An Analysis of the Economic Crash of 2008-2009
During the years 2008-2009, the economy “crashed” with a sharp decline that affected people all over the United States. This significant market decline has been labeled the Great Recession. While there were many contributing factors to this market crash, the following is a discussion about the potential failure of economic governance. This failure to effectively govern was only one piece of a large puzzle. Other factors included the housing prices declination, the defaulting mortgages, decreasing consumer confidence, and unemployment levels. As such, many people believe things that were done that should not have been done by the government, and things that didn’t get done should have been done. A discussion of the balance between hierarchy and heteronomy provides insight as well. We will also take a closer look at the six market failures. These six conditions are explanations of why a market may fail. All six can clearly be applied to the Great Recession and give some insight into what was going on within the market at that time and how each of those factors contributed to the Great Recession in their own way. The government intervention was a key event of the time and was controversial to say the least. We will look at the successes and failures of the intervention and the intentions behind those decisions. Like most things, the government was faced with a no-win situation, but the analysis allows a clear picture to be drawn.
Hierarchy and the Great Recession
To begin this discussion, the role of hierarchy must be clarified as it pertains to the market events occurring between 2008-2009. The United States government has hierarchal qualities. Simply defined, a hierarchy is a government that is ordered by way of importance and influence. For example, in our government there is the Federal government at the top, then the state governments directly below, followed by the local municipalities. These are listed in order of influence. That being said, as you move up through the government bodies, they have more authority than those below them, with the “ultimate” in authority being the Federal government. This form of government works well, most of the time.
Many economists consider the hierarchical nature of our government part of the problem in the recession. Some of the casualties of the recession could be considered the local municipalities and the smaller governments. Due to the hierarchy, the Federal government was relatively unscathed while the state and local governments took quite a financial hit.
Heteronomy and the Great Recession
Next, let’s discuss heteronomy. This can be defined as being under the influence of a governing body. For instance, within the Unites States government, each level of government is subject to the rules or laws created by the government above them. Another way to look at this is at the individual level. An individual is subject to the rule of the local police department. That same individual is also subject to our government as a whole. When laws are passed, citizens are obligated to abide by them, or face consequences.
Some of the complication with heteronomy is in the fact that even if the individuals disagree with the terms or the laws put in place, there is very little they can do. They are obligated to follow such laws. This being said, you can apply this directly to smaller governments as well. For instance, a local municipality has no choice but to deal with the consequences of decisions made by the Federal government.
There are sometimes issues with this type of arrangement when decisions are made that aren’t uniformly popular. The Bank Buy Out that will be discussed shortly is a great example of such a decision.
Six Manifestations of Market Failures
There are six market failures in terms of economics and governments. These include imperfect competition, public goods, externalities, incomplete markets, imperfect markets, and unemployment. Theory states that these six market failures are proof that an economy is in complete market failure. Some say these six factors are actually just excuses for the consequences of poor decisions and weak leadership. Regardless of the nature, for the Great Recession, all six of these factors existed. First, imperfect competition. This refers to monopolies. Second, public goods. These refer to goods that the government pays for (or no one at all) but the public receives the benefits of them. Incomplete markets describe a situation when a service or product is failed to be provided, even at a price that is lower than the public is willing to pay. Lastly, unemployment levels were extremely high. Housing prices were dropping like rocks and unemployment levels were climbing. Consumer confidence was at an all-time low. All of these contributing factors created the financial devastation we have now grown to know as the Great Recession.
Government Intervention – Success and Failure
During the Great Recession, the government did attempt to intervene. With the volume of defaulting mortgages, and the trouble the banks were in financially, the government attempted to minimize the damage with the Bank Buy Out. The government was on a mission to prevent the big banks that were simply too big to fail from going bankrupt. When Lehman Brothers declared bankruptcy, that served as the last straw. Everyone else panicked. The government stepped in and offered over $700 Billion to big banks like Merrill Lynch, AIG, Freddie Mac, Fannie Mae, and Alliance, just to name a few. The idea was that if these banks when under, the nation was financially doomed, so the government stepped in and did what they could to ensure the banks survived the crisis. To what degree did they help? The support varied from bank to bank, but was significant. This was very controversial at the time. Many people believed our nation was in the situation that it was in due to the bad loans written by these banks and the extremely high consumer debts. They felt that the buyout was not the answer, and in fact, would simply contribute to the problem. However, while this did save those banks, and others, the debt incurred was immense and the ramifications of this decision will be felt for years, possibly decades, to come. In some sense, the government intervention through the Bank Buy Out was both a success (as it saved the banks) and a failure (as it didn’t do everything they had intended).
Conclusion
The time between 2008-2009 was appropriately named the Great Recession. The devastation caused by the decreasing housing prices affected people from all walks of life and in a myriad of negative ways. The “creative” loans led to mass amounts of defaulted mortgages as the adjustable rates began to kick in and people with “state income” loans realized that they simply couldn’t afford the payments anymore and began foreclosing. As the banks took back home after home, the financial future of the big banks began to look quite precarious. The hierarchical qualities of our government and the heteronomy contributed to the negative repercussions of the government involvement. The results of the Great Recession will be displayed for years to come. Lastly, the six manifestations of market failures showed the true magnitude of the situation. The market was destined to fail and the market failures give an explanation for those circumstances.
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