Factors leadingto the 2008 financial crisis was perverse incentives ending up having anegative effects, opposite of what was intended. Like, mortgages brokers gotbonuses for lending out more money, that encourages them to make riskier loans,which hurt profits in the end, leading us to moral hazard. Banks and lenderswere wiling to lend to sub-prime borrowers because they planned to sellmortgages to someone else. Everyone though they could pass the risk up theline.
“Too big to fail” is a perfect example of moral hazard. The governmentfail to regulate and supervise the financial system. To quote the bi-paryisanblamed on the years of deregulation in the financial industry and regulators fornot doing more. The U.Sgovernment enacted a program called TARP, the trouble assets relief program,and which the rest of us call the bank bailout. This initially earmarked 7000billion to shore up the banks. It actually ended up spending $250 billionbailing out the banks, and was later expanded to help auto makers, AIG andhomeowners.
In 2010,congress passed a financial reform, called the Dodd-Francj law. It took stepsto increase transparency and prevent banks from taking on so much risk.Dodd-Franck set up a consumer protection bureau to reduce predatory lending.
Itrequired that financial derivatives be trated in exhanges that all marketparticipants can observe. And it put mechanisms in place for large banks tofail in a controlled predictable manor. But theres no consensus on whetehr thisregulatin is enough to prevent future crises. In combinationwith lending by the Fed, this helped stop the panic in the financial system.Treasury also conducted stress tests on the largest wall banks. Government accountantSalarmed over bank balance sheets and bublicly announced which ones were soundand which ones needed to raise more money this eliminates some of theuncertainties that had paralysed lending among institutions.
Congress alsopassed a huge stimulus package in January 2009. This pumped over $800 billioninto the economy, through new spending and tax cuts. This helped slo the freefall of spending, output and employment. In the end, thestates tightened the agreements of global finance.
The capital ratios requiredin the banking community have been increased, as have the resources allocatedto the supervisory authorities. Another target of these new rules, known asBasel 3, is to reduce the banks “too big to fail”, which states wereforced to save during the crisis. “The solution is to make the banks allthe less profitable as they are large,” Charles Wyplosz, (IHEID) inGeneva, in the figaro. There aredifferent views on how the financial structure affects economic growth exactly(Levine, 2000). The financial services sector has experienced stresses due tolenders action repercussion in creating unnecessary moral hazard. The legalsystem shapes the quality of financial services (for example La Porta et al.,1998) in agreement with this statement, in my opinion I believe the governmenthad its part of responsibility to regulate banks by separating private topublic institutions to protect depositors.
Understanding theunfair advantage to competitors who has less efficiency due to nationalizedbank. The nationalization “option” shows how any medium or big company such asNorthern Rock could fail and the result of this failure would be to be saved bythe government with tighter restrictions and regulations in the future.A crucial reasonwhy I think the nationalization of Northern Rock was a good decision is becauseit ensured economic survival and efficiency in face of crises and post crisesreconstruction. It could have a monstrous impact on the British economy,affecting also citizens who would end up no longer trusting their financialinstitutions as well as the government.
This nationalization allowed tomitigate depositors even if the government had to pay a huge sum to save NorthernRock from these problems.Northern Rockcould not be funded more quickly than by being rescued under nationalownership. This give the banking structure the possibility to be rebuilt in aquicker and effective way which guarantee effective regulation of bank in theFuture.
After the nationalization of Northern Rock, depositors decided to trust thebank by putting their saving and money. Even if the failure of northern rock was massivedepositor took the advantage to secure their financial asset under thenationalization which guaranteed no looses.The nationalization of this bank is the least bad of the options. She would have the advantage of leaving the treasure alone in charge. It would then be easier to set priorities and ensure transparency. Without the help of the government, the bank would have gone into liquidation and Northern Rock would have received almost nothing.
With nationalization, they will receive compensation. Of course I think that the problem could have been stopped if regulations were put in place earlier to influence the I consider the rescue of Northern Rock to be a good decision, I believe it was the best decision in term of value for money to take as not to overshadow the economic situation a part of the western world financial crisis.