Even in a free market economy, the huge impact of the credit crunch has meant that the US government had to step in to take over the bankrupt firms Fannie Mae and Freddie Mac, two of the leading mortgage firms. This intervention was to stop an even greater crash in the countries market. Across the country there has been a huge increase in unemployment, with the plummeting stock market, and the consumer uncertainty, many companies profits have gone down, and the way to accommodate for these drops in profits is to cut the workforce. Although the rich have also suffered greatly due to drop in share prices, the poor who were issued the high risk mortgages in the first place have been made even poorer, as they unable to pay back these mortgages. The US housing market has also plummeted, due to the current insecurity. The future implications of the credit crunch will be increased government regulation in the economic system, in order to prevent a similar event occurring. Private companies will also become more aware of the possible outcomes of their actions, and therefore there will be more risk management.
North Korea is an example of a command economy. In this type of economy, the government or state controls all key areas of economic activity. This includes control of all major resources, ownership of most businesses, all of the resource allocation decisions to reflect the needs of the people, the construction of development plans on production targets and performance, and isolation from market economies. This means that the people are working for the common good, and own no property. It is the privately owned banks which caused the credit crunch, which are now being bailed out with the tax payer’s money, when instead they should be being punished for the bad decisions they made. Due to the increased interest rates, the consumer wants have changed, as they do not want to borrow money at this troubled time, so they are only spending on necessity items. The market, which before provided a lot of luxury items, will need to change to accommodate for this.
The collapse in the economic markets could cause another famine, similar to the one in the mid 1990’s. However, as foreign trade is suppressed in the command economy, the credit crunch may have less impact, as the country is used to surviving without foreign trade. Another feature of the command economy is no private ownership. This means that the global drop in house prices and the unavailability of mortgages will not affect people living in a command economy. In effect, because CPE’s are so self contained, the credit crunch has less effect than countries with other economic systems. The future implications of the credit crunch are that if it is prolonged, scarce resources combined with the lack of aid from other countries due to their own economic problems, mean that CPE countries could suffer from prolonged famine.
Recently, the economy of China has been changing from the centrally-planned command economy to the free market economy. This means it is a transition economy. The first step in this is liberalisation – allowing most prices to be determined by the market, and lowering trade barriers that had shut off contact with the price structure of the world’s market economies. Then the high inflation after this liberalisation and pent-up demand needs to be brought under control over time. China is at the stage of transferring the ownership of state owned businesses into private hands, thus creating a viable financial sector, and reforming the enterprises in the economy. The final step in the transition will be legal and institutional reforms, which are needed to redefine the role of the state in the economy, establish the rule of law, and introduce competition policies.
One of the main impacts of the credit crunch is that although Chinese commercial banks did not provide many innovative mortgage products to potential buyers during the housing boom, due to the transition of the economy, the lack of a credit history system made it difficult for banks to evaluate the credibility of home buyers effectively, therefore if what has happened in the US happens to China, many similar problems could occur. The prosperity of the Chinese real estate market has been developed in accordance with its fast growing economy. A large amount of trade surplus has increased market liquidity and rising household incomes have supported a strong housing market. Due to limited exposure to US subprime mortgages, most Chinese commercial banks will not be critically impacted by the current crisis. Nonetheless, several recent developments, such as rising consumer prices, energy shortage, a struggling stock market and a cooler housing market imply that China, especially its commercial banks, cannot be complacent about a potential house market crash and wider financial crisis. To prevent such a crisis, Chinese banks need to strengthen their performance and adhere strictly to the lending criteria set by the People’s Bank of China. The procedures in the mortgage services need to be tightened up and the banks should cooperate with other institutions to establish a comprehensive credit history system for homeowners and potential buyers.
The final economy to be explored is the mixed economy of the UK. This is where the government and private sector interact in solving economic problems. This economy lies between the extremes of the command and the free market economies. In the UK, most decisions are made by the market, for example the consumer defining which goods the producer makes. However, some decisions are made by the government, for example public services. The emphasis is on letting the market make most decisions because of its high level of efficiency in responding to customer preferences. However, some decisions must be made by the government on behalf of the general population.
Due to the links between UK and US banks, the impact of the credit crunch has been more direct than in some other countries. The UK has taken a rather cautious approach by keeping the interest rates more or less unchanged, fearing inflation pressure caused by high oil and food prices, so the main future impacts of the credit crunch are the reduction of the availability and increasing the cost of both bank lending and bond and equity finance; depressing house and share prices, with potential adverse wealth and collateral effects on household spending and business investment; a general increase in uncertainty feeding through into reduced business and consumer confidence and spending; and adverse impacts on UK exports to (and repatriated profits from) the US and other economies hit by the direct and indirect effects of the global credit crunch. An idea being explored is the part nationalisation of the banks, in order to restore confidence in the system, which if it worked would entitle the taxpayer, who’s money was being invested, to profit from it, however if it doesn’t work, the taxpayer would lose money.
In summary, it is certain that excluding the self contained centrally planned systems, and to an extent, the transition systems which are still prospering off the post liberalisation high, markets all around the world have had bad impacts from the US credit crunch. The widespread lack of confidence in the economic market has caused share prices to drop worldwide. The increased interest rates and the unavailability of credit have led to diverted consumer spending away from the plummeting housing market and luxury items, and towards necessary staple goods. In the future, all of the systems will see an increase in government monitoring, free market or not.
