Shadow Banks and The Great Recession

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In last week’s post I looked at current financial reform and regulation, and why these are necessary to fix the economic situation in America.  I had looked into what this new regulation would entail and a lot of it was about regulating shadow banks.  According to the Paul Krugman column Financial Reform 101 there had been a lot of regulation of standard banks in the post-World War II period, which is why there had been such a long period of stability.  Unfortunately the regulations did not apply to “shadow banks,” institutions that carried out banking functions, but weren’t banks.  These shadow banks were able to operate without being controlled by the same regulations which standard banks were.  This enabled the shadow banks to make a lot of money really quickly, but at the same time left them very vulnerable to any risks, such as the mortgage crisis.  I want to look into the emergence of these shadow banks and the effect they had on the economic crisis.

In order to look into these shadow banks I want to look into the recent history of companies such as Lehman Brothers and Merrill Lynch.  I want to research the ways they operated and what risks they took that were dangerous.  I already know that Merrill Lynch worked closely with Enron, an obvious risk to begin with.  I want to look into court testimonies, interviews and investigations to determine what risks these companies took and how they lead to the financial crisis.  I think that these organizations operated in an open system.  I want to look into the ways that these organizations affected their environment and the ways in which their regulation-free environment affected them.  The actions of these organizations sent the economy into one of the worst recessions since the Great Depression and required the government to spend billions of dollars in order to keep the economy from collapsing. The environment also had an effect on the ways in which these organizations operated.  Because there were no existing regulations there was nothing to keep them from taking the risks they did.  I want to investigate the specific actions taken by Merrill Lynch and Lehman brothers and the ways they possibly affected the environment as well as the effect that any regulation or lack thereof had on their actions.  As I said I plan to look into testimony from things such as the Congressional Oversight Panel, and newspaper articles throughout the past decade about the operations of these companies.  I also want to look for scholarly articles regarding the lack of regulation, or Lehman Brothers or Merrill Lynch.

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Further Research: Alan Greenspan’s Take on the Causes of the Recession

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In preparing to write the final paper I have come to the conclusion that I desire to focus on how the actions of economists and large firms like Lehman Brothers led to the current economic recession. My preliminary explorations suggested to me that both economists and Firms like Lehman brothers had a sense that the market was now safe and that they could predict its course of action with ease. As I mentioned in my post last week, the belief that the market had become “inherently stable” led market actors to make decisions that ultimately resulted in financial crisis. Moving forward, I want address the question of why they acted in the manner they did in a little more detail, but more importantly I want to understand how the actions of economists and large firms caused the market to collapse. In addition, I want to see if there was a chance to avoid this recession by looking at the case of Lehman Brothers and exploring their organizational actions prior to the recession; hopefully enabling me to identify points in time where actions could have been taken to avoid the downturn, what those actions were, and who should have undertaken them. However, to do so I still need to look more deeply into the causes of the recession.

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Best of How To Understand the Great Recession

CONGRATULATIONS, Will! Your post on Financial Innovations in the Banking Industry is this week’s Best of the Blog!



The Blog Council for this week (Macey, Jessie, and Jordi) would also like to highlight other notable posts:

Derek for Most Passionate: The Great Recession: Making Fools of Economists

Emily for Best Use of Resources: The Great Recession and Reform

Molly for Most Original IdeaLehman Sisters?

We would also like to give a SHOUT OUT to Christian for redefining eloquence in An Eloquent Reflection on Innovation in The Wire

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