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The video explains the events leading up to the 2007-2008 financial crisis. The country’s economy collapsed under the weight of subprime mortgages and the trade of unregulated derivatives. The government could have prevented or mitigated the credit crisis through regulation. By 2003, analysts and experts had warned of a looming crisis, which gave the state the chance to act early, but it did not take it. For instance, it could have raised lending rates, thereby slowing down the boom. The Federal Reserve set the lending rate at 1%, which was not lucrative to investors (Jarvis, 2009). This pushed them to devise other methods of making more money.
The government should also have instituted more stringent regulations measures against banks. The crisis happened because banks gave mortgages to people who would otherwise not qualify for one. The mortgages did not require collateral or proof of income. Consequently, lending to people who were not creditworthy resulted in mass default (DeLong, 2018). The state could also have mitigated the effects of the crisis. After the problem occurred, they should have bailed the banks out. For instance, Congress could have voted to buy the collateralized debt obligations when the underlying asset (mortgages) started to plummet. Government regulation could have averted the crisis or abated its effects once it occurred.
Financial deregulation poses a greater danger than too much of it. The economic system cannot be relied upon to manage itself. For instance, without restriction, some parties can gamble with too much risk in the stock markets. Government intervention could have prevented the major crises witnessed in history, such as the 1929 and 2008 crises. Although too much control might stifle the economy, too little restriction can cause economies to collapse. Law is essential because it holds businesses accountable, prevents scandals, and averts crises.
References
DeLong, J.B. (2018). Could the 2008 financial crisis have been predicted and avoided? World Economic Forum. Web.
Jarvis, J. (2009). The crisis of credit visualized. [Vimeo].
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