Banking System Cleanup

 

Vocabulary

crisis	election	ray of hope
asset	situation	catastrophe
toxic	mortgage	bipartisanship
plunge	leave off	baptism of fire
belly up	pick up (4)	pull together
survive	regulation	uncharacteristic
bailout	congress	take the oath of office
fiscal	stimulus	on the order of
put up	decision	composure
rival (2)	tough (2)	go under (2)
merge	threaten	depression (2)
avoid	to do list	determined
deposit	take over	sort things out
stability	in order to	comprehensive
debate	rage (2)	demonstrate (2)
lurk	preferably	balance sheet
loan	struggle	non-performing loan
burden	to address	package (2)
radical	reinvent	foot the bill
viable	collapse	proprietary
reward	stress test	come back with a vengeance
albeit	successor	press conference
pace	upset (2)	rightfully so

 
 
 
 

Video: Bank System Cleanup

 
 
 
 

Transcript

Barrack Obama’s election victory in 2008 was seen as a ray of hope in the storm of the global economic crisis.

The economic situation was catastrophic: assets backed by toxic mortgages had plunged US banks into crisis. The collapse of the Lehman Brothers’ investment bank threatened the entire global financial system — a baptism of fire for a new president.

His incoming administration picked up where the outgoing one left off. They pulled together to master the crisis.

It was an uncharacteristic demonstration of bipartisanship.

Irwin Collier, Free University of Berlin: “The Obama economic team, even before he took the oath of office in January 2009, was ready to go, had its to do list, and it had a congress that was willing to work with them.

And when we think of the fiscal stimulus in the United States was on the order of seven percent of the year’s GDP, this is real money.”

The bailout package amounted to $700 billion dollars. The government put up lots of money, and took some tough decision: regulators decided which banks would survive, which would merge, and which would go under.

Washington feared an economic collapse to rival the Great Depression of the 1930s. Obama was determined to avoid the mistakes the politicians made back then.

Irwin Collier, Free University of Berlin: “So this is actually one of the many lessons from the Great Depression: importance of deposit, insurance, and actually having the FDIC (Federal Deposit Insurance Corporation) then come in and closing down banks, take them over in order to sort things out.”

What about Europe?

A lot of players had to reach agreements if things are to improve here. There’s still no comprehensive Europe-wide financial regulatory structure.

Since the crisis, debate has been raging on how to insure the stability of the banking sector, preferably without any more taxpayer-funded bailouts.

Risks are lurking in many balance sheets.

Catherine L. Mann, OECD Chief Economist: “The number of the banks that are still struggling have a very high non-performing loans, and in contrast to the United States, where non-performing loans were addressed very early on in the financial crisis, here in Europe, those non-performing loans continue to be a burden on the banking systems.”

Those banks have been among the weakest in regulatory stress tests. They are spread across Europe, and that includes Germany.

It is not clear how great the risks are, or who would foot the bill if things go belly up.

Economists are concerned, especially about Deutsch Bank.

Henrik Enderlein, Jacques Delors Institute Berlin Director: “The German banking system is still in deep trouble. We have one very, very large bank — probably too large.

It is reinventing itself, giving up proprietary trading and looking for a new business model.

But the markets are asking whether this bank, Deutsche, can actually survive, whether it has a viable business model if it has to change so radically.”

After the crisis, Wall Street soon regained its composure, a return to business as usual.

The greed also came back with a vengeance. Just months after the banks had been rescued, they were paying huge bonuses to their staff again.

Had nobody learned from the crisis?

President Obama gave voice to the anger many Americans were feeling.

President Barrack Obama, at a press conference in February 2009: “We certainly believe that success should be rewarded. But what gets people upset — and rightfully so — are executives being rewarded for failure.”

Eight years after the crisis, the US economy is growing, albeit at a moderate pace, unemployment is down to under 5%, and stock prices are way up.

Obama’s handling of the banking crisis has been hailed as a historic achievement.

Irwin Collier, Economist: “When he looks back, he will probably think those were wild days — but we actually prevented a Great Depression 2.0.”

During Obama’s tenure, America’s debt has almost doubled to $19 trillion. Some argue that is a major problem for the economy and Obama’s successor. Others disagree.

Questions

1. Barrack Obama inherited a troubled economy in 2008. True or false? What caused the economic downturn?

2. Did politicians and government officials cooperate?

3. Obama and the government had a plan to fix the economy. Is this right or wrong? What did they do? Was history a guide? Did they learn from history?

4. Has Europe been as successful in turning the economy around as the United States? What are their main problems?

5. After the bailout, financial institutions returned to their old habits. Is this correct or incorrect?

6. Was Obama successful in dealing with the economic crisis? Did it come at a cost?

 

A. Has your country experienced financial or economic crisis? What happened?

B. Are economic recessions avoidable or are they an inevitable part of a natural cycle?

C. What are the causes of financial crises or economic downturns?

D. Can they be prevented or mitigated?

E. What will happen in the future?