In 2008, the financial crisis hit the country. Many enterprises and financial institutions went bankrupt, while ordinary people lost their property due to the inability to pay out loans. Nowadays, it is easier to analyze the reasons that have led to this major drop in the state’s economy. The housing bubble is one of the most obvious causes of the crisis, yet stock market movements also contributed significantly to the problem. Imposing a higher level of regulation of the financial sector by the government came as a reaction to the lessons learned from these factors.
The Stock Market
In theory, the stock market is a very logical structure that relies on the laws of economics. There are rules defining when the stock should be sold or bought, depending on the tendency to grow or fall in price. External factors like the development of technology, the political situation in supplying countries, or the change in the local legislation also must be analyzed for predicting the dynamics for a certain business.
Nevertheless, the situation in the stock market back in 2008 was marked by panic. As shares were rapidly decreasing in price, their owners started massively selling them before they could lose even more capital. Decisions were made fast, and not many shareholders cared about the effect of those actions. Brokers had the power of persuasion, yet they could not shape the way their clients thought. While shareholders watched the news, they became anxious about losing all they had, which made them decided emotionally instead of logically.
Different analytics argue what would the best strategy be for acting in a stock market in 2008. Some of them believe that the primary lesson from the situation is not to sell shares. History shows that over a certain period stock always goes up, despite the difficulty of the situation (Ro para. 7). Over more than 150 past years, the United States experienced several devastating periods, yet the market always managed to go back up even higher than before, as it was after the Great Depression when American government raised the economy by supplying allies with armory that was massively produced in the country. The don’t-sell principle was shared by some of the stock market players, but their views were not popular.
Flexibility and Behavior
Despite the points described above, the stock market is not that predictable. In fact, the share price may go either up or down, and this is the single stable value in this field. Thus, the principle of not selling the stock during the poor economic situation might just as well lead to failure. One of the most important lessons that can be learned from this financial crisis is that the stock market has to be flexible.
Any betting holds a risk to its performer. While there are options like a different size or value, outcomes are never possible to predict. The only difference lies in the amount of loss. In this case, traders must always keep in mind that the stock market game does not give any opportunities to completely eliminate all the risks. There is no single strategy that can be followed. Thus, the stock market is not a place for panicking since emotions rather create reactive decisions than flexible choices.
Another lesson that can be derived from the financial crisis is that the government has a great influence on the nation regarding its buying behavior. As John H. Cochrane mentions in his article, back in 2008, the presidential team translated and idea via mass media that the country was facing a massive crisis worse than the Great Depression and the government does not have money to save all the companies that were endangered by it (35). While admitting the difficulties is essential, the President is also responsible for controlling the situation by limiting the quick decisions caused by panic.
The Housing Bubble
Before 2008, the American government led by Republicans favored an idea of all citizens having the ability to afford a private housing. It corresponded well with the concept of the American Dream and made the government, which seemed to care for the population’s wellbeing, look good. Banks were issuing loans to a large number of people disregarding their financial background. By the end of George W. Bush’s term, so many people took loans for properties that could not afford that the whole system collapsed. Many banks closed, unable to return their investments. Besides, a lot of people lost their houses that they could not maintain or buy through paying off a loan.
The so-called housing bubble became one of the most visible causes of the 2008 crisis. It could be presumed that people have learned to buy only the things that they can afford according to their salary and stability of their other income sources. However, the current situation shows that a significant number of American citizens still live in houses, study in universities, and use items that they would not be able to afford in cash (Lamagna para. 2), despite the loan regulations becoming more severe.
The issue with the housing market in 2008 has split the American society into camps, each having a different perspective on who is responsible for those failures. The common trait is that these beliefs are somehow associated with the party that people support. Thus, two main opinions prevail, with Republicans blaming the government and ordinary people, and Democrats holding financial institutions responsible for the crisis (Swendson para. 2).
Republicans are the supports of the idea of free market. They do not tolerate the governmental regulation of the financial and trade sector, which has much to do with their conservative ideology of freedom as it was understood in the past centuries. Personal responsibility is a concept that many Republicans see as a way to control the economic instability associated with poor decisions. According to them, the government supported enterprises and offered them money to survive the difficult times. This caused a lack of responsibility among the enterprises’ managers who did not take enough time before making a risky decision. Ordinary people also fell for the program of affordable loans without properly evaluating their chances of paying off the borrowed money or at least reading the bank agreement.
Democrats, on the other hand, see financial institutions as the ones who did not take enough responsible actions to prevent the crisis. Managers of those organizations viewed the increase of personal wealth level as their top priority, while the nation’s interests were forgotten. The Democrat government that came to the White House in 2009 tried to increase the control over financial institutions.
One of the government’s answers to the crisis of 2008 became a set of policies aiming to control the process of decision-making in the country’s financial sector. The Dodd-Frank Act (111th United States Congress) signed in 2010 became one of the most influential documents since the Great Depression era that aimed to control the financial institutions in the USA. According to this piece of legislation, the economic stability can be reached through making banks and investors report their actions to the government, along with the revenues and losses that they have. The measure became a response to the former lack of independence of the Fed officials (Nier 6). While the agency was managed by very influential people, the extent to which they could interfere in financial institutions’ actions was quite limited.
One of the main lessons learned as a result of the financial crisis is that the financial market must be regulated on all levels. The government must report all the information in a clear way, yet any negative news must be presented in a delicate way not to create panic. Citizens also have to be educated about the proper ways to invest and to borrow money from financial institutions, while the latter have to be direct about the risks they take and impose on others.
The financial crisis of 2008 was a logical outcome of the situation when one party borrowed too much money, and another was making unreasonable decisions that led to the budget shortage and bankruptcy. Regulating the financial sector is necessary as it greatly affects the country’s economy. Of course, there is no guarantee that people in charge will make the proper decisions. However, the clarity in this field allows drawing many expert opinions that can be combined to develop the best solution.
111th United States Congress. Dodd-Frank Wall Street Reform and Consumer Protection Act. The U. S. Government Printing Office, 2010.
Cochrane, John H. “Lessons from the Financial Crisis.” Regulation, 2009. Web.
Lamagna, Maria. “These 7 Data Points Reveal the Sorry State of Americans’ Finances.” MarketWatch, 2016. Web.
Nier, Erlend W. Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis. Monetary and Capital Markets Department, 2009.
Ro, Sam. “Terrible Things Happen All of the Time and the Stock Market Keeps Going Up.” Business Insider, 2014. Web.
Swendson, Paul. “Possible Lessons from the Financial Crisis.” HubPages, 2016. Web.