EC4001NP Economics and Society

Informatics College Pokhara

Economics and Society

Module Code: EC4001NP

Word Count: 2,022

Submitted By: Submitted To:

Student Name: Udgam Gurung Dr. Sushil Ojha
London Met ID: 20048859 Module Leader
Group: L1B1
Date: 17 September, 2021
EC4001NP Economics and Society

Acknowledgement
This report was prepared as part of the coursework for London
Metropolitan University's informatics college Pokhara's
Bachelors in Business Administration (BBA) program. Dr.
Sushil Ojha, my (Economics and Society) subject instructor,
deserves my heartfelt gratitude for allowing me to work on this
assignment. I owe him a respect and gratitude for his help and
guidance in finishing this assignment.
I'd want to express my gratitude to my family and closest
friends so much for being supportive and delivering me well
wishes.

Udgam Gurung
EC4001NP Economics and Society

Question:
Highlight the events, causes of 2008 Financial Crisis and the
following economic recovery.

Ans: - Years have passed since the financial crisis of 2007-2008. By the
summer of 2007, the global financial markets had demonstrated that the
evidence credit estimations were due for many years. BNP Paribas
advised investors not to withdraw money from two of its funds, and the
Bank of England was looking for emergency funding.

The current financial and economic crises in the United States and
abroad, as well as government interventionist efforts to stabilize national
economies, have prompted a lot of debate about the value of the free-
market system and the prudence of state involvement. The purpose of
this article is to provide a broader theoretical perspective to the debate
over the relative efficiency of free markets vs government intervention,
as well as to emphasize the importance of competent regulatory
oversight of financial institutions in ensuring economic stability. Despite
the warning signs, few investors believe the world's worst crisis in almost
eight decades has come to an end. The seeds of the economic
catastrophe were laid over years of low interest and weak credit laws,
which fueled a home value inflated in the United States and around the
world.

As is common, it begun with good intentions. Faced with the rise of the
dot-com bubble and, as a result, a series of corporate accounting
scandals and terror acts 2 on September 11, the Federal Reserve
lowered its federal funding rate from 6.5% in May 2000 to 1% in June
2003.   The goal was to boost the economy by giving companies and
customers access to cash at reasonable prices.
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Introduction

The present financial and economic crisis in the United States and
throughout the world, as well as government interventions to stabilize
economies, has prompted a major philosophical discussion and
disagreement over the merits of the free-market system and the role of
government in an economic system. In September 2008, fearful of the
worsening financial crisis, governments of Western advanced nations
took extraordinary measures to save failing banking institutions in their
own countries. In the United States, the tumultuous asset comfort
program has received approval for $700 billion, plus an additional $243
billion for commercial paper funding, $200 billion for Fannie Mae and
Freddie Mac injections, $112.5 billion for the AIG rescue, $29 billion for
Bear Stearns funding portfolio losses, and $12 billion for the United
States. The current financial and economic disaster in the United States
and around the world has sparked numerous intellectual debates and
controversies about the benefits of the free-market system and the role
of government in the economy, as well as interventionist efforts by
governments to stabilize their economies. In September 2008, fearful of
the worsening financial crisis, leaders of Western industrialized countries
took extraordinary measures in their own countries to save failing
financial institutions.
EC4001NP Economics and Society

Showing the Seeds of the Crisis

The seeds of financial disaster were planted during the years of low
interest rates and liberal lending laws, which led to a house price bubble
in the United States and others.

As is customary, it began with good intentions. In light of the fall of the

dot-com boom, a succession of corporate accounting scandals, and
therefore the terrorist attacks on September 11, 2004, the Federal
Reserve cut the federal funding rate from 6.5% in May 2001 to 1% in
June 2003. 2 The goal was to boost the economy by providing money to
businesses and customers at negotiated rates. As borrowers benefitted
from low-cost hypothecary rates, property values increased. Even
lending and impoverished subprime borrowers have recognized their
vision of housing ownership. The banks then sold the loans to Financial
Companies, packaging them in low-risk financial products like mortgage-
backed securities and collateralized debt obligations (CDOs). Soon after,
an obscenely large secondary market for subprime loans emerged.

Regulatory Policy and Economic Stability

Supervision is a step in ensuring that businesses and other non-

governmental organizations (NGOs) function in accordance with public
aims. Our understanding of the role of regulation in the relationship
between government and private organizations is dominated by two
major themes: public interest theory and private interest theory (Mitnick,
1980). Regulations are enacted to safeguard and benefit the overall
EC4001NP Economics and Society

public, or certain important sub-classes of the public, in line with the

principle of the public interest. For example, in circumstances where
customers and society are both attempting to obtain competitive
advantages. The idea implies that the production and distribution under
particular circumstances of an item or service via a competitive market,
in which all the necessary actors pursue their own self-interest, would
lead to a socially inefficient delivery of that commodity or service. For
example, in order to secure favorable regulatory action (Uwe &
Brautigan 1978), a business with lesser earnings can lobby, and
members of Congress can profit by converting the regulation into pork
barrel policy (Posner, 1969). (SINGH, 2021)

Financial Services and Inefficient Regulatory Governance

According to Tiger (1971), regulated firms frequently urge regulatory

bodies to change and implement legislation in their favor. Regulated
businesses can exert political pressure, for example, by presenting
lawmakers with unilateral evidence to support their positions and
attempting to gain their opinion through campaign funding.

As Laffont and Tirole (1991) and Laffont (1999) pointed out, regulatory
seizing is probably more successful when a set of interests is strongly
concentrated, organized, and involved, and when rules are technically
complicated, asymmetric data is common, and outside verification is
difficult. Kane (2001) also discovered that during his following study
capture, management and bureaucratic interests were not fully
represented, and budget constraints and shift objectives had a role in
the fiasco. Rosenbluth et Schaap (2003) show how different election
EC4001NP Economics and Society

rules impact the extent to which bank policies favor producers over
financial-service consumers. From the standpoint of regulatory capture,
such a structure might suggest a shared vision and interests between
the financial business and regulators. a liberal worldview based on
socialist goals of growth, employment, and redistribution (Ruggie, 1983;
Polanyi, 1957). The interventionist tendencies that had sprouted in the
prewar period were reinforced by pre-war and economic instability in the
1920s.

The Aftermath

Cost of the 2008 financial crisis

Figure Showing The Cost of Financial Crisis 2008.

EC4001NP Economics and Society

(Note: The amount spent by the government on the Troubled Asset

Relief Program) (TARP). They collected $442,6 billion after reselling
assets purchased during the crisis at a profit.

A public outrage erupted. Bankers appeared to be rewarded for

haphazardly controlling the economy. Despite this, the economy has
shifted once again. It's also worth noting that the government's bank
investment was entirely replenished with interest. The transfer of the
remodelling package helped to stabilize the stock markets, which had
collapsed in March 2009 and were about to begin on their longest bull
market in history. (SINGH, 2021)
EC4001NP Economics and Society

Financial Sector Liberalization And The 2008 Global

Financial Crisis

The emergence of neoclassical monetarism, new public management,

and economic globalization were all important in liberalizing financial
sector operations, which eventually contributed to the current global
financial and economic crisis. The maritime developments in public
sector reform in the 1980s and 1990s led to privatization, outsourcing,
and the elimination of public obligations in the United States and the
United Kingdom, respectively.

The movement for modern public management and neoclassical

liberalism resulted in market-based regulation of some government
entities, notably financial institutions in the Western world, and led to not
just economic progress but also unfettered capital markets. Since the
beginning of the 1990s, the world has shifted away from a wide legal
regulatory policy and toward more voluntary, collaborative, or market-
based regulatory instruments (Busch, Jorgens & Tews, 2005). Financial
market deregulation mixed with self-regulation resulted in the emergence
of financial products, with little or no financial regulatory oversight
significantly raising financial institutions' risks.

During the excess of liberalized financial market activities, regulators

took notice of the concept that if little financial innovation was excellent,
a lot would have to be wonderful (Bhide' 2009). The idea of this idea
came from bankers and contemporary financial theorists. Kanaya & Woo
(2000) argued that liberalization without appropriate regulations and
unnecessary regulatory abstention could have the disastrous
consequences of the international financial system for a nation-wide
financial system. As Kanaya & Woo (2000), the world financial system.
(Aikins, 2009)
EC4001NP Economics and Society

Signs of Trouble of 2008 Financial Crisis

Homeowners reached a threshold of saturation when interest rates

began to rise. The Federal Reserve began raising interest rates in June
2004, and the federal funding rate reached 5.25 % two years later. It
remained at that level until August 2007. There were early signs of
discomfort. By 2004, 69.2 % had bought a home. Then, in early 2006,
home prices started to fall.

Many people in the United States were seriously harmed. Their homes
were worth less than they paid for them. They couldn't sell their
properties since they owed money to their banks. With adjustable
mortgages, their payments would rise as the value of their properties fell.
The more vulnerable sub-prime borrower was first in line for mortgages
they couldn't afford.

(Notes to Remember) New Century Financial, a subprime mortgage

lender, made more than $60 billion in loans in 2006, according to the
Reuters news agency. In 2007, it declared bankruptcy.

One subprime lender after another filed bankruptcy as 2007 began.

Between February and March, more than 25 subprime lenders
collapsed. New Century Financial, a subprime lender, filed for
bankruptcy in April and laid off half of its employees.

By the end of June, Bear Stearns had stopped taking redemptions in two
of its hedge funds, prompting Merrill Lynch to remove $800 million in
assets from the businesses.
EC4001NP Economics and Society

Administrative and Policy Implications

The global financial and economic crisis has significant policy and
administrative consequences when seen in the context of competent
regulatory oversight and a healthy financial and economic system. Every
country needs governance systems that will help it achieve material
prosperity while also fulfilling its political and social goals. A society
creates a set of political institutions, which then constitute the legal
framework within which the country's economy and market’s function,
according to Lehne (2006).
As a result, despite each country's individual governmental system, the
underlying reality is that, while politics and markets are usually viewed
as separate processes that drive civilizations, they are intimately
connected (Zysman, 1983; Dobbin 1994). This implies that the nature of
a country's public policy, and therefore its regulatory framework, has an
influence on the economic and financial system's operation.
Despite considerable concern about the free-market system's survival as
a result of the present financial and economic crisis, the market and
government do and may complement each other in capitalist societies
with appropriate administrative and institutional capacity and enforceable
rules. Indeed, under the market capitalism paradigm, the major purpose
of government is to guarantee that markets function properly. The US
government was compelled to undergo specific regulatory measures to
protect not only society, but also financial institutions, from excessive
risks. In this view, government involvement would have been critical for
the financial institutions' stability and existence, as well as the
preservation of public resources that might have been used to provide
various social service.
EC4001NP Economics and Society

In developing and implementing policies with marginal social costs that

do not exceed marginal social advantages, the legislature's and
regulators' independence from undue special influence is important.
Regulation arbitrage, for example, can lead to unhealthy competition and
risk concentration as a result of disparities in regulatory and oversight
across financial institutions engaging in similar securitization operations.

Conclusion

Deregulation without adequate regulatory adjustment, weak regulatory

inspection, and a failure to learn from the past all contributed to the 2008
banking and financial crisis. A country's financial sector becomes prone
to disaster without adequate economic policy and regulatory framework,
threatening the broader economy's stability.

Historical accounts and evidence show that a failure to avoid past

mistakes, build on past successes, and put institutional safeguards and
control mechanisms in place to help minimize inefficiencies has resulted
in disastrous consequences for either the free-market system or
government intervention in an economy. Governments in capitalist
nations rely on business for investment, output, employment, a higher
standard of living, and government revenue. This needs a governmental
and corporate structure that encourages increased aggregate demand
and rapid economic growth, as well as increased income to sustain it.
EC4001NP Economics and Society

Bibliography
SINGH, M. (2021, Janaury 10). The 2007–2008 Financial Crisis in
Review. Retrieved from Investopedia :
https://www.investopedia.com/articles/economics/09/financial-
crisis-review.asp
Aikins, S. K. (2009, Janaury 17). Global Financial Crisis and
Government Intervention: A Case for Effective Regulatory
Governance. Retrieved from Reserch Gate:
https://www.researchgate.net/publication/228911287_Global_Fina
ncial_Crisis_and_Government_Intervention_A_Case_for_Effective
_Regulatory_Governance

Reference
https://www.slideteam.net/2008-financial-crisis-cost-spending-ppt-
powerpoint-presentation-model-graphics-design.html