Recession caused by greed of Americans?

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The documentary Inside the Meltdown illustrated the details of the recent recession in America do to sub-prime mortgages. After the fall of several big companies such as Bern Sterns and Lehman Brothers, government saw no solution but to intervene, they needed to act to help the economy survive. Wall Street had gambled by entering into the house market, many firms had made massive investments in sub-prime mortgages not knowing that it would become toxic for them in the future. Companies that decided to invest in this market had been enjoying immense profits for several years. They would buy mortgages; put them into securities and sell them to investors. However, the bubble that had been giving them great success started collapsing and companies began losing billions of dollars in bad mortgages. The meltdown began on 2007 rumors spreading that the house market was going to collapse. By spring of 2008 when CNBC rumored that Bern Sterns was in financial problems, things began going downhill. Something that government had to take into consideration was the huge web that connected every single company to the world in unforeseen ways. When the president of the Fed, Ben Bernanke, saw Sterns in the midst of going bankrupt, his fear of entering a recession became true. In the next few days CNBC announced that JP Morgan was buying Bern Sterns for $2 per share. More companies that have been involved in this risky market one being Lehman Brothers. Although government had helped Bern Sterns, they did not offer the same support due to moral hazard and political pressure; Lehman Brothers announced their bankruptcy shortly after. Everything froze the next day, nobody was making loans to anybody and the market was collapsing. Government had to act quickly so Paulson and Bernanke proposed a bill that Congress would eventually pass — a $700 billion bailout plan. This documentary gave everyone an example of how greed and social economic status can bring down an entire economy. People where buying houses that they couldn’t affored. This can be a lesson to not only business people but to Americans to understand the implications of buying something that they can’t afford.

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8 Responses

  1. What caused there to be an increase it people buying homes that they could not afford? Was there something that triggered this sort of greed?

  2. I honestly do no know the answer to that question. I guess at the moment a lot of people began buying houses and it became the new form to show off your wealth. People didn’t know at the time the consequences of entering a loan that they wewren’t sure they could pay.

  3. I think the increase in people buy houses they could not afford, and refinancing their homes with mortgages they could not afford, was not actually a result of personal greed; but a consequence of a common misconception. It seems that the problem was not that people knowingly bought houses they couldn’t afford, but that they mistakenly thought they could afford to purchases the properties. The value of these properties was believed by many people to be guaranteed to continue to increase because of the housing bubble. Resulting in the buyers of new homes believing that their investments were secure because, even if they ran out of money, they thought the value of their home would have increased greatly over what they paid for it. However, when the housing bubble collapsed these individuals became trapped in a situation where the value of their home decreased to significantly that they could no longer afford to cover their debts based on the equity of their house. I therefore think that the increase in people buying homes they could not afford in actuality was more of a result of their misconception that these were secure investments in the long run. A belief that was further supported by the lending practices pre-recession.

  4. You mention the greed of home buyers who wanted to show of their wealth but what else can be said about that of the corporations who focused solely on short term profits? Borrowing these large amounts of money and essentially “betting” it on nonexistent capital and a housing market soon to burst also seems like greed to me. You also mention the government helping these firms and acting quickly, but did lack of regulation further spark the greed of these institutions in the first place?

  5. I think that the lack of regulation did spark some greed int he institutions. Banks were doing their doing these investments in large amount without thinking of the future consequences, the economy falling apart. I think that government should have more action in regulating firms and how they invest their money. The FED can not continue to keep saving companies that are trying to get higher profits in very risky markets. The documentary ended with the CEO of nine major banks meeting with the president of the FED, Bernanke. Bernanke told all CEO’s that they should have been held accountable for everything that happen. However he had to do something to keep the economy alive. He also told them that negotiations like this will never happen again and that he hopes that they all learned the lesson. Hopefully they CEO’s took to heart what Bernanke was saying and learned from their mistakes.

  6. I don’t understand why people keep asking if the CEO’s learned their lesson. The government is the one that should be taking some notes. Because of their failure to regulate the industry, many of these sub-prime mortgages were sold far and wide, seeping into every crack of the world economy. For everyone who thinks the CEOs are the ones at fault, I whole-heartedly disagree and if you expect them to act in a way that is best for the people, you will be sadly disappointed. The government needs to take responsibility for its legislative failure and strive to do better in the future.

    • The reason why I keep saying I hope the CEOs learned a valuable lesson is because America is a capitalist country. In a capitalist society there is not a lot of regulation. After everything that has happened I would expect that the government realizes that capitalism is not healthy for the economy or the society. There needs to be more regulation, as you said. In a capitalist society, entities are only looking out for themselves finding ways to attain higher profits which could be damaging to the economy.

  7. Clear and simple. Don’t buy something you can’t afford.

    It does not matter that sub-prime mortgage was available what does matter is that people decided to take advantage of the service without thinking of the repercussions. American citizens are ultimately to blame but won’t take responsibility for their actions so starts the finger pointing. Greed has a strangle hold on everyone now and has ripped apart our moral ethical fabric.

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