Economic Crisis Policies
US current economic crisis is considered to be started from real estate sector. The real sector started to decline in 2006 and it accelerated in 2007 and 2008. Housing prices have fallen from the peak from about 25% so far. The decline in prices left homeowners with no option and they were unable to refinance their mortgages and causes default of mortgages. This default of mortgages and loans swallowed the banks and financial markets such as falling of Lehman's brothers and other Banks and blow to rest of economy happened as the whole economy was relying on banks and ultimately it slows down investment in the country and capital flows to other parts of the world like China and India. Bank losses cause reduction of bank capital which in turn requires capital reduction thus saving bank from lending. It is estimated that every $100 loss and reduction of bank capital would cause $1trillion reduction in bank lending. (ISR international socialist review, 2009)
Critical Analysis of the Causes of Current Economic Crisis
The current depression is said to be biggest since the great depression of 1930's.There are many causes of current economic crisis. Some of them are discussed below.
At the macroeconomic level we have seen that consumption has increased over last two decades, aggregate household consumption represents more than 70% of gross domestic product. Consumption increases due to relaxed credit policy for real estate sector which ultimately results in low saving, which puts strain on governments' revenues because of increased investments and results in budget deficits. (Journal of accountancy, 2009)
Another major cause of downturn of U.S. economy is decline of rate of profit in U.S. economy as a whole. From 1950 to 1970 the rate of profit decreases about 50% and around 22 to 12% in onward period. This decline in profits is due to decline in general trend during this period.
Marxist theory while explaining this decline says that this decline further prove to be a double edged sword and cause higher unemployment and soared inflation and also cause lower real wages which paralyze the growth process and cement higher unemployment rate. Moreover, the lower rates of profit in U.S. push the capitalist to bring the rate of profits back to track, while doing so they followed the policy of higher inflation by increasing the prices at a faster rate, which reduced real wages. The more and more U.S. companies followed this practice of reducing wages which caused unemployment.
Another widespread strategy that is followed by U.S. companies is reduction in health insurance benefits and retirement pensions. Article in the New York time magazine entitled "The end of pensions" also highlighted this. Some of the capitalist are following the policy of downsizing and 10 to 20% employees are forced to leave their jobs.
US companies also follow the strategy of bankruptcy as a way to cut benefits and wages. Companies declare bankruptcy which allows them to resettle their debts and declare their union contracts null and void. This strategy was first introduced by steel industry and then followed by airline industry in recent years. Glaring example of this is Delphi; Delphi declared bankruptcy in October 2006 that reduced wages by approximately two thirds and benefits accordingly. Surprisingly, The Delphi chief executive has also publicly urged other automobile companies to adopt the same strategy.
The United States senate issued the Levin -- Coburn Report, which found that a crisis was due to high risk, undisclosed conflicts of interest, and complex financial products, failure of regulators, the credit rating agencies and the market itself to exercise itself in excesses of Wall Street. Some of the analyst is of the view that credit rating agencies and investors have failed to accurately judge the risk associated with mortgage related financial products and government is responsible in the sense that it did not exercise its regulatory practices to address the 21st century financial markets. (Eyes on wall street, 2011)
Some of the critics are of the view that U.S. war on terror has also sapped U.S. economic strength. President Bush inherited surplus budget but long war on terror especially in Afghanistan cost U.S. billion of dollars and has caused all time high budget deficit.
There are some other famous analysts like James Livingston who are of the view that consumer behavior is very important in determining the economic growth and he says that over saving caused the present economic crisis. He is of the view that consumer culture is very important for the success of the capitalism. He argued that ideological view of the economy is dangerous, creating confusion for the state that how should it respond...
The U.S. is a property owning civilization and a number of the people wanted land and housing. Americans however scarcely ever create savings. "The country itself lives on other countries' savings by issuing bonds to finance its excessive consumption. The current crisis began with cheap housing loans offered by banks. Banks provided loans but instead of holding the loan in their books, they packaged them into collateralized debt obligations (CDOs)
Economic Crisis The revelation of the financial crisis that unfolded in United States in 2008 is considered to be the worst economic crisis since the Great Depression, 1929. The distinctive causative factors that have contributed to the U.S. economic crisis 2008- 2009 are differentiated by aggravated financial control, higher risks in capital investment, the housing bubble phenomena in relation to the brisk credit expansion. The aggregation of these factors in the
Economics: Application of Concepts An Analysis of the Economic Situation in the U.S. In the last five years, we have seen the U.S. economy expand but at a pace that is seen as being relatively moderate. In conducting an analysis of the current economic situation in the U.S., I will largely limit myself to inflation, interest rates, and unemployment. Although the current economic situation is better than it was five years ago, there
Economic Trends In terms of output and growth, Canada's real GDP was 2.96% higher than it was a year ago, but the growth trend is slowing down from a growth rate high of 3.81% in Q3 2010. Japan's economy has contracted in Q2 2011 by 0.76%. It's rate has been volatile, growing rapidly over the past year only to contract again. The UK's growth rate is 1.63%, and that country has
Economic Principles and Purchasing a House Economics Principles and Purchasing a House This essay discusses principles of economics as they apply to making decisions about purchasing a home. The essay also reviews the decision making process and how it is affected by marginal benefits and marginal costs. The health of the economy and also international trade are factors to think about too, along with looking at conditions which could have lead to
Improving consumer protection is a less vital factor in the reform package. It focuses on ancillary issues such as predatory lending and credit card interest. Improving protections may help to reduce the incidence of consumer bankruptcy, but has two negative consequences. The first is that the illusion of protection can encourage increased risk-taking behavior among consumers. The second is that increasing consumer protection fails to address the underlying issue, which
Our semester plans gives you unlimited, unrestricted access to our entire library of resources —writing tools, guides, example essays, tutorials, class notes, and more.
Get Started Now