Carolina Alvarado Federal Reserve Bank Testing UTEP
2 ENTERING THE DISCOURSE In 2008 after the supreme mortgage bubble burst, a deep financial and economic crisis followed. This bubble was a result of deregulation of the banking industry and reckless behavior by banks and consumers alike. To this day our economy continues a road to recovery and banks are now under close supervision to prevent any similar situations from occurring in the future. Through detailed research and understanding of the topic, it is concluded that it is best to allow the Federal Reserve Bank to inspect banks and financial institutions on an ongoing basis in order to maintain a safe and transparent financial environment. Deregulation is championed by a free-market view that allows greater flexibility in business practices. However, if not regulated for a balanced environment, unnecessary risks and short-sighted goals can begin to permeate (spread and stick) throughout the market. The wellbeing of financial institutions is put at risks. This wellbeing is tied to economic health and business volume here and globally because of the nature of the industry. Leaving these institutions unregulated means leaving that we are leaving them at greater risk of failing which can lead to a chain reaction that will lead the entire system down (as did in 2008). The stress tests and capital requirements that the Federal Reserve administer are part of the solution. This solution ensures that unnecessary risks are not being made and that banks, as well as financial institutions, are strong enough to ride through economic downturns. Evidence presents that the 2008 financial crisis has been one of the worst in over seventy- five years, not only because of how the United States was affected but because it caused harm to other nations and their economy, making this crisis international (Lloyd B. 2011). This crisis led to the bankruptcy of more than 250 banks and financial institutions. Although the Federal Reserve mainly concentrates on the way banks were affected it needs to be understood that they do so because they are the base that should keep the economy running at a normal scale in case 3 ENTERING THE DISCOURSE of another economic downfall. Because this crisis hit our economy so hard, it not only harmed banks but also the lives of many families by wiping out millions of citizens from their jobs leaving them with little to nothing. It is safe to assume that no one wants to be placed in a position where they are so vulnerable due to lack of a job and money thanks to the deregulations and freedoms that banks have decided to give themselves. Therefore, the Federal Reserve should hold the right to inspect banks and like institutions in order to ensure economic safety in America. In 2008 toxic acid relief program (TARP) was introduced by the government in order to save banks from shutting down no longer being in existence. What led to this was that all banks were giving loans to the public in order to help them buy homes, knowing that the public had no way of paying back. In order to try and save themselves, banks began selling their contracts to other banks which stated such person owes me this amount of money and will pay back by this date. What the banks did was sell it for less amount but did not inform the buyer that their customer had no way of paying the money back. This was happening back and forth from financial institution to financial institution. When the due date came, banks were drained from money because the public had no way of paying them back. This led to foreclosures and resulted in banks having no money. Lehman Banks collapsed and Bear Stearns was bought out by J.P. Morgan. Because banks had no money, this meant that they were destined to shut down. If banks were no longer in existence then there was no way of the public asking for loans in order to buy cars, rent homes, and make big financial purchases. This meant that most of the population would have no money to keep the economy running, which would result in car dealerships shutting down and homes not being sold. This explains the fallout that the economy had in 2008 and the crisis that was felt worldwide. However the government was not willing to allow this to 4 ENTERING THE DISCOURSE happen and introduces TARP. This program allowed the government to buy all the toxic loans from the banks in order to keep banks running. This has resulted in the Federal Reserve finding it necessary to keep track of transactions and movements that banks are making on a regular basis.
Sources: 5 ENTERING THE DISCOURSE Thomas, Lloyd B. (2011). The Financial Crisis and Federal Reserve Policy. Retrieved from http://www.eblib.com Inside the meltdown. (2009). Retrieved May 13, 2014, from http://0- digital.films.com.lib.utep.edu/PortalPlaylists.aspx?aid=12400&xtid=44125 Bill Moyers journal: Facing the economic fallout. (2008). Retrieved May 13, 2014, from http://0- digital.films.com.lib.utep.edu/PortalPlaylists.aspx?aid=12400&xtid=39920 The Financial Crisis and the Role of Federal Regulators: Hearing before the committee on oversight and government reform house of the representatives. 110 TH Cong. 1 (2008). Wall Street to Main Street Is the Credit Crisis Over and what can the Federal Government do to Prevent Unnecessary Systematic Risk in the Future: Hearing before the joint economic committee congress of the united states. 110 TH Cong. 1 (2008).