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what are your views concerning the 2008 and current economic crisis and what your solution would be to rectifying this matter.

Financial Crisis 2008
The Cause of the 2008 Financial Crisis

The 2008 financial crisis and its aftermath was caused by a combination of things.

1) The biggest cause was a lack of poor risk management on the part of banks.  When you give a bank money, they put it into an account and pay you interest (sometimes).  Banks generate revenues by taking the money that you've given them, and lending it to borrowers at an interest rate higher than what they are paying you.  Usually this is in the form of mortgages, business loans, car loans, credit cards, interbank loans, etc.  Subprime loans are given to people who don't qualify for a standard loan, and have higher interest rates.  The reason they charge higher interest rates is because people who qualify only for subprime loans are deemed to have a higher risk of defaulting on their loans, so in order to make up for this additional risk, the bank charges more money to account for the costs of potential losses from default.  Well, banks issued issued so many of these risky loans, that it seriously influenced the total amount of risk the entire banking sector had incurred.  That way, when our economic boom ended in 2007 and we entered into a slump, unemployment increased slightly.  Since those people who often get subprime loans are also those most likely to lose their jobs during a recession, the instant we began to slump, people started defaulting on their loans in mass numbers.  Banks quickly ran out of money because they had given away too much in loans, and they could no longer pay their bills, since all the money they were SUPPOSED to make was now lost as people defaulted on their loans.
This included 2 types of risk.  Credit risk refers to the amount of risk associated with lending money and the likelihood that the person will never pay you back (going into default).  The other type is called liquidity risk, which means you don't have enough money on-hand to meet your own obligations.  You might have lots of wealth/assets, but unless you can turn it into cash you're still incapable of paying your bills.

2) To a lesser extent, the Federal Reserve also contributed to the problem by not properly performing their job in overseeing bank reserve ratios.  It is the job of the federal reserve to manage reserve ratios, and they failed to take into account the increased proportion of total loans composed of subprime loans.  Yes, the banks should have known about this themselves, but that's what oversight is for, and it would have been easy for the federal reserve to do something called a "stress test" on member banks, which means performing calculations to ensure that the banks or the assets they hold were not at risk.

3) The Republican Party is not only largely to blame for the initial collapse, but is also the single largest contributor to our continued economic struggle.  Why the Republican party and not just the federal government?  Simply, the Republicans were the ones who passed the economic insanity of the Bush administration wherein we funded increased government spending and 2 wars using only debt.  They lowered taxes and dramatically increased spending.  So, now the government is faced with all this debt, including interest rates, that they are having difficulty paying because the recession has reduced tax revenues by decreasing the amount of income that businesses and people make on which to tax them.  If it wasn't hard enough to work with the awful financial mess they caused, now they are also blocking all efforts to improve the economy for political purposes.  The federal reserve has done all it can using "quantitative easing" (which is just a fancy way of saying expansionary monetary policy), but their ability to fix a recession is limited.  We need proper fiscal policy as well, and we haven't had that since 2000.

At this point the market has corrected in response to the initial triggers of the crisis.  Profits are back up, stock markets are back near record highs, real estate demand and prices are beginning to increase, exports are starting to pick-up, and unemployment has recovered slightly from its worst.  It's been over 5 years since it all began, now, and we've seen most of the indicators of recovery.  The problem is that unemployment is still much higher than full employment, and the vast majority of people have actually experienced negative real wages over the last 5 years (in other words, wages have not kept-up with inflation).

In order to fix the problem, we need proper fiscal policy.  Particularly, we need to invest in national infrastructure.  Infrastructure is good because it is very labor intensive, so it increases temporary employment right away.  The wide majority of people who work in infrastructure have very high marginal propensity to consume, which means they spend almost all their money.  All that money then goes to generate company profits, deplete surplus inventories, and drive long-term hiring.  All the while, the extra infrastructure that was built helps to increase future production potential by decreasing the cost of doing business and increasing efficiency.  For example, investing in a better railroad system would create a lot of jobs that stimulates economic growth, but also makes rail shipping cheaper and faster, allowing companies to more effectively operate by utilizing the new infrastructure.  Sort of like The New Deal, except more refined in its approach.

Now, you're asking, well why do these people accept loans they can't afford?  Aren't they at fault, too?  To an extent, yes, but that's like faulting the fish for being wet.  Our financial system and its products have become so large, complicated, and mathematically intensive that the average person won't really understand what they're getting.  So, they trust the banks, which they shouldn't do.  Credit card companies are renowned for predatory lending practices that trap borrowers into cycles of fees and penalties by increasing interest rates without warning.  Banks will lend way more money in mortgages than the borrower can afford, often tied to teaser rates or other contract clauses that allow them to increase interest rates.  Then when the borrower can't pay anymore, the bank repossesses their home and holds it as their own asset.  My own home, for example, only cost $114,000, but the bank tried to give me over $300,000, and continue to pay interest on the unused portion of the loan.  That would obviously have been a bad idea, but for someone not as well-versed in economics this may have sounded fine.


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Michael Taillard


Accepts most economic questions


Consulting with major corporations, government agencies, political organizations, small businesses, non-profits, start-ups, and even individual people. Teaching at universities around the world, and developing original coursework. Performing original research and analysis. Writing books and scientific studies.

American Economics Association

Publications You can also check Proquest for a small selection of my research.

PhD (Financial Economics; honors) -- MBA (International Business Finance; honors) -- Grad School Certificate (International Business Management; honors) -- BS (International Business Economics; honors) -- AA (Business Administration; honors) -- Certificate (Chinese Language and Culture) -- Trade School (Transportation Logistics; honors)

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