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What Caused the Economic Collapse of 2008

Throughout history there has always been some sort of a class struggle. The rich always seemed to get richer while the poor barely managed to get by. One of the main things that contributed to the ever-expanding gap between the rich and the poor was greed. Whether it was the greed for money or for power, greed was certainly a driving force. More recently, the greed of several, rich and powerful individuals helped to cause one of the largest financial collapses of modern times. The purpose of this paper is to establish some of the key players in the economic crash of 2008, and to show some common backgrounds among those players and reveal that, even now, they still have significant influence on the financial markets here in the United States and throughout the world.

In the fall of 2008, AIG, the world’s largest Insurance Company, collapsed. Also, at the same time, the United States investment bank, Lehman Brothers, went bankrupt. These events triggered one of the most devastating financial failures that affected nearly every industrialized country on the planet. The failures of these two financial giants: …caused a global recession that cost tens of trillions of dollars, rendered over thirty

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million people unemployed worldwide, and doubled he national debt of the United States. (Ferguson 11:19)

It doesn’t seem plausible that two companies’ failures would be significant enough to have such a drastic impact on the world economy. Furthermore, how did their collapses happen without anyone being aware of its impending demise? “This crisis was not an accident. It was caused by an out of control industry. Since the 1980s, the rise of the US financial sector has led to a series of increasing severe financial crises. Each crisis has caused more damage, while the industry has made more and more money” (Ferguson 12:08).

Until recent times, most banks operated within their geographic regions, being prohibited by law to conduct business across state lines. This restriction essentially kept the money supplies that the banks used to conduct daily business at a relatively small level, which increased the scrutiny the bank would use before it decided to lend money. “Until relatively recently, federal and state laws limited federally-chartered banks from branching across state lines. Instead, as late as the 1990s, U.S. banking consisted primarily of thousands of modest-sized banks tied to local communities” (Levin, and Coburn 15).

In the 1980s, the financial industry exploded. The investment banks went public, giving them huge amounts of stockholder money. The people on Wall Street started getting rich. In 1981, President Ronald Reagan hired as his Treasury Secretary, Donald Regan, the CEO of the investment-trading firm, Merrill Lynch. The Reagan administration, supported by economist and financial lobbyists started a thirty- year period of financial de-regulation. In 1982, the Reagan administration de-regulated the savings and loans industry, allowing them to make risky investments with their depositor’s money. By the end of the decade, hundreds of savings and loan companies had failed. This crisis cost taxpayers 124 billion dollars and cost many people their life’s savings. (Ferguson 15:30)

The collapse of the savings and loan industry was just the beginning. Even though the removal of the financial regulations was an obvious contributor to the failure of the savings and loan industry, it did not set an example to the policy makers in Washington as to how necessary financial regulation truly was.

President Reagan started a trend of hiring ex-CEOs and managers of the financial industries to run the Government’s offices that were put in place to protect the assets of the American public. The idea of using someone from within the industry that you are trying to control does make sense, but only if that individual was dedicated to fulfilling the duties of the job and ensuring the financial protection and solvency of the investors, not working for towards the interests of the financial industry. Sadly, this would not be the case.

Later in his Presidency, Ronald Reagan would appoint Alan Greenspan to head the Federal Reserve Bank. Greenspan, an economist, had previously sent a letter to government regulators to help convince them of the “soundness” of the savings and loan industry and its need to be de-regulated. He was paid $40,000 by a top executive of the savings and loan industry, Charles Keating, for his work in convincing the regulators to de-regulate the savings and loan industry. After the collapse of the savings and loan industry, many top executives were arrested and sent to prison for looting their companies, Charles Keating was one of the main criminals that were sent to prison.

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