American and European Financial Crisis of 2008

The 2008 financial crisis is considered the worst economic disaster to ever affect the world since the occurrence of the Great Depression of 1929. The crisis led to the collapsing of the financial system in the U.S. and other countries in Europe. Millions of people lost their jobs on either side of the Atlantic because of the financial crisis. Different authorities responded differently to curb the crisis in their backyard. This paper looks at the similarities between the crisis in the U.S. and the one in the Euro Zone while also outlining the difference between the two regions.
In the U.S., the financial crisis was mainly caused by deregulation in the financial industry. Banks were permitted to engage in hedge fund trading with derivatives. As a result, banks demanded more mortgages to support the business. Most of the financial institutions in the U.S. created interest-only loans that became affordable to borrowers who had questionable credit points. The demand for mortgages led to an increase in demand for houses that investors were trying to meet. Availability of loans allowed different investors attempt to grab a share of the lucrative business. The rise in the fed fund rates hit the homeowners with high levels that many people could not afford. The housing prices began to fall, and investors could not sell their houses to make payments for the loans. The increased liquidation in the financial sector led to the housing bubble that spread to Wall Street and other countries in 2008.
Similarly, the Euro Zone crisis that has culminated to numerous debts was caused by two main factors. The first is a lack of a mechanism to prevent the build-up of macroeconomic and fiscal imbalances in some countries. The second reason is a lack of common institutions to absorb shocks effectively. Lower borrowing costs increased the intra-eurozone capital flows as bank loans in various states. Cheap credit was not used in investment but was used to fund housing investments. Most of the countries in the Southern part of Europe ran large current account deficits and faced deterioration in the competitiveness. The housing boom hit peripheral countries such as Spain and Ireland, but the problem started with Greek when the government was unable to finance its debt.
The two regions had similarities in the ways they responded to the crisis. The United States had the Fed lowering the interest rates while also introducing some liquidity-enhancing schemes in the country to deal with the credit crunch. The U.S. also responded with an orderly takeover of Bear Stearns, which was one of the failed investment banks. However, the U.S. also focused on the private sector by adding legislation seeking to stimulate demand and ensure there are no mortgage closures. The Euro Zone also responded by having the ECB lower the main policy interest rate to enhance price stability in the Europe area. There were also measures to support the smooth functioning of the interbank market in the area to support the flow of credit to households and enterprises. The main difference between the Euro Zone and the U.S. is that 70% of the funding of homes and corporations in Europe comes from commercial banks whereas only 25% of the financing in the United States comes from banks.
The European debt crisis can hurt the U.S. economy if it weakens the firms that export their products to Europe leading to gyrations occurring in the U.S. stock markets. The crisis in the U.S. contributed to the troubles in Europe by weakening European banks with some requiring the inputs of governments for bailouts. Whereas the U.S. response has been swift and massive, the European response has not been forceful leading to problems in countries such as Greece and Spain. One of the main differences is that some financial institutions in the U.S.A. are independent of the federal government, but the ECB in Europe is under the management of the European Union. The fund established by the European Union to deal with the crisis was not enough leading to lower market confidence in the Euro Zone. In this case, it explains the extended debt crisis even after the U.S. economy started recovering.
Part II
A Greek employee who risks becoming unemployment or having his or her pay cut would not welcome any labor reforms by the government. The issue of inflation in the peripheral countries does not permit any peripheral country citizen to have a reduction in pay. Unemployment means reduced spending and people cannot pay their mortgages or other loans they previously had from financial institutions. Cutting the pension means the retirement ages of some of the workers will have problems and the move may encounter resistance.
A German worker may not be affected by the government’s decision to bail-out Greece. Germany like most of the countries in the northern region was able to stabilize its economy by converging its labor costs and financial regulations. Germany as one of the leading exporters within the Euro Zone benefits when there is stability in her neighbors. A stable Greece means increased purchasing power of her citizens hence increased consumption for German goods such vehicles. Overall, additional profit for the German companies would lead to better salaries for the workers in different sectors.
A worker who has lost his or her job would welcome any legislation that would enhance the growth of the economy and the return of employment opportunities. Legislation such as TARP and ARRA would lead to the growth of the GDP, which means the country experienced moderate inflation instead of deflation. These legislations also prevent the loss of more jobs from the ones already lost while laying the foundations for more employment in future.
Question Two
Part II
This course has influenced my perspective on the financial crisis and the steps that the government should alleviate future occurrences. For instance, the assigned readings argued that with proper regulation of the financial institutions may prevent an occurrence in future. The information about the signs that the crisis would occur informed my view that with close monitoring of trends in the financial sector, the recession would have been avoided. The falling of the house prices in 2006 was a clear sign that the bubble would soon burst if measures were not taken to avert the increased spending by commercial banks. The role of the Fed in escalating the crisis is also well documented, which informed my conclusion that Congress needs to have more control over the decisions taken by Fed to prevent a similar mistake in future.
Looking at the crisis in both the U.S.A. and Europe, it is evident that liquidation was the main course coupled with reduced regulations. For example, in the U.S., Fed responded to the looming crisis by adding more money into the system to cater for the increased demand for loans by investors. When the housing bubble collapsed, and prices went down, investors could not continue paying for their mortgages and could not sell more houses. Adding more money into the financial system without regulating how that money was used is the main problem leading to the 2008 financial crisis. If banks had funded productive investments, then the problem would have been averted before it escalated to the level of being a recession.
In Europe, the worst hit nations had increased their labor costs with a higher percentage while also allowing low-interest loans to all borrowers. The peripheral countries such as Spain, Ireland, and Greece faced a housing boom that collapsed when prices started falling, and inflation increased. One of the solutions adopted by the Euro Zone was to implement labor reforms by either cutting down the pay and pension or cutting down jobs. The course has also changed my view of the impact of the crisis in the U.S. on the debt crisis in Europe. Although the U.S. crisis did not contribute directly to the crisis in Europe, it weakened the banks, and some of them had to require government bailouts for them to operate efficiently.
Part 2
My goals and ambitions in life are to become a financial consultant who can provide meaningful insights on various aspects of the financial sector. In particular, I am fascinated with the issue of inflation and unemployment in the country and the trends across the globe. By undertaking this course, I have realized how a financial crisis can occur out of poor decisions not only by the government but also by the private sector. I intend to bolster my knowledge in such matters related to interest rates to guide financial institutions in future effectively. Moreover, it is within my plans to come up with proper strategies that the government can use when dealing with unemployment or a debt crisis affecting a particular sector. It is through such strategies that the country can maintain a stable GDP and competitiveness in the global market.

References
Blinder, A. S. (2013). After the music stopped: The financial crisis, the response, and the work ahead. Penguin Books