On 2008, the global financial system in on the brink of collapse. Lehman Brother filed for chapter 11. Within 2 months, many giant financial institutions went through the same process of going bankrupt. AIG, Citi Group, BofA, and other comparable size of institutions, are no escape form the financial crisis. Major indexes went through a dramatic bear market, putting trillion of dollars in lost. Not until one of the biggest investment bank , JPMorgan heading to the same road as Lehman Brother, federal bank of united states step in. Too big to fail become a imminent crisis that the government worried the most. It is understandable that, with another big financial institution collapse, it will cripple the whole capital market. A ripple affect that will cascade down to every industry from commodities, foods, services and medical. There will be a catastrophic kind of mankind social disaster that will result to a bigger societal problem. The immediate "solution" - government step involved to carry the weight of trouble those bankers had made.
There are many major steps took by federal reserve of united states during 2008-2009 to solve the so called imminent problem, the "solution". First, bank can direct borrow from the federal reserve. Such move putting all taxes payer money direct access to banks, that consider on too big category to be able to "write-off" short term losses, meaning, bankers can do business by other people money, and having absolute insurance from government. A "guarantee-win" scheme for banks encourage even more aggressive investment in future. A immediate affect of the first move from the fed, result a flood of dollar to the market. With the advancement of technology todays, the fed does not need to induce money supply by physical minting. However, electronic book keeping enable the fed to provide required liquidity demand by banks and other financial institutions by simply register a figure. Such move are accompany by all time low interest rate, making a loan become cheaper.
Third, as there is no free lunch, by putting taxes payer money in stake, the government has to answer to their people. So, a declare of ownership for many private institution is the modest acceptable by the public. Many institution are being nationalized, particularly AIG. For the first time, the bureaucrat which notoriously bad in taking care of business, are on the business. It significantly making blur between the different of the position between private institutions and regulator. It sound like "communism" in some people's eye.
Forth, commercial bank and investment bank was once separate in different entity. It somehow putting up a barrier of risks from investment banking to ordinary people's saving. However, amendments is made during the crisis time, making pure investment bank become relic. It enable investment bank which the primary problem during the crisis to have a better access of liquidity to buried the holes that made at the first place, the government allow a merge between saving banks and investment banks for a better access of "capital". This putting a more dangerous timing bombs to the financial system which will drown every people saving, if the crisis preface again.
Fifth, the government become a bank dealer to "introduce" buyers to buy institutions that is in deep trouble in a penny price, plus a protection scheme from the government itself. Example, on 29 september 2008, well fargo are channel by the fed to "save" Wachovia. The scheme, the fed will secure the fund for the buy out. Isn't it good to buy something when somebody else paid for you.
Sixth, TARP - troubled asset relief program, become part of the lexicon in the industry. With banks' greed to seize profit during the boom time, many subprime mortgage are now somebody to pay off. Thousand losing their home, and value of houses drop dramatically after the feeding frenzy. Then, to win favor of people, the government swear to save thousand homes mortgage by provide TARP 700 billion funds.
Seventh, Henry Paulson, fed chairman during the time summon big banks to accept "loan" from government from the TARP fund to secure their position of any weak spot. All CEO of banks accept the loan. The truth is, government are using TARP as a channel for them to step into the affair of banking business.
The government go even further to step into the affair of business. Bank of America is forced to merge with Merrill Lynch on 2009, January 16. The Government secure the financing, making a bigger "too big to fail" giant emerge. The financing is secure by? nothing but a pure optimism of thing will be better in future. On march 19, 2009, Timothy Geithner, treasurer security under administration of Obama, step in to buy out toxic assets using PPIP (Public Private investment program). It allow private institution to lend hand to buy out toxic loan from the market with a security by government. Another scheme for huge profit potential with minimum risk. The risk all are bear by the government.
So, as a general conclusion from what we had been, the government does not really solve any problem. It only pushing the problem forward using future money by increase the government debt. The debt someday will collapse as a house of card. Today 13 trillion dollar is registered as debt hold by the united states. The systemic problem cannot be solved by simply amend few acts or big bucks. The system crisis is cause by greed and stupidity of the riches. They will not learn the lesson, if you do not let them to fall. The ignorance of the government and industry to accept the failure, hoping to use artificial means to deal with the law of nature, to mediate temporary pain by excessive pain killer, is a pushing forward the catastrophe of a perfect storm in future. Pushing forward is simply the worst kind of "solution". See what is going on and about to happen in the market , such as european debt crisis, middle east conflict, energies crisis, currencies wars, it all related back to the steps and "remedies" took by our regulator.
