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US Financial Crisis vs. Economic Crisis

Extracts from this document...

Introduction

[Name of institution] [Name of writer] Executive Summary The U.S. economy is currently in its worst crisis since the Great Depression. The crisis began in the home mortgage market, particularly the market for so-called "subprime" mortgages, and is spreading beyond subprime mortgages to commercial real estate, junk bond business, and other forms of debt. Total losses for U.S. banks could reach the highest one-third of total banking capital. The crisis has led to a sharp reduction in bank loans, which in turn is causing a severe recession in the U.S. economy. This paper analyzes the underlying causes of the current crisis, it is estimated how the crisis is likely to be, and examines the government's economic policies so far (both by the Federal Reserve and Congress) to address to the crisis. The final section makes recommendations for government policies are more radical than the left, should promote and support in response to this crisis. Table of Content Introduction 3 The current crisis 4 Bank losses 6 Government policies 7 Federal Reserve 7 Congress 9 Nationalize the financing 12 Conclusion 13 Work Cited 15 Bibliography 17 Appendix 19 US Financial Crisis vs. Economic Crisis Introduction To understand the root causes of the current crisis, we must look back after the Second World War. The most important cause of economic under-performance of the United States in recent decades is a very significant decrease in the profit rate for the economy as a whole. From 1950 to mid 1970, the profit rate of the U.S. economy fell by nearly 50 percent from about 22 to about 12 percent. This significant reduction in the rate of profit seems to have been part of a general trend in the world during this period, which affects all capitalist countries. According to Marxist theory, this very steep decline in the rate of profit is the main cause of the "twin evils" of rising unemployment and higher inflation, and hence the decline in real wages, has experienced in recent decades. ...read more.

Middle

It extended the right to secure its loans, treasury bonds, just before they were entitled, but now all types of riskier securities are eligible, including those based on mortgage backed securities. More importantly, the Fed increased lending to investment banks for the first time in its history. Investment banks are not regulated by the Federal Reserve, which has always believed that the Fed does not have the responsibility to act as "lender of last resort" for investment banks when they are struggling. However, when the investment bank Bear Stearns was on the verge of bankruptcy at the end of March, the Fed decided it had to act as lender of last resort for Bear Stearns and JPMorgan Chase, which took over Bear Stearns. Since Bear Stearns was heavily indebted to so many different financial institutions, bankruptcy would have caused loss and could lead to a complete merger of the United States financial system to lend money to anyone any that anything, and a disaster for the economy. Who was at the head of the Federal Reserve Ben Bernanke, the nightmare, and that the Fed acted quickly and decisively as lender of last resort to these investment banks. The Fed justified its course beyond its traditional boundaries by saying that "the U.S. financial system is in danger." The statement by the Fed and its actions are clear evidence of the fragility and instability in the United States financial system is today (Steven, pp 34-189). Then, in September 2008 when the bankruptcy of Lehman Brothers (then the fourth largest investment bank in the United States) resulted in a worsening of the crisis, the Fed took even more extraordinary and unprecedented rescue an insurance company, AIG, the largest insurance company in the world. AIG has dominated the market for credit default swaps, which are a form of insurance against the violation of obligations, including mortgages based on high-risk securities, as well as a form of speculation that the bonds and other defaults. ...read more.

Conclusion

Secondly, the big banks ( "systematically important" that the banks are "too big to fail") who are at risk of bankruptcy should be nationalized and operated to achieve public policy goals. These nationalizations should also involve a significant deterioration of the current debt of Fannie and Freddie and the nationalization of banks (as is done in bankruptcy proceedings) to these financial institutions solvent again without cost taxpayers nothing. We must do something. Otherwise, continue to face the cruel dilemma is to rescue the financial capital or face an economic crisis and even worse in the future and our children and their children. Within the institutional framework of capitalism, the only two options. In order to create other options (most favorable choices for workers), we must radically change the institutional framework of capitalism, we must turn to finance capitalist nationalized public finances(Rudiger and Jeffrey , pp 67-89). The nationalization of banks does not solve the current economic crisis entirely, but to stabilize the banking system and could lead to increased lending to businesses and consumers money. A solution to the current crisis requires, above all, a significant depreciation of the huge mountain of debt accumulated over recent decades in home mortgage debt, consumer debt, corporate debt, bank debt, etc(Kathryn and Jeffrey , pp 121-190). Conclusion The nationalization of banks is not socialism, but could be an important step in the path of socialism. The use of banks by the government to pursue important public policy goals, rather than maximizing profits, is a model for the rest of the economy. More and more people will realize that the whole economy to function according to the goals of democratic politics, decided it would be better for the vast majority of Americans that today's economy, which is managed according to the maximization of profit produces great inequalities, and is very unstable and prone to crisis, as the current crisis, which caused great suffering and hardship. Of course, we can create a better economic system than that. ...read more.

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