The most prominent scenario of the recent financial crisis is the “No Policy Response” scenario, in which policymakers sit idly by as the downturn continues. Of course, policymakers cannot simply stand by while the downturn worsens, but many critics argue that they should have acted sooner. Here are three scenarios illustrating the need for government action in the wake of the 2008 financial crisis. Each scenario has its own pros and cons, and should be discussed in turn to help us better understand how the crisis unfolded.
Credit growth
This study investigates the role of lending growth in Western European banks. Using a panel of 18 Western European countries, it examines how the 2008-2009 financial crisis and subsequent sovereign debt crisis affected lending growth. Using a model that combines the size of the economy, it finds that the four different types of banks show varying levels of procyclicality and lending growth. While commercial banks showed the greatest procyclicality, stakeholder banks showed little or no procyclicality.
The financial crisis led to severe panic and a system-wide run on credit providers, including banks and nonbank lenders. Banks make loans, but intermediaries carry most of the credit risk on their balance sheets. Credit providers finance lending by issuing short-term, safe liabilities. These include repurchase agreements and old-school demand deposits. The impact of the credit crisis on financial markets is a major cause of the current recession.
Asset-liability mismatch
One of the most important aspects of the financial crisis is asset-liability mismatch. Banks are prone to this mismatch since their assets often lose value. In addition, they borrow money at floating rates but lend to consumers at fixed rates. These factors increase the risk of insolvency. Thus, to avoid the danger of bankruptcy, FIs should focus on addressing this mismatch. They must implement a dynamic paradigm.
One way to prevent this problem is to ensure a proper mix of long-term and short-term funds. This is not possible if the bank is not properly funded. Fortunately, NBFCs have learned to manage this mismatch. For example, they should invest in hedge funds to address mismatches in interest rates. But, NBFCs must also take measures to reduce the risk of mismatch in asset-liability ratios.
Lehman Brothers collapse
The 2008 financial crisis and the Lehman Brothers bankruptcy have made the events of that day synonymous with economic meltdown and wealth destruction. Former Lehman Brothers executive Paul Hickey is an example of this. He founded Bespoke Investment Group after the collapse of Lehman Brothers. The financial crisis also resulted in President George Bush’s $700 billion bailout plan. And the Dodd-Frank Act, which was signed by President Obama in 2010, was born out of the financial crisis.
At the time of Lehman Brothers’ collapse, it was still operating under the oversight of the Securities and Exchange Commission. The Securities and Exchange Commission was supervising four other independent investment banks, including Lehman. But the program soon failed, and the final two investment banks became bank holding companies under Federal Reserve regulation. However, the financial crisis made this program seem unnecessary and counterproductive. It’s worth considering whether or not the SEC and the Federal Reserve are making the right decisions.
Government response to financial crisis
The response to the financial crisis will most likely be the same as that of the previous economic crisis. Governments will likely expand certain domestic commitments on a deficit basis. Already, government spending has increased in many sectors, such as infrastructure projects tied to job creation. This response is not surprising. Unlike the 2008 financial crisis, this one will likely focus more attention on preventing future crises. It is also likely to involve greater global government coordination.
To understand what exactly has been done, we need to know how governments responded to the previous financial crisis. The Federal Reserve, for example, acted to increase the amount of money in circulation. However, this money did not directly benefit consumers. This contrasts with the government response to the Covid-19 crisis. In addition, the Fed and Congress implemented aggressive stimulus measures at the same time, which increased M2.
Lessons from history
A book titled Lessons from History was published in 1968, and has been a perennial favorite of history students. The authors, Will Durant and Ariel Durant, explain how history has taught us many things. They discuss the importance of preserving history and learning from its mistakes. The lessons presented in the book are both insightful and practical, and can be applied to any situation. But they are not for everyone. Not everyone is willing to take on the lessons of history.
In history, we often see that opportunities and threats come and go, but the decisions we make can affect our future. This podcast examines historical decisions and brings the findings to the listener. It covers topics of general interest, and Draevnn Motkova’s presentation makes history seem much more interesting. She explores many aspects of history and brings these lessons to life for her audience. This podcast is well worth checking out.