(a) How successful have the American Government and the U.S. Federal Essay

(a) How successful have the American Government and the U.S. Federal Reserve been in running the American economy over the last - Essay Example financial collapse took place during the very last days of the Bush administration and during a U.S. Presidential election. The Fed’s response can be viewed separately and as working in tandem with the political approach of both political administrations and Congress. The historical characteristics of the period preceding the crisis itself can be seen as related to the severity of the crisis, while the aftermath or recovery period can suggest projections about the future consequences of the policies referenced drawn from economic studies and historical parallels in order to illustrate the possible dangers to the macro-economic environment that remain for the global economy. In the period preceding the financial crisis of 2008-9, the major issue of importance is the real estate market, particularly the sub-prime mortgage market in America, and its lending standards which may have led to the creation of a real estate bubble in the country. By some analysts’ regard, the Cl inton administration encouraged Fannie Mae and Freddie Mac to promote financing policies that made it very easy for even the lower income families to get mortgages for home purchases. This type of encouragement was related to a general deregulation of the financial industry that proceeded under both the Clinton and Bush administrations, which included repeal of Depression era statutes like the Glass-Steagall Act that regulated the trading and investment functions of banks. Ratings agencies oversaw the process through which the Wall St. investment banks packaged thousands of mortgages in both commercial and residential real estate contracts into massive, billion dollar bonds known as MBS (Mortgage Backed Securities) that could be sold by the investment banks to groups like pension funds or hedge funds who were interested in fixed-rate or adjustable-rate long term returns. The contagion of global markets is seen in the way that these MBS entered portfolios around the world of all mann er of different public and private sector investors, corporations, and banks. Risk management, as practiced not only by the investors who purchased these MBS but also by the ratings agencies, failed to recognize that these securities could fail in the manner that they did because they underestimated the deflationary aspects of real estate and overestimated the reliability of the lending standards at their basis. This is the â€Å"Black Swan† aspect of Nicholas Taleb’s analysis, who wrote: â€Å"Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increas ed concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur †¦.I shiver at the thought.† (Taleb, 2010) If Wall St. planners, securities ratings agencies, and