The Collapse of the Financial Markets: How Dirty Hands and Self-Interest Led to One of the Greatest Recessions of All-Time

Obama handled the Recession like a Prince

Obama Handled The Recession Like A Prince

Recently in my finance class, we were having a class discussion about the Great Recession of 2008. This discussion got me thinking about some of the concepts discussed by both Machiavelli and Hobbes. As many people know, the American economy started to free fall right after Lehman Brothers, one of the largest investment banks at the time, declared bankruptcy. As a result of this bankruptcy, millions of people lost their life savings and many banks started to fail as the economy tanked. Luckily through the efforts of the United States government and the Federal Reserve, the economy was finally able to stabilize in 2009-2010 and since then both the economy and stock market have picked up tremendously. The Recession did not occur magically. Both the concepts of Machiavelli’s “Dirty Hands” and Hobbes’s “Self-Interest” were heavily involved in setting up the American economy for one of the worst financial crisis since the Great Depression.

The Housing Bubble

The History Of Housing Bubbles In The US

Many people like to talk about how the greed of Wall-Street single-handedly caused the Recession of 2008. Now, this is not completely true as there were many factors that led up to the recession. One of the main reasons the recession occurred was because of deregulation. Deregulation is quite simply the act of removing government influence from certain activities. The housing market in the late 1990s and the early 2000s was constantly getting deregulated through acts such as the Gran-St. Germain Depository Institutions Act(which allowed mortgages to have different interest rates for different clients) and the Gramm-Leach-Bliley Act(which allowed for investment banks to merge with commercial banks). The government was essentially letting large banks give out mortgages and loans to people without checking credit or job history. This culminated into what is now known as the housing bubble. With more and more people able to buy homes, home prices skyrocketed attracting more people to buy houses. Finally,the market realized that many of these people would not be able to pay off their mortgages and the housing bubble “popped” leading to banks like Lehman Brothers(who gave out many of these bad loans) filing for bankruptcy. Besides the deregulation of the housing market, the other main cause of the financial crisis was leverage. Leverage is the act of borrowing money because you are very certain that an event is going to occur in the future which will result in a positive return for you. For the five years prior to the Recession, many banks such as Lehman Brothers and Merrill Lynch started borrowing money at historical highs and used that money to take out huge risks specifically in the housing market. When the housing bubble popped, these companies could not pay off all the money they borrowed and as a result they filed for bankruptcy or were bought out by bigger banks. These two majors reasons were caused mainly by greed which leads us to how “Dirty Hands” and “Self-Interest” played roles in the cause of the Recession.

In Machiavelli’s The Prince we are introduced to this idea of “Dirty Hands” which means that people of power should not be concerned with what the mob thinks when making decisions, but should only be concerned with what they think is right for everyone. In Hobbes’s Leviathanwe are introduced to a similar idea. He says in his essay, “Hereby it is manifest, that during the time men live without a common  power to keep them all in awe, they are in that condition which is called war; and such a war, as is of every man, against every man.” From this quote, we can interpret that every man is trying to look out for himself. When deregulation was occurring, many economists were pointing out the potential negative consequences that could occur if deregulation spirals out of control. Even with these concerns, the government decided not to listen and instead listen to the banks who were donating millions of dollars to many of the politicians in office so that they would ignore these economists(also called campaign “donations”). These banks only care about how they can make money for their clients and themselves which is why they did what they did. Now of course there is nothing wrong with this as the banks jobs are to maximize returns for their clients, but the approach towards the financial markets should not be governed by self-interest or going against renowned economists reports, but should be governed by objective analysis.

As a result of greed and self-interest, America was faced with high unemployment and poverty for more than four years. Now five years after the recession, there are many more laws in place that prevent banks from taking on huge risks and giving out bad loans. The government seems to be steering away from what the banks want for themselves and towards what the people want which will hopefully prevent a future financial crisis.