Root_Causes_of_Economic_Crisis

Hung Tran Eng 101 Research Essay 11/29/2009 ROOT CAUSES OF ANALYSIS OF THE CURRENT ECONOMIC CRISIS Table of Contents: Part 1: Introduction Part 2: Analyze causes of the current economic crisis: I. Real Estate Bubbl II. Debt III. Weaknesses of government’s regulations IV. The Greed Part 3: Conclusion and final thoughts Whenever you turn on your televisions or access to the Internet, you will be surrounded densely by negative news about the current economic crisis. The root causes of the crisis started from USA and spread out all over the world, which causes financial disasters for all countries, from developing ones to developed ones. The decline of demands, consumption and employment are specific symbols of this economic crisis. Until now, there have been several arguments about the causes of the current crisis, but most economists agree about following major causes: Real Estate bubble, critical debt, and depression of stock markets, weaknesses of government’s regulations and the greed . The first cause of the current economic crisis is the one that began in US and continues to destroy the dynamic capital economic system of US: Real Estate Bubble. People keep selling and buying homes with a rocket speed, but the importance is the profits that the owners receive after every trade’s makes a lot of people confused. According to the new surveys that real estate prices has doubled for recently years in states such as California, Texas, and Florida… Imagine the property that you own has the basic values of 200.000 dollars and you sell if for the price 240.000: That is acceptable profit, but the second owner sells it for the price 400.000 dollars. Then, we can realize something is wrong here. The profit that the second owner has is too much, the chain “sell-buy” is in proportion to risk of a bursting bubble, and probably that house’s value can reach 800.000 USD as a result. The last owner probably cannot afford the house price that leads to the failure in paying loans for the banks, so banks have to take the house and as you know it is not worth with its true value so the price falls down significantly. The same situations happen with millions of real estate properties throughout America and homeowners are losing their money in many ways. The foreclosures trends happen everywhere and push so many people out of the streets. In the 2006, President Bush said of the U.S housing boom: “If houses get too expensive, people will stop buying them… Economies should cycle.” The Second cause of this current financial crisis is the critical debt. As you know, the economies of the world celebrate a successful 2007 year, so people have consumed a lot of goods and services. This trend happens in most of developed countries; Banks also run many service packages that called consuming credits. People use that advantage to spend and the virtual economies are really hit by another punch: debt consuming. By encouraging people to consume, the saving rates plummet to an alert rate, “At the broadest level, we have witnessed a consumption boom over the last two decades, where U.S aggregate household consumption grew to represent more than 70% of Gross Domestic product (GDP) , a historically and unsustainably high level”(globalissues.org). People certainly could not defend against with the bad effects of the crisis and they just wait for the banks come and take away their mortgages. Debt also relates to housing debt, national debt and debt per citizen and together they spoil the economies. A research of professor Steven Fazzari in Washington University of St.Louis has revealed: “ The economy is changing, however, and we can’t rely on consumer spending to keep rising beyond its already inflated level; household can no longer push the debt limit because the credit isn’t here”(news-info.wustl.edu). The banks receive the worthless mortgages and total debt is too much for them. This problem can make many banks and funds in the dangerous situation and here are some prior victims of the recession storm WaMu, Lehman Brothers... In addition, many others bankrupt in chronological order. As the globalissues website pointed out: “Around the world stock markets have fallen, large institutions have collapsed or been bought out, and governments in the even the wealthiest nations have had to come up with rescue packages to bail out the financial systems. (globalissues.org). In fact, the Debt of USA is increasing rapidly and reaches at the eighty-five percent. The third cause of the crisis is the weaknesses of government’s economic departments. Governments in developed countries failed to predict this crisis; therefore, just a few countries prepared solutions for the crisis. In developing countries, the governments do not run their economies flexibly, actively and mainly based on the exports. When people in developed countries do not consume and save more, the exports in those developing ones decrease dramatically such as a new report declared: Taiwan (44%), South Korea (35%), Japan (40%) and Vietnam (10%). As the country is more open to the world-trade as more affected, it is. Because of previous statistics, there is a worldwide decline in demands and supplies are overflowing. Some countries such as China and Japan they bought many unstable stocks in USA by their foreign reserve and its worth over three thousands billion dollars and those treasury bonds are potentially flowing to the sea because of the decreasing of USD value and the housing bubble. Moreover, governments also persuaded the risky financial corporations such as Fannie Mae and Freddie Mac to maximize their profit and partly boosted the economies to a downturn. Csmonitor - a respective finance page has warned us: “Regulations designed with the best of intentions are likely to lead to more crises if they distort incentives and thereby cause individual "greed" to undermine economic growth and harm millions” (csmonitor.com). Surprisingly, Iceland- a small country in North Europe announced that the country was in bankruptcy because of the national debt is seven times than its annual GDP. The financial crisis has swept away all the valuable properties in just one night. The reason for the corruption of Iceland could be the symbol mistakes in balancing the debt and the defense for the financial crisis is not strong enough. By the way, the high unemployment in USA or Europe zones created the pessimistic atmosphere for the dawn of future economies. Some departments such as Federal Deserve or Congress have acted vigorously in attempts to prevent a more serious crisis, and have broken their own plans with long-run strategies. The high interest rates are also a cause of the meltdown. Had the governments unintentionally encouraged the speculators to act freedom in the real-estate markets' Besides that, the decision to bail out some giant corporations such as AIG or Lehman Brothers made many economists confused and the curiosity about the effect of Fed is still a big discussion in the Congress. They seem to be inflexible with the meltdown of the economies. Governments and banks responded slowly with unprecedented economical stimulation plans, monetary policy expansion. Beyond the erroneous decisions, they are less cautious with the upcoming signals of the whole system is raveling. The last cause and the most common threats to all the markets in the world is the greed of some huge and “high-level” players in some stock exchange centers. They usually gather into groups and manipulate the markets by their dirty unmoral skills. As an illustration, in the Wall Street there are some investor want to rise up the prices of their stocks so in the morning they will try to do internal trades with their stocks and obviously make the prices go up rapidly. They certainly sell their stocks and receive the profit that doesn’t’ reflect the true value of the stocks. Shortly after that, those stocks’s price will decline and the losses belong to the “new-sheep” in the fierce battleground of stock centers. In the middle of 2009, most of market lost at least forty percents and the signal of recovery is coming in those days. Furthermore, those investors try to create rumors so they can gain the control of the market to make benefit for them. Another factor of greed, from an article of the website grinningplanet, it stated: “Greed — At some point, those in the banking and finance business decided that taking deposits and making loans just wasn't profitable enough, and they started getting creative”(grinningplanet.com). That creativity is killing our economies nowadays. Like a domino chain, when it collapses it will bring about all the spots on its way. Applying this rule to the real economy, we can have one cycle influenced each other’s. People can’t pay their mortgage or loans and that leads to the collapse of banks and it turns out that government have to participate to bail out economies, money paper is printed out, it can cause the inflation that makes the life more challenging with middle class or under class families. The banks are very easy to accept the requests for mortgages and they do not care about the risky factors that could harm the securities of the banks. The financial crisis affects every single family in the earth and my family has suffered from this financial crisis. My parents own some houses and they lease them for living. Unfortunately, the meltdown made the tenants have to move out and the losses belong to us. Moreover, the VND is continuously devaluing and it is harder for me to transfer the money to US. The Threats to Vietnam’s economy are really a challenging issue with Vietnam government: “As global growth sharply drops in 2009, Vietnam's export-oriented economy - exports were 68% of GDP in 2007 - will suffer from lower exports, higher unemployment and corporate bankruptcies, and decreased foreign investment” (cia.gov/theworldfactbook). In conclusion, these causes of the current economic crisis are detailed to inform about the real trouble now. This global issue is a most severe topic and the worst financial crisis since the Great Depression. Everybody knows this is a hard period so we should start saving now, and we should re-investigate our economic activities. Moreover, funds, financial institutions, governments should be more careful with the potential dangers in future and regulations should be strengthened and there will be no consideration in controlling the downturn of economies. WORKS CITED Anup, Shah. “Global Financial Crisis.” Global issues. 25 July. 2009. 11 Dec. 2009. http://www.globalissues.org/article/768/global-financial-crisis> Horwitz, Steven. “Government regulation, not free-market greed, caused this crisis.” 22 Oct. 2008. 11 Dec. 2009. http://www.csmonitor.com/Commentary/Opinion/2008/1022/p09s01-coop.html Neuman, Shula. “Recession’s root cause is consumer debt,expert says.” 31 Mar. 2008. WUSTL. 11 Dec. 2009. http://news-info.wustl.edu/tips/page/normal/11430.html United States. Central Intelligence Agency. The World Factbook. 11 Nov. 2009. 11 Dec. 2009 https://www.cia.gov/library/publications/the-world-factbook/geos/vm.html “The Debt-Based Money System Slams Into Greed and Peak Oil”. grinningplanet.com. 11 Dec. 2009 http://www.grinningplanet.com/articles/economy/causes-of-the-financial-crisis.htm