The Economic Crisis Essay
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Right now in America, we are in an economic crisis that is slowly tearing the seams that holds the country’s banking system together. This ‘recession’ affects everyone from single families to giant corporations because of the nature of the crisis. It began slowly with it quickly picking up the pace, and now with all the new policies in effect the end is now in sight. It seems that everyone in America played their part in a tedious game that only took a matter of time to come crashing down around all of us.
Because of the unstable economy, companies were forced to downsize their employee work force or close their doors. The loss of a job threatened many working class and middle class families with the threat of bankruptcy, because of the increasing accumulation of consumer debt. Jobs were hard to find; in addition, many people without a choice, were forced to sell their homes; many of them moved to states where the cost of living was lower.
Most of them took low paying jobs to support their family.
The unfortunate ones took from seven months to a year before they could find a decent job. Others who were fortunate could sit and wait or started their own business, and the rest either took out a home equity loan or refinance to lower their mortgage payment. In this paper I will discuss the causes of the economic crisis in depth, the key players in the implementing new policies to pull the United States from the recession, and the different policies that are now affecting not just the U.S. economy but the world economy as well.
This crisis was years in the making, but because of the dot com assets many people were not noticing the downward spiral that had started before September 2001. Some of the key factors that caused the economic crisis are: a glut of savings from Asia, bad loans, boom and bust of the housing market, lack of capital reserves, and the reselling of bad loans. These factors not only affect the US, but have been felt by countries all over the world because of bad lending practices by financial institutions. As each factor is explained the new policies address each one of them in a different manner.
As the US economy was booming in the late 1990’s the countries in Asia decided to plow the US with a glut of their savings (Krugman, 2009). This helped to create the dot com bubble and keep the interest rates at low percentage. This encouraged high levels of consumer spending in US. It also encouraged a large current account deficit in the US. It also encouraged an asset bubble, because it was cheap to borrow and this encouraged unsustainable lending. After the events of September 11, 2001, Federal Reserve was able to use this money to keep interest rates below 5%.
Prior to September 11, 2001 the dot com bubble burst then the events at the World Trade Center lead to the US heading to a recession. But, to keep the US out of a recession the Federal Reserve responded with by cutting interest rates to 1% – this was the lowest level of interest rates for a long time (Samuelson, 2010). Low interest rates encouraged people to get loans from financial intuitions. Because people were more inclined to buy a house with their loans, this led to the boom and the bust of the housing market.
As house prices began to rise, mortgage companies relaxed their lending criteria and tried to capitalize on the booming property market. Mortgage companies actively sold mortgages to people with bad credit, low incomes – often first generation immigrants. This is called subprime mortgage. By definition subprime mortgage is giving loans to borrowers who typically are not qualified because of their higher risks: income level, work status, and credit history. This also puts the borrowers into a higher rate category than the prime rate (BAJAJ, 2008).
Prior to 2006, the housing market seemed to be going up for long time. Noticing this trend, borrowers thought that everything was fine and refinancing will solve any future problems. In 2006-2007, the housing market moderately cooled down. Many unable to refinance because of higher interest rate of Adjustable Rate Mortgages (ARM), found themselves in a deep bind. Massive defaults and foreclosures soon followed. In March 2007, the U.S value subprime mortgage is about $1.3 trillion; $7.5 million of that is bad. The subprime mortgage is what eventually caused the housing market to crash.
The crash of the housing market was due to borrowers’ unable to pay mortgages, millions of borrowers’ houses face repossession. Another problem includes many homeowners were not willing to sell at a lower market prices (BAJAJ, 2008). High-risk borrowers’ ability to obtained easy credit and speculation of the then rising housing market, fueled the housing boom. Financial institutions are mostly to blame for the housing market crash. Eager to grow their industry in the name of profits, they were willing to provide high-risk loan options and incentives. Another part of the cause of the housing crisis is consumerism. Elevated by yours truly, President George W. Bush who ask Americans to spend more to get out of economic slowdown.
Another main cause of the economic crisis is lack of capital reserves. The banks thought that they could use credit creation to process loans to borrowers. Credit creation is when banks employ what is termed a “fractional reserve” policy, meaning they can literally take in $1 on deposit and lend out $10 (L Jacobo Rodriguez, 2003). Basically the bank creates money supposedly up to 10 times what they have on deposit and capital. In the boom years, banks pursued a reckless dash for growth. This meant lending a high % of deposits.
Therefore, when they suffered bad losses, they had no reserves to call upon. This led to a dramatic drop in bank loans which had ripple effects throughout the economy. It’s fraudulent because banks are lending out money held on deposit which is supposed to be “on demand” and are effectively making money on money they do not have, and have no right to use. Due to this fraudulent behavior most banks have failed because depositors suddenly show up to withdraw all their money which the bank does not have.
The final thing that caused the economic crisis is reselling of bad loans. Mortgage companies and banks were left with a series of bad debts they had to write off. Most of the bad loans originated in the US subprime mortgage market. Then the US mortgage companies and banks thought it was a good idea to sell these bad loans to different banks around the world. However, these were bundled and repackaged into collaterized debt obligations. They were given triple a ratings and bought by banks around the world. Therefore, when mortgage defaults occurred in the US, the losses were felt by the whole global banking system because most banks had some exposure to these bad loans.
During the aftermath of the economic crisis there were some key players and each had a role to get the economy back on track. The key players that affect the policies that are implemented after the economic crisis are the President, the Congress, the Secretary of the Treasury, and the Chairman of the Federal Reserve. Each of these people or group will affect the policies and how they are enforced to the citizens. As the election day of 2008 was approaching the citizens made some changes that may be for the best or could hinder the overall effect of the plan to get out of this crisis.
With the unemployment rate climbing higher, and as the election for some of the key players in Washington on the line, many voters were ready for a change. As voters cast their vote and the votes were counted the new President was announced. The 44th President of the United States was named Barack Obama, with his new position he put a lot of legislations into play within his first couple weeks of taking over the Oval Office. The president is responsible for the concern of such things as unemployment, high prices, taxes, business profits, and the general prosperity of the country. The president does not control the economy, but is expected to help it run smoothly.
In regards to the economy the president only has the constitutional authority to select the individuals that will be making the policies that affect the economy directly, has the power to determine the new fiscal year budget and how the money is divided, and has the authority to enforce new laws that Congress has made in regards to the economy.
The president also has the authority to make suggestion to the Congress in regards to any new bills or laws that he feel should be passed (Constitutional Powers, 2003). President Obama’s central focus is on stimulating economic recovery and helping America emerge a stronger and more prosperous nation. The current economic crisis is the result of many years of irresponsibility, both in government and in the private sector. President Obama’s role in repairing the economy is to enforce the new policies that have been made and to make sure that all parties involved are abiding by the new regulations.
As the new President took office the Congress was gearing up to make some new policy changes. The Congress only has the responsibility to write new bills and laws that will affect how the economy is ran in the future. The Congress has the constitutional authority to change any legislation that will help put the economy back on track. Currently the economy is top priority for all Congress members and they are making sure all relevant legislation gets passed in a timely manner.
Upon the election of President Obama his first act was to appoint a new Secretary of the Treasury. The new Secretary is Tim Geithner (Secretary, n.d.). He is responsible for promoting economic prosperity and ensuring the financial security of the United States. The Department is responsible for a wide range of activities such as advising the President on economic and financial issues, encouraging sustainable economic growth, and fostering improved governance in financial institutions (Roles of the Treasury, n.d.). The Secretary of the Treasury does not really have any constitutional authority as far as making new policies that will affect the economy. Mr. Geithner has the position to oversee the United States Treasury and the money that is allocated to bring the U.S. out of a recession.
The current chairman of the Federal Reserve is Ben Bernanke, he is jointly responsible for the conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices (Chairman, n.d.). He also supervises and regulates banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers.
Mr. Bernanke also maintains the stability of the financial system and containing systemic risk that may arise in financial markets, and providing certain financial services to the U.S. government, to the public, to financial institutions, and to foreign official institutions, including playing a major role in operating the nation’s payments systems (Responsibilities, n.d.). Mr. Bernanke has no constitutional authority, however his opinion on the economy and the value of the U.S. dollar or assets are valued greatly up on Capitol Hill (Hamilton, 2010).
Immediately after the new administration took over the White House, there were several acts that were passed by the Congress, and signed by the new President. These legislations will help keep the economy on track and reverse the years of irresponsibility of the federal government and the banks (Economy, n.d.). These acts will also help average citizens keep their homes and their current jobs. Most of these acts will help create millions of jobs and help small business by giving them tax breaks. They will also monitor the Wall Street and banks to make sure they are being held accountable for their actions to the average citizen.
As each of the key players had their own opinions about the different policies that make up the way they run the economy, they came together to form amendments to the monetary policy, fiscal policy, and laws governing businesses since the collapse of the economy. The only change that was made to the monetary policy is that they will reinvest principal payments from its securities holdings. The changes to the fiscal policy include tax cuts for some and freezing the pay of government employees. There were many laws that were put into effect to govern businesses and their hiring practices and other items as far as how they were ran. Each of the key actors are responsible for the enforcement of these acts or bills and monitoring of the other key people to make sure that no one taking advantage of the system and the new bills.
Each of these acts, I feel are strong and will help to give the economy the boost that is required to help it get stable. I know that a lot of people feel that it is not helping, but I like to remind people it took us more than 10 years to get into the mess that we are in. No one can expect for the current situation to be gone in less than 2 years. I do however; believe that the federal government should not have bailed out the homeowners. These individuals knew that they could not afford the homes before they bought them, and after the economy got bad they expected someone to give them a handout. The only thing that I can see as a weakness for any of these policies is the enforcement of them. Each policy is unique, but each has to be enforced in a certain way.
Although I am glad to see the economy doing a bounce back, I am more concerned that the citizens will not give our government enough time to make sure it is stable again. Everyone is so set in blaming the President for the economy, when the only people that really need to be blamed are we. In conclusion, I feel that each key player has their own set goals on where they would like to see the economy, but are willing to do whatever is necessary to stabilize the economy. I also think that each policy has been set up to help boost the economy back to its original place since if the U.S. economy is experiencing difficulties then the world economy will be faced with its own problems.
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