The Economic Crisis. Right now in America, we are in an economic crisis that is slowly tearing the seams that holds the countrys banking system together. This recession affects everyone from single families to giant corporations b

Authors Avatar

THE ECONOMIC CRISIS                

The Economic Crisis

Shakea Ricks

POL 201: American National Government

Prof: Marion Rogers

March 19, 2012

The Economic Crisis

         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.

Join now!

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. ...

This is a preview of the whole essay