United States Economic Crisis

1. United States Economic Crisis

2. What is the issue? • The US financial system collapsed, as big corporate banks no longer receive borrowed money back from bankrupt mortgage institutions, investment banks, and individual borrowers and become bankrupt themselves as they in turn could not pay the loans they took from the federal reserve and other places. Many people in the housing, mortgage, banking, and other industry lost their jobs, as companies can not pay them. • Much of the US public (homeowners) don’t have jobs or enough money to pay off the mortgages (loans to buy houses). This lack of consumer money means that companies selling goods can no longer make better profits and start making losses as sales plummit. • Major mortgage institutions, and investment banks become bankrupt because they can not repay loans they took to invest in mortgages

3. Where is it happening? • The entire United States is effected, here shown by the percentage of unemployed people in every state.

4. What are the causes? • Back in the Bush Administration era in 2001, the US treasury made the federal interest rate 1%, to stimulate the economy after 9/11 which meant that investors would be discouraged from investing in the federal reserve, and that banks could take credit loans from the treasury at a very low interest rate. • With many banks taking credit from the reserve, they made it easy for mortgage institutions and investment banks to take loans from the banks. This institutions in turn created the sub prime mortgage phenomena where people could easily buy home with little or no down payment (insurance that the mortgage will be repaid). With housing prices rocketing mortgage institutions offered mortgages with help from investment banks, but if homeowners defaulted and could no longer pay their mortgage, the investment bank gains control of the house.

5. What are the causes? (cont.) • . • The housing prices started to fall with oversupply and that decreased the interest in houses. As a result homeowners no longer wanted to pay their mortgages at original price and defaulted along with other normal defaulters. This meant that investment banks only hold onto houses which was decreasing in value rapidly. • When investors, investment banks, and mortgage institutions can no longer make money, they can not repay the huge loans they took from the banks, who in turn can no longer pay the federal reserve and creditors they took loans from. This makes a huge cycle where all the institutions from small investors to huge corporations like Lehman Brothers, Fannie Mae and GM motors have no money to repay their loans and even cannot pay their employees. These people no longer have money to pay their mortgages, loans and even living cost for food and consumer goods, this affects all spectrums of the economy, and as more companies fail, more people get fired.

6. Effect on Society • The Financial crisis has negatively affected the society. • It has made many Americans lose their jobs, and has made many people unable to afford the basics of life, like housing, food, and clothings. • It has affected people’s mindsets and has frustrated many people. • On a positive note, from the statistics, especially in properties and vehicles, the Crime rates, have decreased after the financial crisis . This may be because of a major decline in prices.

7. Effects on Politics • The Financial crisis in 2008, has severely affected the trajectory of key US policies and elections. They had taken the democratic party from a position of weakness against the Republican party in the 2008 presidential election race just before the beginning of the crisis to a strong position after it had started. It had forced them to use reform minded ideals to convince people who were very much traumatized and in shock with the crisis. • The economic crisis had brought even greater importance to the Presidential election in 2008, with many American voters having lost there jobs mere months before voting day. Democrat candidate Barack Obama publicly criticized his Republican opponent John McCain for being a keen supporter of the very republican idea that brought forth the implications of the financial crisis that was effecting the lives of many American people. He criticized the idea of little regulation of the economy in order for economic growth. With many Americans wishing to elect a president who would solve the financial crisis, Mr. Obama’s policy for stricter regulations and more decisive reform, had in effect helped him win the election.

8. Effects on the Environment • Fossil fuels like diesel, petrol and natural gas pollute the earth as we use them for the electricity to power our lives. The clean or environment friendly energy sector is very up and coming, and is growing fast. • Clean energy companies require a lot of money to start up. This usually comes from banks through the loans. After the financial crisis, getting loans from banks has become increasingly difficult. This implies that there will be little money for expansion of the clean energy sector.

9. Effects on the Economy • The USA 2008 financial crisis has directly affected the US Economy. It has made the entire system collapse. The housing, banking, auto and many other sectors have all been affected. • Major corporations have failed, and have become bankrupt or have needed government bailouts. These include: Fannie Mae (FNM), Freddie Mac (FRE), Goldman Sachs, General Motors, Ford Motors Corp., Citigroup (C), Merrill Lynch (MER), Lehman Brothers (LEH), Bank of America (BAC) ,And American International Group (AIG). There combined worth before the crisis was estimated to be more than 1 trillion dollars.

10. Realistic Solutions • The Government should pass policies in favor of increasing the federal reserve interest rates in order to attract investment in federal bills. This will also keep the banking sector from taking risky investments, and making the banking sector more secure by giving out high interest loans to banks. This creates a banking sector where high risk investments are especially discouraged. • The Government should apply stricter regulations and reform on the financial sector to ensure only safe loans are taken, and safe investments are made. • Pass a bill where real estate permits are given enough for only the maximum projected growth of the population. This makes sure prices are reasonable, there is no lower or oversupply, and the market remains stable. Similar bills should be passed to ensure the stabilization of other sectors in the economy. Ensuring against high inflation and any deflation in all the sectors, and economy in general.