Given the current economic situation that the United States is in, consider and discuss the following.

Question:

Many consider that the government’s failure to act on and help prevent the collapse of Bear Stearns as the starting point of the current financial crisis. In your opinion was the government correct in letting this happen and what should have been done differently. More importantly do you consider this to be the starting factor of the current economic meltdown?

Answer:

The government’s decision to let Bear Sterns fail was not only a warning to financial firms but to buyers and sellers of mortgage backed securities in general. While at the time it was perceived as the right thing to do, because the government was not fully aware how connected the large financial firms had become, it unknowingly led to a sell off in the credit markets.

While I personally believe that Bear Stearns as well as other institutions should be allowed to fail, I personally would not have let the firm collapse. Warning or not, their where several indicators pointing to the possible collapse of the credit market due to a fail in the housing market largely because of the enormous amount of credit default swaps that had occurred between large financial institutions.

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