Liquid and Illiquid Assets: The Bane of Banks

Before the Great Recession of 2007-08, both the United States and the global economy were tied to an economic system that eventually, in 2007, broke down. In their chapter on the Great Recession, Jonathan Levy talks about how the economic system used broadly in economic circles had a major flaw of liquefied assets that many banks had accumulated over the years. In economic terms, a liquid asset is one that can be traded for cash in exchange for a non-cash asset, so an illiquid asset is one that cannot be exchanged for cash. Since 1992, many banks had relied on the fact that they could exchange money and assets with each other to keep afloat publicly despite not having the cash or liquid funds available to support themselves otherwise (Levy). When that belief and reliance was shattered in 2007, banks started to close off exchanges between them, making many turns inward to see what they had for assets to keep them afloat. A part of the problem that many had when looking at their current assets was that many had mortgaged or housing assets that had gone belly up, leading them to be almost useless and unexchangeable (Levy). This meant that when banks and companies looked for assets that they could use to get themselves out of the red, many were looking at housing assets that had no value and assets that were liquidable. With this realization, many banks were in fear of going under since they no longer had the safety net of exchanging money and assets with other banks to offset their red balances, and they had very little assets they could liquefy. 

    The Obama administration, during the Great Recession, had to make a decision about what they would do to try and help out the banks from all falling into the red and going bankrupt. In the past, the main concept of the markets being a way to promote growth and trade alongside the plan of federal deregulation was what people wanted to follow during the Great Recession (Levy). When pressed by the immediacy of the Great Recession problem, the Obama administration had to pick how it would try and stop the situation from getting worse, but there were two ideas about how to do so. One was for the government to purchase or get the remaining assets from banks to get money back into the system, while the other was for the government to gain control of the banks and then try and fix the problem (Levy). Similar to what many wanted, the Obama administration decided to have the federal government purchase assets from banks so that they could maintain the old system while keeping the banks afloat. While this fit the old idea of maintaining the markets as a way to promote growth again, it didn’t conform to the idea of deregulation fully. This is because deregulation is when there are fewer regulations by the government and, while that did happen, the government was the one to oversee the assets being purchased, which to me isn’t deregulation.

    The U.S. Treasury and the Federal Reserve (the Fed) are two unelected, government bodies that handle the economic side of the government. Based on what is talked about in Jonathan Levy’s chapter on the Great Recession, they gained power based on the fact that they were the ones stepping up during the recession to fix the bank money issues to try and help the economy recover. Besides that, I think that they have as much power as they do since one (U.S. Treasury) has been around since the beginning of the U.S. and the other was given power during another financial crisis. Both of these mean that they have power either given to them or written to them that has only grown with not many attempts to check or mandate how it is handled.