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.

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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How to Reform? The Big Question

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In wake of the financial crisis the public is demanding more regulation on the banks and other financial institutions that have put the country’s economy where it is.  These regulations range from total transparency with derivatives, breaking up of the “Too Big To Fails” (TBTF), and other restrictions on financial institutions.  Anyone can easily see that this is a complex topic, now throw politics into the mix.  On the Baseline Scenario many author and financial reform bloggers have discussed this topic and its issues. Continue reading

The Great Recession and Reform

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While living in the Bucknell bubble, I tried to avoid hearing about the financial crisis.  I guess my thinking was the less I knew about it, the less real it was.  This was when I was a naïve sophomore, but now as a junior I am much wiser (maybe) and I realize that it is better to be informed and understand the financial recession than to have no idea what is happening. Continue reading