Preview

Economic Crisis: Causes, Consequences, and Remedies

Good Essays
Open Document
Open Document
492 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Economic Crisis: Causes, Consequences, and Remedies
What Caused Economic Crisis?
Readers Questions: What are the factors that makes today’s economic crisis? Which of them are the most important in today’s economic crisis?

Some of the most significant factors in causing today's economic crisis:
· A glut of saving from Asia. A glut of savings poured into US and similar countries like UK. This kept US interest rates low and encouraged high levels of consumer spending in US. It 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.
· US interest rates kept too low for too long around 2003-2005. This encouraged an asset bubble, especially in US. The problem was that inflation was low and people felt this was the most important target. In targetting inflation, people ignored the asset bubble. (see: Mistakes of Alan Greenspan[->0])
· Bad Loans. Probably the biggest cause of the current credit crisis. Banks and mortgage companies made a serious of bad loans especially for subprime mortgages. Basically, people were lent mortgages they had no realistic chance of repaying. Mortgage companies and banks were left with a series of bad debts they had to write off. (see: Subprime crisis[->1])
· Lack of Capital reserves. 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.
· Reselling of Bad Loans. Most of the bad loans originated in the US subprime mortgage market. However, these were rebundled and repackaged into collaterised debt obligations. They were given triple a ratings and bought by banks around the world. Therefore, when mortgage defaults occured in the US, the losses were felt by the whole global banking system because most banks had some exposure to these bad loans.
· Boom and Bust in

You May Also Find These Documents Helpful

  • Good Essays

    Econ 224

    • 3731 Words
    • 15 Pages

    - Incomes fell, budgets were unbalanced, governments introduced deflationary policies which made things worse, sufficient funds were not available to debtor countries.…

    • 3731 Words
    • 15 Pages
    Good Essays
  • Powerful Essays

    The financial markets were in great shape and the housing market was booming. Two of the mentioned drivers of the economy were also the main drivers during the downturn. Financials institution were giving out substantial number of mortgage loans, thus creating “fake” money. This way major banks were able to project a healthy financial image, while in fact trillions of dollars were accounting for more than half of the money created by the banks. The housing and commercial market were creating a significant gap between the actual money in possession of the banks.…

    • 1644 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    Inside the Meltdown

    • 490 Words
    • 2 Pages

    Fannie Mae and Freddie Mac, the two largest mortgage lenders in the world, lost 60% of their stock value in July 2008. The government fired the management and the feds took over both companies. Then in the beginning of September, Lehman Brothers, another investment bank, had their stock dropping quickly. It was once again toxic investments that once made them money before, but now was responsible for their company plummeting. The government would not intervene with Lehman and they let them fail. It turned out that Lehman Brothers was even more interconnected than anybody thought. Because of Lehman’s bankruptcy, no one could get a loan and everything freezes. The meltdown had begun.…

    • 490 Words
    • 2 Pages
    Good Essays
  • Good Essays

    In 2008 there was a significant banking crisis that led to "the great recession," during which millions of people lost their homes, their jobs, and their standard of living. This disaster was caused by reckless behavior on Wall Street.…

    • 222 Words
    • 1 Page
    Good Essays
  • Powerful Essays

    The Gramm-Leach-Bliley Act

    • 1796 Words
    • 8 Pages

    The financial crisis of 2008 is considered by many economists to be the worst financial crisis since the Great Depression of the 1930s. First signs of the crisis started to show in 2007 when the price of houses started to fall rapidly in the United States and then around the world. This financial crisis resulted in the failure of many large US financial institutions, banks to be bailout by the United States government, and the stock markets around the world were affected. One of the major issues leading to the financial crisis was the rising default on subprime lending. Large financial institutions were in completion with each other for revenue and market share,…

    • 1796 Words
    • 8 Pages
    Powerful Essays
  • Better Essays

    Dbq Great Depression

    • 894 Words
    • 4 Pages

    Financial markets crash. The share trading system took off all through a large portion of the 1920s, and the more it developed, the more individuals were anxious to empty cash into…

    • 894 Words
    • 4 Pages
    Better Essays
  • Powerful Essays

    The recession of 2008, which we are only just starting to come out of, happened as a result of a few major factors. The primary factor was the deregulation of banks during the Bush administration. Another factor was that banks offered loans without looking into the financial stability of borrowers or businesses. Also, credit unions, savings and loans, and banks entered into competition with each other. The Security and Exchange Commission, S.E.C., reduced requirements so that banks could pile up debts.…

    • 1376 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Before the crash, people felt like they had everything. They spent more money than they had. Because people were spending money they did not have, the economy crashed. This crash led to people losing their money, their homes, and their jobs. People who felt really rich suddenly because extremely poor.…

    • 425 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Dodd Frank Thesis

    • 755 Words
    • 4 Pages

    There were several factors that contributed to the market failure that can be observed as far back as the repeal of The Glass-Steagall legislation in 1998. Banks became involved with precarious investments, asset managers began dealing in high-yield mortgage-backed securities, and credit agencies such as Moody’s, S&P and Fitch presented AAA ratings on the junk securities all of which was just the start of the breakdown in the market. Then in 2006, there was a strong drive for short-term profits in which 84% of sub-prime mortgages were issued by private lending firms to low and moderate income borrowers (Swift, 2011). The lack of regulation allowed companies to write trillions of dollars in derivatives all while not reserving any dollars against future claims. Additionally, with combination of the majority of the sub-prime lenders not being obligated to the standard mortgage laws and regulations, the use of nonbank underwriters, and exempt status from federal regulations lead to the financial crisis of…

    • 755 Words
    • 4 Pages
    Satisfactory Essays
  • Powerful Essays

    much like the 1929 crash; the 2008 crisis was fueled by greed and a desire for more money. The 2008 credit crisis was the result of low interest rate. The low interest rate offered by the Federal Reserve makes T-bill unattractive to investors. The other side of this expansionary monetary policy by the Federal Reserve caused Wall Street to borrow as much as possible. According to Kharusi and Weagley, banks loaned their money to the buyers “who would not normally qualify” to buy mortgages.…

    • 1314 Words
    • 6 Pages
    Powerful Essays
  • Good Essays

    Skrypnyk Veronika ESL 6A Cause-and-Effect Essay The Great Recession of the United States The Great Recession of 2000s in the United States was the long and extensive economic crisis since the Great Depression of 1929-32. A recession is an overall period of general economic decline. The bursting of an 8 trillion dollar housing bubble was the beginning of the Great Recession. In 2008 and 2009 the United States job market lost 8.4 million work position , or 6.1% of all payroll employment.…

    • 609 Words
    • 3 Pages
    Good Essays
  • Good Essays

    the great depression

    • 479 Words
    • 2 Pages

    This sparked a panic, and there was an exstream rush to pull money out of the stock market because people feared more bankruptcy. However, there was no one to buy the stock that people were trying to sell, so more companies started to fail. Major banks started to fail as well because of their ties to the stock market, and all the money people had stored in these banks was…

    • 479 Words
    • 2 Pages
    Good Essays
  • Good Essays

    The banks just like many others put all their money into investments in the stock exchange but when that all crashed it left them with no money to give to the rightful owners, this caused a massive five thousand banks to close and over nine million saving accounts destroyed without those nine million getting their money. The economy or lack thereof, led to people getting fired from their jobs or their job just completely shutting down resulting in the rate of unemployment to soar. There was said to be one million unemployed citizen in New York City alone and a disturbing fifty percent of the able bodied workers in the city of Cleveland were out of…

    • 661 Words
    • 3 Pages
    Good Essays
  • Better Essays

    Some of these factors include farm foreclosures, consumer credit, and the banks in the market. These three factors were also related to one another in a way. The consumer credit influenced the farm foreclosure because since farmers were in debt and they could not pay off their debts, they had to foreclose their farms and go to other cities and states to try and find jobs to sustain their families and themselves. Farm foreclosures influenced the banks in the market because the farmers could not pay off their debt and when the banks came around demanding them to pay their debts, they could not and had to foreclose and the banks could not get any of their money back. Consumer credit affected the banks because the people kept spending money they and the banks did not have. When the banks called for the loans to be repaid, the people could not repay the banks and the banks went bankrupt or closed. It did not help that the banks did not reduce the debts of the European nations that allied with the United States after the war. Because the United States did not reduce the debts, the European nations took out more loans to repay the debts, basically repaying debts with debts. With each and every one of the factors, the Great Depression was created and prolonged, and the United States will never be the…

    • 1666 Words
    • 7 Pages
    Better Essays
  • Good Essays

    American Dream Barriers

    • 659 Words
    • 3 Pages

    culture, one with enduring significance. During the years preceding the credit market collapse in 2008, the subprime mortgage industry thrived. Individuals with bad credit were given access to loans that weren’t supposed to be able to go to them. But as long as home prices were on the rise, these poor lending practices were simply ignored. Lenders could afford to write poorly used loans as long as the homeowner's equity outpaced their desire for new debt. If borrowers were to fail to payback their loans, lenders could always foreclose on the home, since it was an asset with ever-increasing value. The credit market's problems began when housing prices started to fall in 2007. Homeowners frequently found themselves with underwater loans, owed lenders more than the home was worth and when faced with these facts, homeowners began to fear the threat of foreclosure. Even more disturbing was the fact that some families abandoned their homes; choosing to start their lives anew elsewhere rather than worry about paying off their debts. Many Americans had wages lowered, resulting in strike, others were laid off or fired. This caused a major debt in the economy and stunted the growth of…

    • 659 Words
    • 3 Pages
    Good Essays