Economics 311 Spring 2011
                                                                                              Due Date: April 27, 2011

                 America’s Contemporary Financial Boom and Bust: A Differential Analysis

Our current financial crisis is an overwhelmingly intricate system failure that has many players to blame. This

catastrophic financial debacle we find ourselves in currently consists of bureaucratic misconduct in regards to

regulations, greed beyond petty greed, and excessive high-risk investments made by large-cap banks to name a few,

but this crisis has many more culprits that line up from Main Street all the way up to Wall Street. An elaborate and

in depth analysis of those at fault and the causes of the financial crises was not readily available until years later. My

comparative analysis, as assigned, will come from readingsto substantiatemy theorizing from the following texts:

The Financial Crisis Inquiry Report (as presented by the Financial Crisis Inquiry Commission: January 2011) and

Thomas Sowell’s The Housing Boom and Bust.

Furthermore, the main focus of my analysis is to differentiate between both texts, focusing on the following points:

1) how the narratives about the crises differentiate in each text 2) the causes of the crises in each text and 3) theorize

on how each text allocates the proportionate blame respectively to free markets, misguided regulations, incompetent

and corrupt government bureaucrats, and stupid or corrupt politicians. Keep in mind, as our term paper guidelines

state, that whenever a financial occurs, domestically or globally, the same debate occurs about the causes, and

usually the same laundry list of culprits are trotted out. These guidelines theorize that the crisis occurred because of

the following five reasons:

         1.   Unregulated free markets are inherently flawed.

         2.   Government regulations gave way to perverse incentives that led people to engage in irresponsible and

              reckless fiscal behavior.

         3.   Government bureaucrats are incompetent and should be less corrupt.

         4.   Politicians are responsible for writing flawed laws which make way for conditions that are ripe for

              abuse by certain private parties.

         5.   Or simply bad luck.

                                                                                          Economics 311 Spring 2011
                                                                                            Due Date: April 27, 2011

These five reasons that are identified as the “same laundry list of culprits” will be considered throughout the context

of this analysis.

I begin with the FCIC report made available by the Financial Crisis Inquiry Commission, and then comparatively

follow up with Sowell’s book. The purpose of this FCIC report, to my understanding, was to give an in depth,

concrete and chronological analysis of how this economical catastrophe came about and why. The FCIC report cites

sources ranging from interviews with financial executives, policy makers to community leaders. The report was

intended to educate the American population of what transpired throughout the buildup of the “boom” and the

sudden crash known as the “bust.” This report approaches the crisis and disburses the explanation into five different

segments. In comparison, yet in common, Sowell explains this failure in five segments as well. The approach,

however, differs.

The FCIC report explanation starts with a preliminary segment that summarizes the conclusions of the Commission,

which was unraveled from millions of documents and from hundreds of interviews (FCIC Report, pg. 3). It explains

how the crisis could have been avoided and managed to elaborate on where the red flags where coming from and

from whom. The report carries on with the explanation of how the propping of the “stage” - or the prepping of the

“boom” took place. This is where shadow banking, securitization and derivatives, and subprime lending

(commercial papers and repos) alongside building pressures from Alan Greenspan to deregulate the free

marketswere discussed (FCIC, pg. 35).

Furthermore, the FCIC continues with an elaborate amount of information in regards to the credit expansion, the

“mortgage machine” as they call it, which consisted of many players including foreign and domestic investors

alike.The FCIC report also references CDO’s and their upbringing, as well as identifying how Citigroup, Bear

Stearns, the SEC, Goldman Sachs, AIG, and Moody all had their fingers in these synthetics. This report feels likeit

turned over every stonein the financial worldand compacted immense amounts of information in order to satisfy

unanswered questions for the American people. The report also considered what they called “the Unraveling.” Here

the report explains the timeline between early 2007 up to bailout of AIG in late 2008. Disruptions of funding, the

                                                                                            Economics 311 Spring 2011
                                                                                              Due Date: April 27, 2011

fall of Bear Stearns, the takeover of Fannie Mae and Freddie Mac, and the bankruptcy of Lehman Brothers. These

are examples

we can reference back to- fivereasonsas to why the same culprits, as just described, keep popping up.This

economical fallout was caused by a panic large enough to impact us in the largest of scales.

In summary, the FCIC covered everything from explaining how the crisis could have been avoided, identifying

failures in financial regulations and supervision, failures in risk management, systematic breakdowns in

accountability and in ethics, up to how the government was ill prepared for the crisis. With this, one would theorize

that all entities mentioned in the report had their fair equal share of blame. But for sake of an analogy, they’re all

gears within a watch that depend on each other,however, some gears are bigger than others, in my opinion,simply

because they play an authoritative role in the system;a subtle amount of corruption. Overall, the report was overtly

technical and well structured, filled with an immense amount of references and methodical detail. I now proceed to

analyze, explain, and theorize onthe second assigned reading, Sowell’s The Housing Boom and Bust.

Sowell begins his analysis with what he calls “The Economics of the Housing Boom,” he identifies the cast of

characters/culprits which include the Federal Reserve System, Freddie Mac and Fannie Mae, and the U.S.

Department of Housing and Urban Development, also known as HUD. He continues with “the cost of housing”

where he covers the importance of interest rates and the effect of little or no down payments on the overall debacle.

“The Economics of the Housing Boom” goes on toalso explain the role of expensive housing markets and how

certain home buyers and their knowledge affected the outcome of the crisis respectively. He explains the “politics”in

the“Housing Boom” where he discusses affordable housing and their pressures, the lowering of lending standards

and its effects, and finally points out the long list of newspaper articles that warned us allabout the bad times ahead.

Moreover, he goes on to explain the decline of falling prices in homes, subcategorizing the differential impacts and

the financial market repercussions the decline of prices have/had. Economic and political adjustments and responses,

political solutions that consisted of regulation and the coverage of inflation and the stimulation of the private sectors

were considered in this segment of the book (Sowell, pgs. 84-95). Sowell goes on to describe the “politics” of the

                                                                                            Economics 311 Spring 2011
                                                                                              Due Date: April 27, 2011

blame game and explains how this usually turns out to be the continuous, cyclical, I-had- nothing –to- do- with -it

attitude we see repeated from bust to bust.Sowell also aggregated in his analysis minorities, discrimination laws and

their roles in the mortgage market; the unfolding of “redlining” and “community” investments. Sowell talked about

the vision and realities of the markets, the market versus the government, and covered what he called rhetoric in

housing. Sowell, I think, did a great job of painting the reader his story. The way I perceived it was as if this

explanation was coming from a broker within the real estate industry. In all, Sowell had a more relaxed, third

person, perspective, I felt, that was undoubtedly well researched.

To summarize this reading, Sowell started with the his cast of characters, elaborated on the cost of housing, the

politics of housing, explained the housing bust, and referenced political solutions. Reflections of the past and future,

Sowell thought was important in order for history not to repeat itself. He concluded his writing with what he called

“the New Deal Ideal.” Here he explains the stock market crash, the purpose of job creations, ending the depression,

and the lessons of the New Deal. All in all, this text was a very informative reading.

Now in comparison, both of these texts differed in their narrative approach by setting a different tone when

divulging their information. The FCIC report started with all their conclusions summarized as to give bullet points

of what six hundred pages plus collectively concluded.;whereas, Sowell starts by identifying the main players and

their roles. It is expected, however, here is my reasoning behind it: The FCIC report is intended for the American

people’s inquiry and was drafted by an appointed commission, solely brought into existence to thoroughly peruse

through vast amounts of information to ultimately identify how this whole issue transpired. Sowell’s book, even

though it was thoroughly researched with a group of professionals, ultimately has his perspective narrating and

referencing his researched annotations. Therefore,I think there would be a subtle, fundamental difference in the way

the information is told and how it unfolds.

To summarize my readings, and in regards to the purpose of this analysis, the differences between these two texts

was the delivery and the content. There were several portions in each reading that overlapped, but this is easy to

                                                                                            Economics 311 Spring 2011
                                                                                              Due Date: April 27, 2011

understand simply because both of these readings were/are talking about the same financial collapse/contraction in

the American economy. The differences were mostly found in the amount of context each reading had, how the

crises was described, what the main reasons were, and how the proportion of blame respectively fit with all

mentioned entities.

The FCIC report which is a six hundred plus report filled with answers to hundreds of questions was undoubtedly

heavier reading in comparison to Sowell’s version, which sits on roughly two hundred pages of literature. Overall,

this crisis will probably not be the last to come. As long as the economy carries out behavior much like in the past,

then it’s almost safe to say that history does repeat itself. All we can do today is analyze, understand, adjust, and

minimize the risk and damage that can come from any future cyclical collapses. It is a learning of our own mistakes.


Shared By:
fanzhongqing fanzhongqing http://