Economics: Financial Fiasco by Johan Norberg (Essay Sample)

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Economics: Financial Fiasco by Johan Norberg
In the examination of the causes and forces responsible for the greatest global economic crisis, recession, Johan Norberg critically enumerates possible causes and recommendations for rectification by the portrayal of the chapter by chapter analysis.
Chapter 1: Preemptive Keynesianism
In the first chapter, Norberg examines the United States use of preemptive Keynesianism –money policy in the economy during the early times of the 21st century. He contends that by keeping low the interest rates, the Federal Reserve chaired by Allan Greenspan encouraged risky lending practices. Greenspan however is depicted as neither a monetarist, supply sider nor a Keynesian. His theory on lending formula of the central bank to other banks and how the Fed power controlled the prices of money enabled him to spot the economic shift hence able to change the direction of the monetary policy. ``There was no doubt the Greenspan was usually talented at reading the economy" (22) but in this made him powerful but indeed prone to making mistakes. This risky lending together with the surpluses from the growing markets flowing into the U.S financial markets was an ultimate provision of easy money to the people. However, the major beneficiaries of this money were the U.S financial markets for example, as seen between 2000 and 2005, the single family homes value increased by 8 trillion dollars. The real estates also served as a beneficially. By keeping the interest rates low, the Fed encouraged consumption expenditures credited by low-cost dept. This also led to the increase in the rate of consumption. Thus, according to Norberg, the existence of such a monetary policy is unsustainable and in turn results to depression.
It is well seen that the government’s mismanagement of the financial crisis has duly led to the constrained financial catastrophe. The intervention of the government is hence crucial for the stability of the economy.
Chapter 2: Castles in the Air
In this chapter, Norberg describes how the U.S housing policy of home ownership expansion was practiced few decades ago. This is through the analysis of the game Building castles in the air. The resultant features of these policies are the unscrupulous lending and lax credit standards. Norberg blames the actors of the game ``building castles in the air (cit..,p.23)”: Fannie Mae and Freddy Mac, HUD, corporations compensation schemes, architects of federal government housing policy, the ordinary people and lenders. The mortgage crisis is discussed from the time of its inception and its subversive effects to the economy. The mortgage Institutions and banks were the major beneficiaries of the extension of the federal mortgage insurance. It depicts how the republicans and democrats worked systematically to ensure an increase the share of families who owned their homes. However, this in turn is shown to undermine the traditional requirements of the credit worthiness. The actions and policies of these actors thus emphasized the lax lending of easy money. The led to accessibility of homes to the subprime and borrowers who, in any case did not have financial ability. There was wide spread foreclosures all over the United States.
This was a good approach by the politicians to ensure a good number of people owned homes. This translates to the improvement of their welfare. However, to affect this there resulted to an increase the money circulation due to the ease in credit acquisition. This is not a good approach for economic growth.
Chapter 3: How to Build Financial Weapons of Mass Destruction
In chapter three, Norberg describes how financial innovations/Alchemy was a major agent in the Great recession. The innovative financial instruments comprise the securitization of mortgage loans into collaterized liability (debt) obligations. The CDO is composed of various trenches based on their risk levels. It is noted that even the lowest trenches received high ratings from the concerned agencies who had acquired power and authority from the federal government. `` We have securitized mortgage loans and bonds" (pp, 46). The CDOs were bought, repackaged and sold. This meant that the issuers gained triple since they charged a fee on every stage. The banks also joined this moving business. The U.S administration decided to start the interbank loans and increase the level of the deposit insurance. This was seen as a lesser risky way of liquidating the money and just in case the customers required their cash back.
A related financial innovation was the` off-balance sheet financing’. This was achieved through the employment of special –purpose entities for example the structured investment vehicles. The actors in this financial innovation are usual suspects including, citigroup, Wall Street investments such as Merrill Lynch and Lehman Brothers, Freddie Mac and Fannie Mae, federal regulators, Moody’s and other rating agencies and AIG. The rating practices of Moody’s and the other federal agencies including those of the federal government regarding the rating agencies are depicted to contradict the performance of the economy. Their practices are seen to create a highly profitable `oligopoly’.
It thus noticed that the bonuses and regulations of the mortgage system enticed everybody in investing on the same. It was a cheaper way of acquiring wealth to less fortunate. In my view, this doesn’t demonstrate growth and development in an economy.
Chapter 4: Hurricane Season
In this chapter, Norberg consolidates the first three chapters in a story of how the downfall of an investment bank affected the global economy. A CEO knocked down by a subsidiary made the country go into a state of bankruptcy. This is in an attempt to account for the Great Recession including the government dropping out of some financial institutions which were constantly involved in credit default swaps. These financial institutions were originated by JP Morgan Inc. in service to the insurance policy against risk. Norberg postulates that the bubble burst on September 15, 2008 which entailed the bankruptcy of the prestigious bank Lehman brothers Holdings gave rise to the ``hurricane season”. The bankruptcy aggravated the systematic risk to the U.S and the global economy. This was the precursor of many events to follow. These includes, the fall in U.S housing market, the fall in Net Asset value for the Reserve Primary Funds to $0.97 per share, a run on the shadow pricing banking sector, AIG bailout of September 16, write down of asset values ,the backlash of these events for Iceland and many other countries. Iceland is depicted as country who put the interest rates so high that elsewhere which was in due response to the high rate of inflation and the overheated economy. The bank attracted more foreign money and also made it cheap for the Icelanders to import.
Government practices are continually seen to convey a great impact on the well being of the global economy. A nation can go bankrupt due to its actions more especially to the interest rates. In my view, the market itself is enough to drive the economy wheel. The market forces are enough to make the changes the individuals of nation require with minimum government interventions. Concisely, the involvement of the government in interest rates, housing policies and other related crucial activities is what brought about recession.
Chapter 5: Madly In All Directions
The Chapter provides the comparative analization of the Great Depression, the Great Recession during the time the Federal government’s crisis management was in all directions going madly (Norberg.cit. p.99). Norberg, in his view, postulates that the Great Recession was not as catastrophic as the Great Depression. The latter is seen to affect even those too young to have parents who lived through it. This I well coined to the situation of the U.S under the leadership of President Hoover. The government plays its roles but soon realizes that government intervention is ruining the economy. This idea is tabled and the American government faces major critics across the globe as to the intervention as the major cause of Great depression. More than 10,000 U.S banks collapsed at this time. There is uncertainty in the labor situation, tax situation, and the monetary situation. Questions are raised as to whether the taxes are to be raised or not, whether there should be union labor or non-union labor. The government tries to find the measure to take in order to curb this Depression. The proposal by Henry Paulson and Ben Bernanke to borrow 700 million Dollars to facilitate the ``Troubled Assets Relief Program" is also described. The eventual use of the funds being for other purposes and not for buying trouble- assets. They believe by many people that bureaucrats and politic...