How did we respond to the Financial Crisis?

Since the Great Depression of the 1930s caused by the Wall Street Crash in 1929, the financial crisis was among the biggest crisis the world had seen; pushing the world’s banking system under enormous pressure and almost to their collapse itself. The crisis plunged several economies into economic decline: having enormous effect on unemployment seeing an increase of 100% in some countries as well as millions of people falling into poverty even in Advanced Countries such as the United Kingdom and the United States. Not only this but the financial market itself and trading markets froze. But how did we get ourselves out of this seemingly hopeless situation?

Initially, policymakers were successful. Considering as the economy was in a recession, the Congress passed a stimulus package in Jan 2009 where they pumped over $800 billion into the economy to control growing public debt and aim to grow the economy instead of diverting this money in an attempt to prevent an increasing debt, they tried to reflate the economy, sustaining economic activity and employment and replenishing banks’ balance sheets. The Federal Reserve offered to make emergency loans to banks to prevent the larger, more established banks from collapsing since the lenders began panicking. The US government began a policy knows as TARP: Troubled Assets Relief Program whereby $700 bn was allocated to help banks. It ended up spending only $250bn bailing out banks and was later actually expanded to help with the growth of companies that collapsed during the crisis including AIG.

The US treasury conducted what were known as ‘stress tests’ on largest banks on Wall Street whereby they looked through bank balance sheets and public announced which ones were stable and which were not to promote awareness for the public; eliminating uncertainty. In 2010, the Dodd-Frank Law took steps to increase transparency to prevent banks from taking on so much risk: it was useful in countless ways. First of all, it set up a consumer protection bureau (stops fraudulent business practices) to reduce unfair lending. It was reliant on financial derivatives (a financial security with value reliant on other groups of assets) being traded in ways observable by all participants in a market, thus increasing transparency even more.

So to conclude, the government indeed was effective in mitigating and reducing the impact of the financial crises in the short term: specific government policies such as the Dodd-Frank law ensured that there was increased transparency and to promote fairer lending and thus this could indeed be beneficial. Furthermore, the enormous bailout which poured billions into the banks prevented a total disaster but the question arises on whether this similar situation can be averted if the same crash happens again? The answer: probably not. In the long run, none of the solutions provided by banks were designed to help them in the future: the solutions all focussed on how to lessen the short-term impact.

10 years on, although we have learnt a few lessons, putting us in a better condition to adapt to the socio-economic issues of the COVID pandemic, we are still, as a society are unsure on what to do to forecast and prepare for future recessions and crises.