Alan Greenspan Case Study

Between the late 1890’s, after the panic of 1893, and the late 1920’s, the American people led good lives in which most prospered. In the 1920’s the problems that led to the Great Depression were dispersed over a time of maldistribution of wealth, and what was called a bull market. A bull market is a stock market that is based on speculation. Speculation was a system of borrowing money to buy stocks and selling for a profit. Speculation only worked if the stock market was on the rise though.

Average working individuals went into debt stocks had no defined value, but was based upon demand. If the stock was popular, the price increased. If the stock was unpopular, then the price decreased. For example, many people in the 1920’s made so much money that they thought they could never lose with buying stock in American companies. Men such as Jesse Livermore became famous from buying and selling stock from the US treasury (Chancellor).

Going from inflation to deflation there was a boom from 1919-1920 and a slump in the year after. Although the slump was short, it was harsh for the people to endure. In assisting with the production of money, the Federal Reserve System kept discount rates low for member banks which led to an increase of borrowed money, the money supple raising, and the price inflation accelerating. This expansion of money supply during inflation wiped out much of Federal Reserve System’s free gold determined to restore by reducing excess money. Banks had to stop borrowing money and begin paying back the loans of the Federal Reserve System.

Avery Howard Econ 102 - Financial crisis paper 4-30-14 Causes and Results of the Financial Crisis. The 2008 financial crisis started long before the market crash of 2008. After the Great Depression, America enjoyed a time of “Great Moderation”(economist) named for the consistently low interest rates and steady growth of the economy following the Great Depression. Financiers took note of this and eventually started to make more and more risky investment decisions; financial firm’s profits would increase as long as low interest rates and stable economic growth continued. Financiers eventually grew blind with greed.

He theorized that all crises resulted from an overproduction of commodities and capital. When there is a decline... ... middle of paper ... ...he study, “the top 10% of earners in 1928 received 49.29% of total income. In 2007, the top 10% earned a strikingly similar percentage: 49.74 percent.” This data may serve as an indication of the role of inequality in leading to financial crises. When the wealthiest individuals in society are in control of the money, they act irresponsibly, which leads to financial collapses, as experienced during the Great Depression and the recession in 2008. Overall, Marx’s theories identify several aspects of capitalism that inherently cause oscillations between crises and periods of economic expansion.

Its most recent profit increase was a result of developing countries and cities such as India, Abu Dhabi, and China making money. This doubled the cash pool available for investments, but left fewer solid investments for the taking. The solution was residential mortgages and the US housing market. The investment managers thought the low-risk high-return investment in the housing market was a good, stable idea. The glo... ... middle of paper ... ...tized global distribution is what caused the market crash (Coe, Kelly, and Yeung, 2013).

In addition, AIG, a leading financial company, downgraded its credit because of underwriting more credit derivative contracts than it could actually pay off. So on September 18, 2008, talks of a government bailout began. This send the Dow up 410 points and the following day Treasury Secretary Henry Paulson recommended that the Troubled Asset Relief Program (TARP) of as much as one trillion dollars be accessible to acquire the harmful debt to prevent a complete financial meltdown. “Also on this day, the Securities and Exchange Commission (SEC) initiated a temporary ban on short selling the stocks of financial companies, believing this would stabilize the markets. The markets surged on the news and investors sent the Dow up 456 points to an intraday high of 11,483, finally closing up 361 at 11,388.

Instead, most money was in the hands of a few families who saved or invested rather than spent their money on American goods. Thus, supply was greater than demand, and some people profited, but others did not. As such, the bubble had to inevitably burst, since the stock market boom was very unsteady and people borrowed money on false optimism. Black Tuesday in 1929 was that bubble burster. In the summer of 1929, a few stock market investors began selling their stock.

This gave the banks a false sense of comfort. They started doing risky deals such as credit default swaps which was accomplished through derivatives. “The standardization of contractual terms allows a loan to be packa... ... middle of paper ... ...a mutual fund over an individual stock is diversification, which you don't get if you invest small amounts of money in a few securities. For example, if you have $10,000 to invest, you can buy maybe 100 shares of five stocks. When you buy a mutual fund, it might own 50 to 100 stocks, so if one stock blows up, the entire fund won't go down in flames.

(4) America's unevenly distributed wealth played a role in the stock market crash and slowed the recovery. During the "Roaring Twenties" our country prospered tremendously, but our middle and lower class prospered little compared to the upper class. The upper class profits sky rocked and the distance between the classes grew out of control. In 1929 the top .1% had a combined income equal to the bottom 42 percent (2). Much of the money was in the hands of a few families who saved or invested rather than spent their money on American goods causing a greater supply than demand.