Causes of the US financial crisis and solutions - 1925 Words

Causes of the US financial crisis and solutions (Coursework Sample) Content: Causes of the USfinancialcrisis and solutionsNamePaper nameProfessors NameDateIntroduction The economic crisis of 2008-2009 not only affected the United States but the whole world. It was the most difficult time in the history of economics. The crisis led to widespread hunger across the world since people could not have enough resources to purchase food. The prices ofcommoncommodities rose up (Brown, 2009).Literature Review There are many reasons given to what caused thecrisis, some true and othersuntrue. Many people attribute thebeginningof the financial crisis to the breakdown of the housing market. Even,though,the housing bust plays a vital role in the health and banking sector, the problem was deeper. There was a lot of macroeconomic imbalances before whichwere reflectedby fluctuations in the real estate. To know the truth behind the crisis and the way forward, these scenarios should be lookeddeeply. The general agreement was that the losses in the h ousing market started the USfinancialcrisis since the great Depression. The United States economy plays a significant part in the worlds economy. Thecrisisthenspreadto all parts of the world due toimpactthe US economy has worldwide (Mosley, 2009).Methodology There aremanymethods employed to collect data, and in the case of the topic on USfinancialcrisis, two methodswere employed. The first one is togetinformational from written materials like journals and books. Journals and books contain a lot of information on the US economic crisis and the measures taken tostopthemenacefrom getting worse. Information about the crisis is also available in the media.DiscussionThe root causes of the financial crisis. Below are some of the causes of the financial crisis of the US economy: Excessive Land Use Regulation The demand for housingwas increasedbyprofligatelending. However, thisdemandproduced remarkably different results in different metropolitan areas, depending on the micro-economicfa ctorof land use regulation. Land use restriction in some metropolitan markets propelled the prices which led to higher mortgage exposures. On the other hand, the traditionally regulated markets where landregulationwas notsevere, there was arelativeincrease of the housing prices. Theseposetwo different worlds experiencing different periods (Mosley, 2009).Thefinanciallosses would have beenextremelylittleif the increment of the mortgage exposures around the US had been on the order of the traditionally regulated markets. Nobel Laureate Paul Krugman had noted the two natures of the Americans 3 years before the crisis occurred. He realized that the housing bubble was moreconcentratedin regions withformidableandstronglandregulation. The largest housing prices increment occurred in areas which had strong restrictions on the use of land. These areas where referred to as smart growth, urban consolidation orcompactcity. On the other hand, metropolitan markets that had the traditional land us e and were moreliberalexperienced thelittleincrease in the prices of housing. The traditionally regulated markets, unlike thestrongregulated markets, allowed anormalsupply response to thehighmarket demand created by the profligate lending (Brown, 2009). The basic principle of economics inoperationstates that shortages and rationingleadtoincreasein prices. There were no enough goods and services available in themarketfor customers to buy. Some businessmen with the little commodities withheld them. The repercussions of these deeds were thesharpincrease in the prices of commodities and the US citizens had to dig deep in their pockets togettheirusualservices and food. This resulted to changes in thelifestyleof many citizens those who could not afford thecommongoodsand servicesdueto lack of money (Brown, 2009). Among the fifty metropolitan areas with more than one millionpopulation, twenty five had significant land use restrictions therestwere liberally regulated.Theliberalland use res trictions markets were capable of absorbing from theexcessiveprofligate lending atpricenorms, that is,mediummultiple divided by median household income of3 or less, while this was impossible with the restrictive land use regulation.In addition, the demand washighinliberalmarkets than the restrictive markets. Since 2000, there is a high growth of population in thetraditionalmetropolitan markets, about four times thegrowthinthe more regulatedmarkets. There has also been anoutflowof residents from the restrictive land markets to the markets with traditional land use regulation, where the house prices have remained within historic norms (Brown, 2009).Profligate lending Profligate lending led to loses. All the markets of the United States of America experienced profligate lending. Profligate lending is wastefulness orrecklesslending. There was greater availability of mortgage funding, which in turn led toexceptionaldemand for housing.The excessive consumption was due to loosening of le nding standards prompted by the US government to increase homeownership rates.These resulted alsodueto record low saving rates. People, who could nothavequalified before for credit received loans (subprime borrowers) could easily do, while others secured loans much higher than they could do before (prime borrowers). The subprime andprimeborrowers when overstretched, they were unable to pay their mortgage loans in time. The lenders could not absorb the foreclosure and delinquency rates. The US economy, financed by the excess credit, spent more than it earned. Thislendto undermining the mortgage market, resulting to failures ofprominentand well known firms like the Lehman Brothers and Bear Stearns.Since we are in theeraof interconnected or intertwined markets, these unprecedented effects in US economy reverberated across the world (Mosley, 2009).Solutions to the Financial CrisisThe US stakeholders together with the government took several measures to avert the crisis from becoming w orse.Below are some of the measures applied tosolvethe crisisFinancial investment For a sustainable, long term growth, the US Economy desperately needed high levels offinancialandrealinvestmenttorebuildthe economic foundation. Thesavingratewas increasedsignificantly in order to start generating household wealth, which is su...