Paper Length: 10 – 15+ pages, typed, double spaced, with bibliography and appropriate annotation, preferably the MLA format, due the third to the last week of class

Topic:

The starting point of the assignment is the current economic situation in which the country presently finds itself – popularly known as the Great Recession {GR} (after the Great Depression) While not as severe as the Great Depression, the GR shares a number of similar characteristics of its better known predecessor – such as very weak private demand, the inability of monetary policy (ie low interest rates) to stimulate demand, and an under-regulated financial sector which contributed significantly to the downturn.

Your assignment is to take one or more of the causative factors mentioned below and critically analyze and relate its links to the Great Recession. Your paper will be evaluated according to two broad criteria 1) economic content, including, where appropriate, the use of charts, graphs and RELEVANT statistics and 2) narrative writing, in the sense of your articulating the relevance and relationship of those factors you have chosen to the GR At the same time, you need to use proper grammar, syntax, and punctuation, coupled with clear and logical organization of the paper and effectiveness in arguing the cause and effect link. It is highly recommended that. at an early date in the semester, you begin by preparing and submitting a rough draft or outline of your paper to the Learning/Writing Center, followed by subsequent revisions as you refine your paper for final submission.

When approaching your term paper, it is suggested that you focus on one of the two factors and then pick one or more sub factors and explore it in more detail. The minimum length is 10 pages, so make sure that you pick the correct combination of factors, so that you can explore the topic in adequate detail and explore all of the interrelationships in adequate detail. As a practical matter, I would recommend not selecting more than two sub topics.

I – UNDER REGULATION OF THE CAPITAL MARKETS

Similar to the Great Depression, the GR was accompanied by a widespread financial speculation and a concomitant lack of effective regulation, including the likelihood of significant criminal activity. There are several components to this that might be topics to pursue.

Glass-SteagalL Act

One of the signature achievements of the New Deal was the Glass-Steagal Act (GSA), which effectively separated commercial banking, which was regulated and whose deposits insured by the FDIC, from the more speculation that largely characterizes the Current (and past) Wall Street practices.

The scope and scope of the GSA was weakened over several decades, including first under the Reagan Administration, and then eventually eliminated under the Clinton Administration. Under the former administration, we first had the Savings and Loan crisis in the late 1980’s, which should have served as a warning of things to come.

The Shadow Banking System/Increased Leverage In Financial System

The steady erosion of the bright line that historically separated commercial and investment banking is often referred to by economists by the moniker of an emergent shadow banking system, symbolizing the profound structural changes that have happened in the financial sector since the 1970s or so. Much of this change was beneficial, but the lowered regulatory oversight, particularly the rising level of debt (leverage) by Wall Street firms, also raised the stakes. At the time of the meltdown, most major Wall Street firms had a leverage ratio (ie borrowed money/retained earnings) of about 30:1; much of it borrowed short term. A related topic was the downfall of AIG and the use of unregulated credit default swaps, which eventually lead to the bailout of Wall Street, colloquially known as TARP (Troubled Asset Relief Program)

II – THE COLLAPSE OF THE HOUSING MARKET

The widespread decline in housing prices has justifiably gotten much blame as the key factor in the GR. Of course, we have had numerous housing crashes and/or recessions before. What makes this downturn especially severe is the fact that it is happening nationwide. In fact, one needs to go back to the Great Depression in order to find a downturn on a scale as severe as the current one. There presents several lines of inquiry for those interested in pursuing this area of research.

Subprime Loans/Securitization

Subprime loans, or those loans made to borrowers with a weak credit history are justifiably named as a proximate cause of the downturn. The rise of the subprime loan phenomenon, a relatively recent occurrence, together with the practice of bundling these loans together and making financial securities that are sold and traded in the financial markets was a key factor. Related to this is the legitimate question of whether there were proper disclosures by the mortgage originators and whether there was fraud or criminal action involved. A final aspect is the so-called “robo-signing” of mortgage documents by bank employees or agents, which is currently a matter under review by the Justice Department.

Under Water Mortgages

The explosion of subprime mortgages, together with the collapse of the housing market, has lead to a widespread situation nationwide of a significant number of homeowners being “underwater”, that is, owing more on the mortgage of their homes than the home itself is worth. This has all kinds of negative consequences in terms of locking people in their homes, so they cannot move to a new job, to foreclosure and consequently, a freezing up of the housing sector. A related topic would be to look back during the New Deal and see if there were policies or programs instituted then from which we could learn today.