Why is there a financial crisis in the US?

Answer 1

I agree with many of the s to this question. The "root" cause for this financial melt down is "GREED." Money has never been the problem. It has been the love of money. Because of this greedy love for money organizations that lacked morals began creating lending programs, fraudulently inflating property values and even committing mortgage fraud to get people qualified that could not afford to buy.

What causes me more worry for me is that our government thinks that the solution is to give the banks more money to get more people to borrow.

Here is a Fact...

If the nation is incapable of paying their debt today, what make us think that consumers will be able to re-pay even more debt in the future? The key to resolving this problem is not loaning more money. It is teaching and empowering the nation's consumers to get debt free. People need to learn how to be GOOD STEWARDS of their money.

Let us focus on helping one another to make the right decisions and get out of this mess.

-----------------------------------------------------------------------------

The Mortgage problem is the result of corporate greed run amuck. And the damage caused in the '90s by changing banking regualtions is small change compared to the fleecing of the middle class with the tax code. That's why they can't pay a mortgage.

See: How has the Income Tax contributed to the economic crisis of 2008?

and: What is the main cause of the current economic crisis in the US?

:Basically what happened is that in the late 1990s the Republican Congress did away with a lot of regulations in the financial industry that had been put in place in the 1930s during the Great Depression. Without these regulations, it became easier for a lot of questionable banking and lending practices to take place. Lenders started making money by giving out mortgages to people they knew or should have known could not actually afford the houses they were buying; the lenders assumed that housing prices would continue to rise, so in the case of foreclosure the lender would still make money.

Millions of people ended up in these kinds of mortgages, called subprime mortgages; knowingly or not, these people ended up not being able to repay their mortgages. At the same time, housing prices started to fall. So imagine this: you buy a $500,000 house with mortgage of $475,000 and a down payment of $25,000. With the initial interest rate, your mortgage payment each month was only $400. But then interest rates rose (and these people had mortgages with adjustable, instead of fixed, rates on them), and so your payments went up to $600 or $800. The problem is you don't have enough income to pay that each month, so you can't afford to make your mortgage payments. Meanwhile, the value of your house falls to $400,000. That means that, even if you sell your house, you will still owe the $100,000 difference. The result of this is that people in this situation go bankrupt, and the lender ends up owning the house.

This problem has happened millions of times in the U.S. but also in other countries where the same lax practices were taking place, e.g. Spain, Canada, the U.K., etc.

Lenders that gave out too many mortgages of this type then found themselves having a lot of people not be able to pay back their mortgages. The lender then ends up with the foreclosed house, but it can't sell the house for very much because housing prices are falling. This means that the lender has lost a LOT of money on the one house. If banks loose $200,000 on a million homes, that's already $2 billion in lost money.

This is all simplified, of course.

The other problem is that these mortgages were being bundled into investment opportunities that companies like Lehman Brothers and other companies then sold shares in to investors. All these people are now also loosing their money.

The results are that bank in trouble don't have enough assets to stay in business; the problem is so massive that only government bail-outs can keep the banks in business. Because so many banks have so many bad mortgages, which are a kind of loan, so they have bad loans, it's hard for any bank to offer credit/loans for any reason right now--they just don't have enough cash to cover everything.

The problem then turns to businesses: small businesses rely on credit to expand, make payroll, etc., and without credit business starts to shrink, jobs are lost, and the economy overall tanks because no one can get any credit at all, so the economy is being forced to switch to a cash economy: if you don't have the money already, you can't buy anything.

The fundamental reason: Financial Leverage was misused to manipulate markets for decades. Organizations were never regulated and compelled to hire more ethical traders and managers rather than B-School MBA Grads who have just learned to make money at any cost. US officials while rescuing the global giants claim it is just a real estate correction due to bad debts in banking system. Whatever the case, the market sentiment have changed forever, and valuations will come under immense pressure from now on...be it real estate, equity, debt, bond, products, services, or...anything

A man jumping from top floor out of a 100 storey building can feel flying with joy until his reaches the ground floor with a big bang. This is the case with most inflated companies and their greedy management, we only know when they actually burst. We should watch and regulate them starting from their intention to climb that building from ground zero!

Some Food for Thought: The golden rule is "do not expect the market to behave and act for your profit". They are playing for their own profit. Win-Win is only a term used to convince or induce not-so-smart investors. There will still be a bunch of guys who have profited from these crashes. After all, nobody is throwing money into the Atlantic Ocean, if you lose someone else gains. Unfortunately, incentives for playing smart (mostly doing bad) are huge and accepted by legal systems, regulators, government and modern society at large.

American Debt They have been spending money that doest exist. they have now spent so much that the collateral they put up wont cover the debt. and in order to keep spending, even modestly, they have to loan more money, the lender knowing they are unable to repay are nervous about lending the money. as a result the organizations that provide work cant get the finance they need to continue and end up having to put people of. This has a snowballing effect. For instance America has been buying cheep goods from China for years with American money. and china has been lending it back to them and making interest on the deal. If the US dollar losses value then the Chinese will have to ask for higher interest in order to recoup for Chinese imports into the US. The tentacles go every where. For every dollar the US owns They are about 200 dollars in debt.The price of self regulation, human greed and corruption.

Answer 2

Though sub-prime mortgages are blamed for this catastrophe they are only a small part of it. If that was the entire problem, it could have been solved last year with a few hundred billion dollars and changes to the prepayment penalties and rate adjustments that forced so many foreclosures. That was not the main problem, though it did provide a convenient excuse.

The vast majority of the damage has been and will continue to be caused by the completely out of control derivatives segment. The Bank for International Settlements says that exchange traded derivatives total approximately 700 TRILLION DOLLARS, or about 12 times the world's GDP. Since most derivatives are not traded on an exchange and are over the counter trades, they estimate the total market could be 1.4 QUADRILLION DOLLARS, or about 25 years of the world's GDP. It could easily be more than that.

There is no way to buy back all the fraudulent paper these entities have sold here and around the world. The U.S. doesn't have the money, the rest of the world doesn't have the money and neither we, nor they can possibly print enough money to make these organizations whole for the frauds they have perpetrated worldwide. Nor should the paperhangers prosper from their crimes.

Sub prime Mortgage crisis is the reason for this financial crisis in US

- Banks lent loans to people who were not capable of repaying their loans. Based on these loans a lot of complex financial products were created and sold to a lot of people.

When the US real estate market took a beating, house prices started coming down. This resulted in a high number of defaults on sub prime mortgage loans. This triggered a sequence of events which resulted in losses in billions to whoever was involved in this confusion.

AnswerTo say that the "mortgage crisis" caused the financial crisis in the U.S. is a gross over simplification. It is also probably putting the cart before the horse. A contraction of the money supply most likely caused the "mortagage crisis".

Facts supporting this argument are:

1) Regulation of the U.S. economy by an illegal entity called the Federal Reserve. (Creation and the operation of the Fed is contrary to the Constitution of the United States.

2) Exploitation of the derivatives market (complex financial products mentioned above) by the banks. The banks that own the Fed are the prime culprits.

3) Sudden contraction of the money supply. The only entity which is capable of causing the contraction of the money supply that caused this crisis is --- THE FEDERAL RESERVE.

The Federal Reserve is controlled by a "board of governors". They are appointed by the banks that caused this mess in the first place. The chairman is appointed by the president, but he is just a figure head. This select works in secret and not even Congress gets to know what it is doing.

4) This contrived assault on the U.S. economy could be in preparation for another attack and further erosion of the legal government of the United States which is "of the people and by the people" as represented in the Declaration of Independence and the Constitution and Bill of Rights.

5) Subversive activities by this financial cartel are proven by historical precedent, they are not "conspiracy theory" as the media would like us to believe. J.P. Morgan and his associates who pushed through the Federal Reserve in 1913 were also involved with a plot to overthrow Constitutional Government in the 30's. Google Smedley Butler and George Prescott Bush together to learn the details of this plot.

6)Another historical precedent for planned economic chaos was the Stock Market Crash of 1929. According to a number of respected sources this was caused by a contraction of the money supply by the Federal Reserve.

7) It is historical fact that the banks that comprise the Federal Reserve are owned by the same international banking cartel that funded both sides of the Napoleonic Wars, World War I, and World War II.

8) The fact is that the Bailout Bill was pushed through congress in the midst of a chaotic national campaign. The first bill stipulated no congressional oversight and judicial immunity. The second version of the bill provided for oversight, but the "oversight committee" was not created until weeks after funds were released, and still is not exercising its supposed authority. The funds are being hoarded by the banks and used in an illegal manner contrary to the stipulations in the act.

9) It is historical fact that the Federal Reserve act was passed in the same manner. The vote was pushed through congress just prior to the Christmas break of 1913. Many legislators were absent or didn't have time to inform themselves adequately before the bill came to a vote. Many true patriots were opposed to the creation of the Federal Reserve, aware of its illegal and unconstitutional nature, and prophesied that the economic chaos we are now experiencing would result. Among these was the famous American Hero Charles Lindbergh.

See the related questions: Who really owns the Federal Reserve? and What is the main cause of the current economic crisis in the US?.

AnswerQuote from Richard H. Timberlake, complete paper linked under 'the policy that created the Depression' below.

Since the epic disaster of the Great Contraction, similar sector instabilities have occasionally appeared. The most recent example is the subprime mortgage crisis and the real estate slump. The Federal Open Market Committee's response to these events shows that Fed policy is too ready to take the politically easy route by accommodating "important" markets that get themselves into trouble. Every time it does so, it generates moral hazard in the protected sector, thereby making more difficult the one task that it, and only it, can accomplish - internal price level stability, which means a dollar of constant purchasing power.

Answer 3

The mortgage collapse was the final "straw that broke the camel's back", but this is merely a symptom of concentration of wealth.

An excellent collection of articles on Federal tax policies and their effects from the Center on Budget and Policy Priorities is given in the links below.

One of those papers states: " Not since 1928, just before the Great Depression, has the top 1 percent held such a large share of the nation's income. " from Income Concentration at Highest Level Since 1928, By Chye-Ching Huang and Chad Stone (linked below).

Wikipedia has a good article on Distribution of wealth - see the link below for the entire article. The next snip is from this article.

In the United StatesIn the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth.

In describing tax systems, it is important to distinguish between the percent of taxes paid on a given income, and the percent of taxes paid by a person with a given income. For example, if a person earns $1,000,000 and is taxed at a rate of 10%, they will owe $100,000 in taxes. On the other hand, if a person earns $10,000 and is taxed at a rate of 20%, they will owe $2000 in taxes. The person with the greater income is taxed at a lower rate but pays a higher tax. The person with the lesser income is taxed at a higher rate but pays a lower tax. The United States has a tax system which is a mixture of progressive taxationand regressive taxation. The income taxis progressive, capital gains tax, at a lower rate than the income tax, is regressive, as is the sales tax, since the less wealthy spend a greater percentage of their income. In 2003, the one percent with the highest salaries paid more than 34% of the nation's federal income tax; the ten percent with the highest salaries paid more than 66% of the total income tax; the top 25% of paid 84% of the income taxes; and the upper half accounted for virtually the entire U.S. income tax revenue (nearly 97%). This is an inevitable consequence of the concentration of wealth. People who do not have much money cannot pay high taxes, even when they pay a greater percentage of their earnings in taxes.

The above clip gives ecomomic reasoning that explains why the Constitution of the United States originally forabade direct taxes (income taxes).

This country's growth and success are the result of giving everyday people the right to "life, liberty, and the pursuit of happiness". That growth would have been even greater, and probably built on a more solid base if the Native and enslaved population had been given those same rights. This country will continue to deteriorate economically and socially if those rights are not restored.

You have this fairly continuous downward trend from 1929, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s.

Above quoted from linked article below: "The Wealth Divide".

The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by theCongressional Budget Office shows.

The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher.

The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.

See the NY Times article linked below for the rest of the above article.

"The last quarter of the twentieth century witnessed some disturbing changes in the standard of living and in equality in the United States. ... Between 1973 and 1993 the real wage declined by 14 per cent, though it has since risen by 7 percent from 1993 to 2000, for a net change of -8 per cent. .... Despite falling real wages, living standards were maintained for a while by the growing labor force participation of wives....

excerpt-

Another troubling change... Inequality in the distribution of family income .. virtually unchanged since the end of World War II until the late 1960s, has increased sharply since then.... The poverty rate, which had fallen by half from a postwar peak in 1959 (the first year the poverty rate was computed) to 1973, has since risen.

excerpt-

The first series is the top marginal tax rate (the marginal tax rate faced by the richest tax filers). Back in 1944, the top marginal tax rate was 94 per cent! After the end of World War II, the top rate was reduced to 86.5 per cent (in 1946) but during the Korean War it was soon back to 92 per cent (in 1953). Even im 1960, it was still at 91 per cent. This generally declined over time, as tax legislation was implemented by Congress. It was first lowered to 70 per cent in 1966, then raised to 77 per cent in 1975, then to 50 per cent in 1983 (Ronald Regan's first major tax act). and then again to 28 per cent in 1986 (through the famous Tax Reform Act of 1986). Since then, it has trended upward, to 31 per cent in 1991 (under President George Bush) and then to 39.6 per cent in 1993 (under President Bill Clinton).

Above from Recent Trends in Living Standard in the United States, in Edward N. Wolff see below

Obama has proposed a raise in the top marginal tax rate. Some are screaming about it but it correlates to healthier economic times. Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986.

(see Manikaw economics blog linked below) Taxation can be utilized by the government to facilitate the redistribution of wealth. See the Wikipedia article and the related question: How has the Income Tax contributed to the economic crisis of 2008? Short Answer: Bad Mortgage Lending Practices not mandated by the government If you ask me put your money into a money market mutual fund.

Sources.

http:/mutualfunds.about.com

http:/www.amfi.com/types/money-market-mutual-funds

Deregulation of the mortgage lending and investment banking industries.

Um - or is it over regulation because the "liberals" bought their votes by helping people afford homes?

No, really, wait .... it's because the SEC isn't enforcing the regulations we have.

No! No! No! It's because the politicians have trashed the Constitution and we are being held hostage by "THEM", the ones that own the FEDERAL RESERVE.

I agree with many of the answers to this question. The "root" cause for this financial melt down is "GREED." Money has never been the problem. It has been the love of money. Because of this greedy love for money organizations that lacked morals began creating lending programs, fraudulently inflating property values and even committing mortgage fraud to get people qualified that could not afford to buy.

What causes me more worry for me is that our government thinks that the solution is to give the banks more money to get more people to borrow.

Here is a Fact...

If the nation is incapable of paying their debt today, what make us think that consumers will be able to re-pay even more debt in the future? The key to resolving this problem is not loaning more money. It is teaching and empowering the nation's consumers to get debt free. People need to learn how to be GOOD STEWARDS of their money.

Let us focus on helping one another to make the right decisions and get out of this mess.

-----------------------------------------------------------------------------

The Mortgage problem is the result of corporate greed run amuck. And the damage caused in the '90s by changing banking regualtions is small change compared to the fleecing of the middle class with the tax code. That's why they can't pay a mortgage.

See: How has the Income Tax contributed to the economic crisis of 2008?

and: What is the main cause of the current economic crisis in the US?

Answer:Basically what happened is that in the late 1990s the Republican Congress did away with a lot of regulations in the financial industry that had been put in place in the 1930s during the Great Depression. Without these regulations, it became easier for a lot of questionable banking and lending practices to take place. Lenders started making money by giving out mortgages to people they knew or should have known could not actually afford the houses they were buying; the lenders assumed that housing prices would continue to rise, so in the case of foreclosure the lender would still make money.

Millions of people ended up in these kinds of mortgages, called subprime mortgages; knowingly or not, these people ended up not being able to repay their mortgages. At the same time, housing prices started to fall. This problem has happened millions of times in the U.S. but also in other countries where the same lax practices were taking place, e.g. Spain, Canada, the U.K., etc.

AnswerLenders that gave out too many mortgages of this type then found themselves having a lot of people not be able to pay back their mortgages. The lender then ends up with the foreclosed house, but it can't sell the house for very much because housing prices are falling. This means that the lender has lost a LOT of money on the one house. If banks loose $200,000 on a million homes, that's already $2 billion in lost money.

This is all simplified, of course.

AnswerThe other problem is that these mortgages were being bundled into investment opportunities that companies like Lehman Brothers and other companies then sold shares in to investors. All these people are now also loosing their money.

The results are that bank in trouble don't have enough assets to stay in business; the problem is so massive that only government bail-outs can keep the banks in business. Because so many banks have so many bad mortgages, which are a kind of loan, so they have bad loans, it's hard for any bank to offer credit/loans for any reason right now--they just don't have enough cash to cover everything.

The problem then turns to businesses: small businesses rely on credit to expand, make payroll, etc., and without credit business starts to shrink, jobs are lost, and the economy overall tanks because no one can get any credit at all, so the economy is being forced to switch to a cash economy: if you don't have the money already, you can't buy anything.

AnswerThe fundamental reason: Financial Leverage was misused to manipulate markets for decades. Organizations were never regulated and compelled to hire more ethical traders and managers rather than B-School MBA Grads who have just learned to make money at any cost. US officials while rescuing the global giants claim it is just a real estate correction due to bad debts in banking system. Whatever the case, the market sentiment have changed forever, and valuations will come under immense pressure from now on...be it real estate, equity, debt, bond, products, services, or...anything

A man jumping from top floor out of a 100 storey building can feel flying with joy until his reaches the ground floor with a big bang. This is the case with most inflated companies and their greedy management, we only know when they actually burst. We should watch and regulate them starting from their intention to climb that building from ground zero!

Some Food for Thought: The golden rule is "do not expect the market to behave and act for your profit". They are playing for their own profit. Win-Win is only a term used to convince or induce not-so-smart investors. There will still be a bunch of guys who have profited from these crashes. After all, nobody is throwing money into the Atlantic Ocean, if you lose someone else gains. Unfortunately, incentives for playing smart (mostly doing bad) are huge and accepted by legal systems, regulators, government and modern society at large.

American Debt They have been spending money that doest exist. they have now spent so much that the collateral they put up wont cover the debt. and in order to keep spending, even modestly, they have to loan more money, the lender knowing they are unable to repay are nervous about lending the money. as a result the organizations that provide work cant get the finance they need to continue and end up having to put people of. This has a snowballing effect. For instance America has been buying cheep goods from China for years with American money. and china has been lending it back to them and making interest on the deal. If the US dollar losses value then the Chinese will have to ask for higher interest in order to recoup for Chinese imports into the US. The tentacles go every where. For every dollar the US owns They are about 200 dollars in debt.The price of self regulation, human greed and corruption.

nothing other than SUB PRIME lOSS.....it is nothing,US bank issused Home loans to all the people without enquiring their credit background......which lead to non-repayment of many loans......this is one of the reason for US crisis

The USA was spending money it borrowed from China, China lent money to America so they would buy their goods. Something had to give. The economy of the world is based on toasters and ever improving mobile phones.

Answer:The current crisis is both economic and financial. It may be better to have an understanding of what causes these crises in general, rather than getting tied down in endless details regarding the current crises. The causes of the Great Depression are still being debated over seventy years later. It is unlikely a consensus will be reached regarding the specific chain of events leading to the current crises.

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The underlying cause of all financial crises is due to a drop in the rates of return on investments, falling equity prices and/or a rise in defaults on loans.

Such changes can put a chill on the investment markets, thus driving down the current prices paid for units of investment instruments. As investors see 'paper' losses mount ('paper' value is the stated value of the investment at a given time, usually based on the most recent price paid for a unit of that investment by the last buyer), a feedback process may ensue in which falling 'paper' values lead to more risk aversion, which in turn leads to a further drop in 'paper' values.

For this reason, understanding the difference between 'paper' losses and real losses is important, though it appears many investors do not understand the difference. Real losses are only experienced when an asset is sold for less than what was paid for it (assuming the interest or dividends paid on the investment kept up with inflation). Many investors do not know whether or not they are experiencing real losses because they generally do not keep track of what they paid for the assets to begin with. Rather, they believe they have lost money simply because last price paid for a unit of the investment by a buyer is less than the previous price paid for a similar unit by an earlier buyer. This is much like believing you've lost half the value of your house because your neighbor sold his extremely similar house for half of what his neighbor sold his extremely similar house for.

When 'paper' losses occur, sophisticated investors and their agents realize that assets had been overvalued in the first place and that promised rates of return were unsustainable. In a severe crisis and armed with this truth, many begin looking for answers as to why prices and expected rates of return had been so high in the first place. In some cases, the answers are used to punish those who 'caused' the meltdown. In other cases, the answers are used to justify legislative and regulatory changes meant to prevent a recurrence of such errant valuations.

As stability returns to the financial economy, prices and rates of return on investments will be based, as they should be, on more realistic estimates of the expected profitability of enterprises that produce goods and services for the economy.

A sizable financial crisis will generally lead to a decline in funding for riskier investments. The deeper the crisis, the more severe the decline in funding.

Real economic growth - especially that which comes from new or improved goods, services and technologies - depends on funding provided by risk-taking investors. If investors are hiding from risk en mass, such economic growth will decline or cease (and the economy may be even shrink) until funding for riskier investments in real economic activity increases.

An economic crisis occurs when there is a substantial drop in resource utilization. Resources fall into three categories: labor, capital and raw materials.

A substantial drop in resource utilization might be caused by loss of or reduced access to one or more resources. For example, an economic crisis can be triggered by a sudden lack of access to oil.

Declining resource utilization may also be caused by declining demand for some goods and services. As demand for some goods and services decline, so does demand for the resources that produce those goods and services.

Generally, a decline in resource utilization is considered a crisis when the resource in question is labor and the decline is sudden and substantial.

Of course, unused resources are available to be utilized to produce other goods and services, assuming that demand for them either exists or is projected to exist, and assuming that investment monies are available to fund the creation of new enterprises or the expansion of existing enterprises.

Because the financial economy consists of numeric valuations of economic realities, it is viable only to the degree it renders an accurate numeric portrayal of the real economy. Therefore, a real economic decline should be reflected by declines in the financial economy - unless government and other actors seek to mask the economic crisis with actions that result in bogus valuations in the financial economy.

Therefore, a financial crisis might be the numeric representation of a crisis in the real economy, or it might be the result of the financial system 'correcting' previous overvaluations of real assets (i.e. - removing overly-speculative influences from those valuations). In some cases, an economic crisis may trigger financial 'over-correction', thus magnifying the overall effect of the economic crisis and perhaps prolonging it.

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An economic crisis will inevitably lead to a financial crisis - unless governments and other agents manipulate financial valuations in an attempt to avoid devaluations based on real declines in economic potential. Attempts of this sort usually lead to even greater financial crises later that are manifest as damaging levels of inflation or deflation. This occurs as the financial economy, in order to remain viable, inevitably seeks to establish accurate valuations of the real economy.

All financial valuations are stated in terms of numbers and those numbers represent money. As such, a financial crisis can be triggered by too much or too little growth (or decline) in the money supply. Such disruptions can, and often do, lead to disruptions in the real economy as well. However, these 'disruptions' may be quite frequent, though little noticed because they are so small. Major monetary mismanagement will lead to major financial disruptions, which can then lead to disruptions in the real economy.

The worst scenario is when an economic or financial crisis is large enough to set up a feedback cycle between the two aspects of the economy, thus pushing each toward further decline. A financial crisis can thus lead to an economic decline which further perpetuates the financial decline, which in turn perpetuates the economic crisis. In such a situation, risk aversion may become more important than making money on investments, leading to abandonment of risk-taking investments.

Assuming an adequate supply of funds available for investment and continued access to real resources, economic crises are prolonged solely by continued widespread aversion to risk on the part of those with funds available for investment.

Any crisis emerges from changes in the real economy and/or from the need for the financial economy to 'correct' itself in order to render more accurate valuations of the real economy. The beginnings of the crisis are due to real disruptions in the real economy, the financial economy and/or the money supply, but the longevity of that crisis is increasingly based, as time goes by, on the unwillingness of holders of wealth to invest in real economic activity.

This question should be merged with

What is the main cause of the current economic crisis in the US
1-root cause of Labor and Capital conflict. Labors are killed by Capitals with new technology and outsourcing.

2- In Global market, many people lose jobs and less income.

3- Local market, regimes pay less price to local labor.

4- As the result, consumption and purchasing power fall down.

No job or less pay -> reduce purchasing-> market slow- > economics crisis.

Answer 4

The Subprime Mortgage Crisis is an ongoing economic problem that has become more apparent in 2008 and has resulted in reduced liquidity in the global credit market and also the banking & financial systems. This crisis has exposed the weakness in the global financial system and also the regulatory framework that is overlooking them.

Some of the reasons for this crisis are:

1. The US Real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities

A Subprime loan is a loan that is granted to a borrower who does not qualify for loans owing to a variety of risk factors like low income level, bad credit history etc.

How it all started:

In the past few years, due to high liquidity and low interest rates on mortgage loans, the demand for housing properties started increasing. After the advent of the subprime lending practices, people who were, not so creditworthy began to buy homes using these loans. This resulted in a heavy demand for houses which in turn fuelled the increase in residential property prices. The prices increased exponentially and people who already owned homes, opted for refinance at lower interest rates.

At the same time, Banks were lending mortgage loans to everyone who asked for it, considering the property price hike. On one hand, they would get their money back even if the borrower doesn't repay the loans and on the other hand the banks were selling their loan products to investment companies who packaged them into MBS and sold them in the open market. This resulted in the bank getting back almost their entire loan amount which they started lending to further subprime customers.

What went wrong?

Trying to cash in on the heavy demand for residential properties, real estate majors started promoting a huge number of residential projects. This led to overbuilding. This resulted in a surplus inventory of homes which eventually caused the real estate prices to decline by the end of 2006.

Ease of availability of loans coupled with the assumption that property prices would continue to move upwards prompted a lot of subprime borrowers to buy houses. Once the housing prices started to fall, the interest rates on loans started to rise. Most of the borrowers were unable to make their payments on time and also due to unavailability of refinance options default on loans started to increase. For most home owners, their outstanding amount on the mortgage loan was much more than the value of their houses. This motivated home owners to walk away from their property in spite of the fact that it would impact their credit ratings. People were not ready to pay hefty mortgage amounts when their property wasn't worth that much. If our home loan was worth 10 lacs and our home was worth only 6 lacs would we continue to pay our EMI on the home loan? :-)

This resulted in a surplus supply of houses which were available for Sale. The only way banks could reclaim their amount was by selling these homes. With the availability of so many homes, the prices of residential property fell further. The losses & Non Performing Asset's for banks started to increase.

The high rate of default on subprime loans & downward movement of housing prices resulted in lower demands for the MBS products created out of subprime loans. The banks & financial institutions were unable to generate the liquidity that they were expecting to which resulted in an overall credit crunch. The Banks were left with too many houses with too little buyers and similary the financial institutions had lots of MBS products with very little takers.

Answer 5

The Subprime Mortgage Crisis is an ongoing economic problem that has become more apparent in 2008 and has resulted in reduced liquidity in the global credit market and also the banking & financial systems. This crisis has exposed the weakness in the global financial system and also the regulatory framework that is overlooking them.

Some of the reasons for this crisis are:

1. The US Real estate market crash

2. High default rates on Subprime loans &

3. Subprime Mortgage backed securities

A Subprime loan is a loan that is granted to a borrower who does not qualify for loans owing to a variety of risk factors like low income level, bad credit history etc.

The sub prime crisis began in the USA and because of our close import export relationship with USA the effects are evident in India also.

Answer 6

For many years the US dollar has been considered as the world's leading currency. Even today the dollar is world's reserve currency which means that many other governments keep their savings in dollars. But the recent crisis hit the US hard and this situation might change. The US economy used to be the dominant but many economists believe that China's economy will become number one in the world by year 2020.

Reasons for the US debt and the coming collapse of the US dollar:

Current account deficit: Imports in the USA are greater than exports and this outflow of currency puts downward pressure on the dollar. In the past China used its foreign exchange reserves to buy US debt, and that countered the effect of the outflow of dollars. Asian countries are now standing aside from greenback as they no longer believe it will retain its value. Between February 2009 and July 2011 the Federal reserve was printing dollars and buying the US debt that could not be sold, but at least for now this money printing has ended. This does not bode well for the value of American bonds.

The severe reversal in the housing market discourages the foreign investors from buying dollars. At the same time it's very difficult to predict when the housing market will recover.

And one of the most important factors: falling US consumer confidence. Whilst confidence cannot drive a market forever, it has kept US markets buoyant much longer than anyone expected.

The high level of personal debt amongst US consumers - as a consequence of this the US economy is sensitive to any rise in interest rates. Higher interest rates would be one solution to a falling currency and may be necessary to attract investors to finance America's trade deficit. The Credit Crunch is also a factor, causing a decline in loans, a shortage of funds for lending and a sudden increase in the interest rate.

The high level of government debt - most of the US government borrowing is short term in nature. If the US raises interest rates to defend the dollar the cost of renewing its borrowing when old borrowing expires will make the interest bill prohibitively expensive. The US is damned if it raises rates and it is damned if it doesn't. In the end, market forces may force rates to rise as lenders turn their back completely on US bonds, and at this point the government will no longer be in control of the interest they pay on new debt they borrow from Peter to pay Paul.

The government budget deficit - The US government has spent 50% more than it receives in tax revenues each year since the 2008 crisis unfolded. This looks set to continue with most of the spending being non-discretionary. There are only 2 ways to fund this: By borrowing more or by printing money. Both scenarios are unsustainable and will lead to an eventual crumbling of the value of the US dollar as interest rates eventually rise.

Recently the national debt of USA reached the maximum approved by the government. This means that the country should not borrow any money from now on. This will cause bankruptcy unless the Senate vote for increase of the debt ceiling. The United States is the country with the highest national debt in the world - 14,392,451,000,000 dollars and counting. This is a huge number. If 1$ banknotes were put one on top of the other, the pile would reach the Moon! However, there is another important fact - the US Debt represented as a percentage of the Gross Domestic Product (GDP is the total revenue of the economy of one country). For the USA it's 97% of GDP. There are many countries, which owe more than they earn each year: United Kingdom (398% ratio national debt to GDP), Netherlands (ratio national debt to GDP), Norway (861% ratio national debt to GDP) and the extreme case of Ireland (1224% ratio national debt to GDP). It is interesting to be note that most of the national debt of the USA is owned by US individuals and institutions at 42,2%. China holds 7, 5 % of the debt (they typically owned 20% in the past) and it is the biggest foreign country owner, followed by Japan - 6, 4%, and UK - 6%.

How could this situation with the national debt be solved?

There are several solutions according to the experts:

Increase taxes. This is bad for the business but the country will quickly generate short term funds. This method was recommended by Alan Greenspan, ex. director of the Federal Reserve. Raising taxes crimps productivity however and the government would still need to cut spending massively just to stop bleeding money, even with tax raises. Over time also, tax rises tend to lead to profits moving offshore where it's harder to tax them and the tax revenues will fall.

Reduce outsourcing. One of the benefits of outsourcing is the cheap labor force. The problem is that Americans lose their jobs because the company moves the production to third world countries in order to cut costs. Unemployment is key factor for the recent recovery of United States. This however is likely to be a bogus argument as forcing companies to stop outsourcing would be equivalent to putting a tariff on imports, and this would lead to tit-for-tat reactions from abroad causing an overall reduction in trade, and a fall in GDP.

Print more money. There are pros and cons to this. When you print money you devalue existing money and generate inflation. From one side inflation is good (for the country printing the money) because more money in circulation makes it easier to repay debt. The problem with this is that the inflation could become hyperinflation through a loss of confidence in the dollar. "Three Comrades" by Erich Maria Remarque describes the situation in Germany after the First World War. The inflation was enormous and the prices were jumping 10 times per day! The cost of one beer was 3 billion Deutsche marks. Hyperinflation would wipe out all wealth in the united states for a period of time.

Richard E. Noble: "Printing money and skipping the Federal Reserve will no doubt create some inflation. But, using that money to buy back Treasury Bonds (Debt.) will be anti-inflationary. On the one hand, we are printing money to put into circulation, but using it to take money out of circulation by reclaiming debt on the other. If it is done properly - with due diligence - the one will cancel out the other and America will one day be debt free and it will cost nobody anything. This will not be a loss or gain - it will simply be a monetary transfer. We will transfer a bunch of one type of paper for another type of paper. If it is done right, nobody will know the difference. And if we want to add an additional check on inflation, when we start buying back our treasury bonds from the Federal Reserve with our free paper, temporarily raise the required reserve security demands. In other words, if the banks are required to hold 10% in reserve - raise that requirement to 12% or whatever. Then as time goes on and we see that inflation is under control, lower the requirement."

Jim Rogers:"The U.S. dollar is going to be a 'total disaster' due to our country's position as the world's largest debtor and the policies currently being undertaken by our Federal Reserve. "The Chinese yuan is likely to be a 'safe' currency. Bernanke only understands printing money and does not understand economics."

Default. This solution is very extreme, but it will show immediate results. The problem of this idea is that this could demolish the confidence in the dollar as a reserve currency and in the economy.

So what should a small investor do?

Store your savings in more than one bank.

Store your savings in more than one currency. Gold is always a good investment.

Don't buy and sell stocks (trade) unless you are a professional. Markets change swiftly nowadays and it's almost impossible to predict what will happen with your investments.

If you'd like more details about what to do with your money, read here how to protect your wealth

Answer 7

Sub-prime Mortgage Crisis

While debate continues and the cause will likely never be completely certain the main event is undoubtedly the U.S. sub-prime mortgage crisis. The sub-prime mortgage crisis was the creation of, sale, and packaging of sub-prime mortgages at increasing rates in the U.S. housing market during the 1990s-2000s. While this allowed many new families to own houses and maintain them by making minimum payments, it was only sustainable during economic growth. During recession or stagnation, sub-prime mortgages were dangerous because the homeowners would lose their ability to pay and maintain no leverage to support their home. To counter this, mortgage firms packaged the risk of the mortgages into a new type of asset, which they resold to investors. These assets were extremely risky but previously unknown. Credit rating agencies gave the assets relatively high ratings even those they were uncertain, feeding into investment. This created a bubble, or artificial demand, for sub-prime mortgages. This increased the housing market's demand, price level, and growth. However, the economy began to slow in the mid-2000s and investors began to question the safety of the housing market, leading the an eventual collapse. The collapse caused a major failure for homeowners to maintain their payments, leading to default, release of assets, and general problems for the major U.S. banks and mortgage firms. Since these businesses were essential for matching savings to investment and providing financial services, their hit caused a widespread panic and sense of danger to the economy as a whole. While many of them eventually went under, the U.S. government decided to intervene to save some of them in order to prevent further recession. Moreover, this investment, combined with the collapse, lead to a decline of demand, increasing supply costs, and failure of many other firms in the economy. Arguably, the U.S. sub-prime mortgage crisis was the chief cause of the current recession.

Repeal of the Glass-Stegal Act

The central issue that led to the current recession/depression is the repeal of the Glass-Steagall act. The financial institutions were able to lobby to get the legislation removed in an example of plutocracy. With the legislation successfully removed after 50 years, the financial institutions were free to engage in high-risk speculation.

According to Heakal (n.d.) the Glass-Steagall act was passed in 1933 in response to the Great Depression by Roosevelt, and was repealed in 1999 by Congress during the Clinton administration (para. 1). It placed restrictions on financial institutions in order to prevent financial activities which could result in economic destabilization and harm to the country (social problems such as unemployment, poverty, etc). The act placed limits on high risk speculative behaviors by financial institutions (para. 4). The other thing the act did was to separate commercial banking, investment banking, and insurance; also to reduce high risk behaviors on the part of financial institutions (para. 4, 6). The function of the act in part was to prevent banks from taking high risks in pursuit of high profits that could result in severe social problems.

The Glam-Leach-Bliley Act repealed the Glass-Steagall act (para 8). The arguments for the repeal were that the Glass-Steagall Act made the financial institutions uncompetitive on the global market, that securities were low-risk(HAW HAW HAW), that financial institutions could separate financial/commercial/insurance activities through subsidiary organization, and that in other parts of the world financial institutions weren't regulated the same way and they had no problems ("Glass-Steagall Act", 2010, para 10).

Overstimulation of a Sound Economy

A recession, like all economic cycles, is practically inevitable.

The current one in the US was likely caused by overstimulation of a sound economy.

This included, but was not limited to, government mandated adjustments in lending practices. Government's encouragement into investing in the Stock Market. Government pressure to cycle the dollar faster.

Why would our government do this?

Our Federal Government does not determine its budget based upon collected taxes. It bases it on project potential revenue. If they can claim the economy is growing they get to print a lot of extra money. Our Federal Government is the first to spend those extra dollars. Economic growth gave Congress huge amounts of extra dollars to spend. So they artificially engineer ways to show greater economic growth.

Using the farming analogy, they used genetically altered seeds to produce extraordinary crop yields, (for a time) but just like with killer bees, altering the natural course has repercussions. Over farming has repercussions. Bad soil management has repercussions. Maybe not right away, but at some point we find out why we were stupid in pushing to far and too hard.

So they encourage everyone to invest in the stock market . . . the stock market goes up; economic growth. . . they can print more money. They structure a set of rules that allows anyone (regardless of their ability to pay for a house) to buy a house, house prices rise at huge rates; economic growth. . . they get to print more money. They raise the minimum wage; the cost of goods goes up. . . more money is changing hands; economic growth. . . you guessed it.

We are now suffering the hangover from the outrageous excess that we have been participating in. That is it. this is a hangover, and the hair of the dog is not going to make it go away.