US Recovery from 2008 Financial Crisis

The recent financial crisis in 2008 was second only to the Great Depression as the largest economic downturn of the 20m and 21“ century. The magnitude of its effects stretched beyond the United States and into the complex global market created over the past few decades. The human cost to the financial meltdown is incalculable, but its reasons for happening are scarily empirical. Today’s mainstream media has contorted the crisis into an obscure monster, an evading shadow of a distant economy. But the facts behind it are quite.

. .factual. Behind every great downward fluctuation, there are various trends and predictions that are simply overlooked. Unfortunately, the cognitive function of intelligibly knowing what is going to happen if we continue down a certain doomed path bows down to the manipulative function of not caring or seeing enough to pursue alterations.

But once the results of such actions became real and inevitable, policymakers in Washington pursued many different options in search of a healthy recovery.

However, we will see that from an institutional point of view, the policies implemented were ineffective to say the least. What are policies that evolutionary economists would have advised to make to help the economy recover? Would the recession have occurred if evolutionary economists’ ideas were heeded and applied? Such questions render answers that could potentially cause Americans to shake their heads. Overall, the financial crisis of 2008 could have been avoided if evolutionary economists’ predictions would have been heard and measures to institutionally regulate the housing and derivatives markets would have been implemented.

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In order to delve deeper into the policies behind and the predictions of the recession, it is necessary to statistically define what caused such a rippling collapse.

First and perhaps foremost, the great housing bubble of the early 20005 is often seen as the biggest contributor to the economic downfall. In early 2004 and 2005, the land was at an all-time cheap, and houses were relatively inexpensive to purchase. Fixed—rate mortgages given by large mortgages such as Fanny Mae and Freddy Mac were comparatively low. This inherently created the bubble, and now consumers were taking advantage of the cheap housing Consequently, fixed-rate mortgages started to rise. Even though mortgage companies and banks knew that many families could not pay off the mortgage at the rate they were charging, they were still cleared for purchases In the short run, the mortgage companies and banks were collecting revenue, but in the end, the outcome became all too grim, Fannie Mae and Freddie Mac were taken over by the government on Sept 8, 2008 and were given $200 billion to help recover from a heavy debt from mortgage default losses. Fixed-mortgage rates fluctuated between 65 and 61 percent during this time.

This caused financial markets to fall into turmoil, for people invested in realty were deeply harmed The Fed than began working on a $700 billion bailout plan On October 3‘“, it was put into action On October 29‘“, the Fed cut the interest rate to 1 percent to promote spending. In a matter of about two months, the bubble popped and the housing market collapsed. Additionally, the lack of regulation of insurance companies, investment companies, and the derivatives market as a whole caused unethical practices, hurting the nation’s stability as a whole. As Nobel Prize Winner Paul Krugman ingenuously put it, “Regulation didn‘t keep up with the system”. During the 1990s, a dynamic derivatives system was made to predict stock market outcomes. However, there was no regulation placed on this new system.

The banks, investment companies, and insurance companies such as AIG all found ways to use this system to gain excessive leverage on how to play the stock market. Eventually, AIG and investment companies began to bet against their own clients who they advised to take toxic shares and made a profit off of them. Without any regulatory implementation, investment and insurance companies ran rampant. After these events took place and the economy was essentially failing, the government attempted to play a huge role through policy implementation. However, the government, after bailing out so many huge companies and spending so much on quantitative easing (pumping money into banks to increase spending), had accumulated a good amount of debt. It was pronounced essential that the debt become a top priority.

According to Thomas Russo and Aaron Katzel, economics authors, there are three ways government can get rid of debt: pay it off, restructure it/convert it to equity, or inflate it In this case, America has attempted to inflate its economy through inflating prices and diminishing the value of the dollar, thus diminishing the value of the debt. But it didn’t work, for consumers expected the inflation to occur and acted accordingly. In evolutionary economics, it is important to gather real-world data to analyze consumer decisions; the government did not do this Similarly, the OECD conducted a survey in 2007 to see what consumers wanted the government to implement during the crisis. The government ultimately ignored the survey; among an extensive list of recommendations, the government took no actions when consumers said they wanted: the Earned Income Tax Credit to increase, to expand trade adjustment assistance, to improve energy infrastructure, to consider the introduction of a value-added tax system, and to consider a carbon tax on all carbon-based products.

All of these considerations seem viable, but the government did not give them heavy thought. In the eyes of the institutionalist, this is a fatal mistake Additionally, the discretionary monetary policy that the government placed in order to stimulate the economy ultimately failed. John B. Taylor, a contributor to the Journal Ofecanomic Perspectives, called their policies “a lack of empirical rationale”. First, the government implemented a tax rebate system, where the consumers received more generous tax rebates, This was done so that spending could increase. But the increase in consumers’ disposable personal income did not increase spending, it increased saving. Next, Taylor analyzes how the government used countercyclical discretionary policy (stimulating the economy during a downturn) and how it was not necessarily the best route to take. The stimulus ultimately failed in many areas this is backed by Paul Boothe, an economics author who analyzed Canada and Australia during their economic downturns.

These countries let the downturn take its course and used pro-cyclical discretionary policies to help. Australia and Canada both recovered more healthily than the United States is currently. This lack of empirical rationale and blatant overlook of seemingly essential data is why evolutionary economists continuously challenge mainstream economics and its use of mathematic models to solve crucial economic problems The institutionalist is able to sum up the recession in one word: predictable Thorstein Veblen spoke of capitalist greed and its potential dangers in 1923. When the Federal Reserve System was established in 1913, Veblen saw its possible collusive nature with investment companies and banks, As Jan Toporowski and Jo Mitchell, editors of Handbook of Critical Issues in Finance, put it, “Bernanke [chairman of the Federal Reserve] opened the Federal Reserve‘s discount window to Wall Street securities dealers, allowed investment banks to become bank holding companies, arranged for large commercial banks to become bank holding companies.

Veblen also predicted that the Fed was going to try to become the single authority to control inflation through the money supply. The harmful practices of these institutions were foreseen, but mainstream economists did not take these predictions into consideration. Additionally, Gunnar Myrdal’s dynamic disequilibrium that focuses on business cycles could have been used to predict the inevitable economic downturn It concentrates on real phenomena and is not bogged down by the mainstream models of attempting to reach equilibrium, The editors of The First Great Recession of the 21“ Century: Competing Explanations consider the idea that knowledge of the history of economic thought allows the idea that there is more than one way to solve economic problems. The institutionalist agrees. Lastly, G.M, Hodgson, contributor to the Cambridge Journal ofEconomics, is probably the most agreeing author with this hypothesis of prediction. He states that non-mainstream economists such as Richard Dale (financial deregulation), Hyman Minsky, and Nouriel Roubini (mortgage) all predicted the economic crash of 2008 dating back to 1992.

Their predictions were presented in their own works but were not considered due to the fact that they “did not make use of mathematical models”. The institutional point of view frowns heavily upon not considering real»world statistics to solve real»world problems. The need to observe empirical data and make rational decisions based on human phenomena is apparent now more than ever. However, as Hodgson says, “In current bureaucratic cultures, the absence of quantified risk prevented the warnings from being heededi Also as noted above, Roubini’s warnings were disregarded partly because he lacked a sufficiently respectable backup model”. In essence, it is imperative that mainstream policy makers open their minds to the complex global market and assess situations from a non-mathematical point of View