nov. 3. The 10-year Treasury note sank, pushing the yield up to 2.634%. Gold and metals also fell as the Fed said it would maintain its existing policy of reinvesting principal payments from its securities holdings, and purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011 at a pace of about $75 billion a month. The Fed said it would also "regularly review the pace of its securities purchases and the overall size of the asset-purchase program" as economic data flows in. Expectations of Fed easing had helped fuel a two-month surge on the stock market that has added 12% to the Dow. The Fed move was generally in line with market estimates, putting to rest the idea that the central bank would proceed on a more cautious step-by-step basis from the get-go. Anthony...
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... Matthew Toenjes 2/17/2015 BE 401-004 Inside the Meltdown Review The 2008 Economic Recession was devastating to many. Corporate greed and overconfidence in the housing market were the main culprits to the economic downturn. As the US economy crashed, Wall Street and investors began to panic. This widespread panic was for good reason as huge multinational firms began to fail. One after another, these firms were about to go bankrupt. As the panic spread, stock prices began to plummet. As the US government tried to turn the economy around, it plunged further and further down. The effects of the recession not only hurt the US economy, but sent “shockwaves” throughout the world. I did not realize how close our economy was to collapsing. Ben Bernanke said, “If we don't do this tomorrow, we won't have an economy on Monday." When I heard this, it sent chills down my spine. How did we get so close to our economy collapsing? Toxic assets are one of the main reasons for our economy failing. These were loans given out to un-creditworthy individuals and unlikely to be repaid. To add to the problem, banks were issuing many of these high risk loans and the market became flooded with them. In addition, these toxic loans were resold which created systematic risk. Massive companies began to fail and a domino effect was created when one company after another got into trouble as people began to default on these toxic loans. During this time, investors had lost confidence in the markets which caused...
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...Dr. Milton Friedman 1. The Social Responsibility of Business Is to Increase Its Profits." that business has a 'social conscience' and takes seriously its responsibilities for providing employment, eliminating discrimination, avoiding pollution In 1970 Milton Friedman wrote that "there is one and only one social responsibility of business--to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud." That's the orthodox view among free market economists: that the only social responsibility a law-abiding business has is to maximize profits for the shareholders. The most successful businesses put the customer first, ahead of the investors. In the profit-centered business, customer happiness is merely a means to an end: maximizing profits. In the customer-centered business, customer happiness is an end in itself, and will be pursued with greater interest, passion, and empathy than the profit-centered business is capable of. 2. Friedman is careful to note that the corporate executive has direct responsibility to his employers, the shareholders. He is also careful to argue that this is not necessarily the manager's sole responsibility; there is, after all, the duty to conform to the basic rules of the society. It is not clear if the latter is a moral responsibility or a social responsibility--i.e., if it is a duty the manager...
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...Geithner & Bernanke Amid the Global Financial Crisis 1. Fiscal policy: Given the breadth and depth of this recession, it was clear that the Treasury and the entire Obama administration had to take bold actions. In fact, right at the beginning, they were committed to a fiscal stimulus policy package which would be “substantial” enough to pull the economy out of the recession. The final stimulus package signed into law in 2009, the American Recovery and Reinvestment Act, was totaled $787 billion including about one-third tax cuts and one-third aid for states and the unemployed. Of the rest, labor health and education investment got 8%, and infrastructure investment got about 7%. It also included a large amount of government money to bail out the automobile industry. (Frank, 2009) In addition, the U.S. government initiated the Treasury’s Troubled Asset Relief Program (TARP) which was signed by Congress in 2008. This $700 billion program was first designed to free banks and other financial firms of the most toxic securities on their books by purchasing them in auctions. As the financial crisis deepened quickly, the Treasury changed the plan and used the TARP funds to directly recapitalize banks and financial institutions. For example, the Treasury injected $40 billion into AIG and about $125 billion to 8 large banks such as Citigroup, Wells Fargo, Bank of America and etc. (Frank, 2009) Monetary Policy: There are three basic tools for Fed to use -open market operations, discount...
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...1.) The biggest trigger was subprime borrowers’ large (in absolute terms) losses of residential mortgage loans. IKB’s Rhineland off-balance-sheet vehicle was also no longer rolling over the ABCP it issued in U.S, markets to fund its asset-backed securities. Commercial paper investors feared risk of default on these securities because of IKB’s difficulty in meeting its funding obligation. This led to runs on key institutions which had a detrimental effect on the financial system as a whole. This “Run on Commercial Paper” occurred because it is easier and safer for lenders to withdraw their money in this type of situation even if the vehicles had no exposure to subprime mortgages. Thus, this financial strain also spread to the bigger banks that were funding these vehicles. This caused short-term funding in interbank market to freeze up. This, with the growing instability in global money, hurt the flow of lending to nonfinancial borrowers and ended up being more damaging than the subprime losses. Another trigger was a “sudden stop” in syndicated lending to large risky corporate borrowers because funding for these loans had recently transitioned from banks to special purpose vehicles that funded themselves through CLOs that were purchased by a variety of investors, including ABCP vehicles. This sudden stop was viewed negatively by investors and contributed to triggering the crisis. 2.) One of the vulnerabilities was the dependence on unstable short-term funding. Shadow banks,...
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...Reflection Paper Housing Crisis Frontline producer Michael Kirk tries to explain how the economy went so bad so fast. Why emergency measures by Federal Reserve Chairman Ben Bernake and Secretary of Treasury Henry Paulson couldn't manage to prevent the worst economic crisis in a generation. It was 2007 when the housing bubble began to burst and Wall Street started to panic. By spring of the following year, rumors began to swirl that prominent investment bank Bear Stearns was about to go bankrupt due to billions of dollars in bad mortgages. In the world of finance rumors can be the difference between success and failure. It was the beginning of a bad chain reaction, someone quoted in the clip “it was like a disease spreading quickly” Over the course of 24 hours, the stock market crashed and credit markets across the globe froze, effectively sending the economy into a downward spiral. It sent this huge confidence shock wave through the entire economy because all of a sudden, people were saying, "If two of the largest companies on earth can fail, that means anyone can fail." At that point, there is no company too large to not fail from the housing bubble Charles Duhigg. After exhausting all other options, Paulson personally called the CEOs of the nation's nine largest banks and told them to come to his office the next day at the Treasury building. Paulson gave each man a single piece of paper spelling out the conditions that said they agreed to sell shares to the government...
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...The article, “Bernanke: Economy Healthy, but...”, posted on CNNMoney.com, discusses how even though there has been a housing slowdown, inflation still looks as though it will not be an issue. Bernanke feels that as the slowdown from housing disappears, the U.S. economy will begin to expand at a more moderate pace during 2007 and into 2008. There are a few factors, however, that Bernanke says could change this outcome. Prices for oils and other commodities such as foreign technology are outside of U.S. control and therefor could have a negative impact on the U.S. economy if things take a turn for the worse. Bernanke says that for the most part this looks doubtful, and as long as foreign trends continue the U.S. economy should do well in the coming quarters. Bernanke also address the Fed’s plans for the coming year, whereas they have stated interest rates at 5.25 percent, which is likely to spark solid growth and slowly decrease core inflation, which is measured by the price index for personal consumption spending minus food and energy. Bernanke did reiterate, however, that if inflation risks do develop the Fed is prepared to take action. From Bernanke’s view that inflation pressures were shrinking, the prices for stocks and government bonds rose, while the value of the dollar fell, as traders thought that the Fed may lower interest rates later in 2007. While many different factors show that the U.S. economy will enjoy healthy and sustained growth, the rate of hiring still may...
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