The Economic Damage of Greed

The Economic Damage of Greed

Brandy Nichole Carnes

POL201

Doctor Palmer

4/23/2012

Abstract

The purpose of this research was to identify the causes of the 2008-2009 Economic Crisis, identify constitutional authority, and explain the policies for recovery by key personnel in the U.S. Government. The research shows that financially irresponsibility played a large part in contributing to the crisis from risky mortgages, land use restrictions, oil prices and high unemployment. Bailouts of the Insurance and Banking industries were used to help stimulate the recovery but only succeeded in giving a hand out to those responsible for the crisis. The Federal Reserve lowered the interest rates, loaned money to insurance agencies and purchased long term bonds all in an effort to recover from recession. In conclusion, the steps taken to recover from the crisis, address the events that caused the crisis and the policies implemented have done little to help our struggling economy.

Keywords: economic crisis, government bail-outs,

The Economic Damage of Greed

The United States of America has spent over one-hundred years as a financial powerhouse in the world market. The US has been seen as a shining example of how to manage one of the world's financial super-powers since the early twentieth century. In 2008 and 2009, that status in the world began to change. The United States took a significant economic downturn that prompted government intervention to mitigate the damage. Federal legislative and legislative authority was used to take actions and create policies to halt the economic slide, initiate the recovery and prevent future recurrences. The crisis was created by a perfect storm of monetary instabilities that combined to create a situation so severe that it was felt around the world. Despite the variety of different factors involved, they were not equally damaging. One factor was so critical to the economic downturn that it set off the cascade of other issues. The lynchpin cause of the economic crisis was unsound financial practices perpetrated by the greed of financiers.

The economic decline that began in 2008 represented the result of decades of steadily worsening financial decision making made by businesses. It is obvious that a business exists to meet a need and to make a profit. An unrestricted desire for profit is often destructive to individuals and entire corporations alike. The greed of financiers can be directly tied to the 2008 and 2009 economic downturn. Unsound business practices gained more and more widespread use in the years leading up to the economic crisis.

These practices were known to be irresponsible and highly risky for everyone, but the short term potential for profit caused the people making these financial decisions to ignore the threat of economic collapse and keep making bad decisions for short-term gains. Personal and corporate greed led to one of the biggest financial catastrophes since the Great Depression of the early twentieth century.

Unfortunately, greed and intelligence are not mutually exclusive. Financiers recognized that there was a high demand for housing in a variety of markets nationwide. As demand for housing continued to increase, it became evident that millions couldn't qualify for traditional fifteen and thirty year mortgages, which required down payments and income verifications. In order to take advantage of potential buyers without the means to purchase a home, financial institutions created atypical mortgages that required little or no money down, adjustable rates, no interest, etc. These mortgages were a high risk to the financial institutions, so they packed them with other loans and sold them to investors. "Exotic and risky mortgages became commonplace and the brokers who approved these loans absolved themselves of responsibility by packaging these bad mortgages with other mortgages and reselling them as 'investments'" (Guina, 2012).

It was in this manner that the negative impact of having a bad mortgage was spread throughout the nation. Now, it wasn't just a potentially overextended family with a risky mortgage from a bank that was affected, it was a nation of investments that would feel the impact when the inevitable defaults occurred. However, as long as financiers could keep juggling the loans, they could act with without discretion because of the huge profits that were made for companies and individuals. "Private equity firms leveraged billions of dollars of debt to purchase companies and created hundreds of billions of dollars in wealth by simply shuffling paper, but not creating anything of value" (Guina, 2012). In an environment without sufficient governmental oversight, the mortgage market created a bubble of buying and investing that was based on unstable practices. These mortgages were like houses built on quicksand, and demand was continually seeking more, larger homes.

The demand for housing, which created the housing bubble and spearheaded the economic collapse, was affected by a variety of factors. As riskier mortgages made purchasing a home easier than ever before, it created a self-fulfilling demand as people sold existing homes to cash out the containing equity. Those people in turn wanted newer and larger homes, driving demand higher still.

Housing demands are not just a product of having less restrictive mortgages or population growth, but of the availability of housing. In many major metropolitan areas around the nation, the amount of available housing has been significantly reduced by land use restrictions. Many of the most densely populated cities in the United States also have rules controlling the construction and expansion of housing construction. This restriction on available housing drove prices up far above the actual value inside of cities. It became clear "that shortages and rationing lead to higher prices" (Cox, 2008).

Prices in regulated areas frequently became so oppressive that potential buyers were forced out of urban markets, into sub-urban markets, creating a higher demand, inflating those markets as well. "Regulated markets accounted for upwards of 80% of "overhang" of an estimated $5.3 billion in overinflated mortgages" (Cox, 2008). The effect of the surging housing prices led to an overall bubble of high housing prices that was marked by pockets of even more overinflated prices.

The economic