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Rock Street, San Francisco

One prime example would be AmericanInternational Group (AIG) who played a majorrole in insuring CDOs and other financialinstruments. If AIG failed it could have led toa cascade of failures and a meltdown of theglobal financial system instantly as it was theworld’s biggest insurer.The UK government led by the bank ofEngland also followed a similar approach butin a smaller scale to counter the crisis. If theFed and BOE only followed traditional fiscaland monetary stimulus, the financial systemwould have experienced a complete loss ofconfidence and the markets would havetaken decades to recover. The effects couldhave been worse than the great depression1929 as the financial systems are moreinterconnected than ever and banks play asignificantly more important role in themodern economy.In conclusion, I believe that the governments(US & UK) got it right when it came to fightingthe financial crisis to curtail the damage. Ifthe tax dollars had not been utilized inbailouts the financial system would havecollapsed and confidence in the system wouldhave been totally lost. In a case as such, it willtake a long period of time to rebuild theconfidence and restructure the economy. Wewould have experienced a depression greaterthan the ‘Great Depression’. In case of a greatdepression the biggest victims will be theaverage citizen. However, it should be notedthat the governments got it all wrong alongthe path leading to the great recession. Theresponsible authorities should have seen thecrisis years ahead and taken corrective action.A bubble doesn’t build up overnight eventhough it may burst overnight. In my view,the government of USA played a major part informing the bubble as it massively promotedsubprime mortgages. The US governmentintervened in the mortgage market bysubsidizing and forcing to give out mortgagesto people who couldn’t afford them, whichwould be unlikely in a truly free marketcontext.

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