Table of Contents
The current economic and financial crisis has affected the whole world and in particularly the United States, one main cause of the crisis in the U.S is the demand for more financial assets on the real estate. Since there are not many places that can provide such assets, in such circumstances speculative bubbles come on to become part of the supply answer of financial assets to the demands of such assets. This was the case with real estates bubble too and that was one of the main factors leading to the current economic crisis. This particular essay seeks to discuss the impacts of the current economic crisis; subprime mortgage problems.
A subprime mortgage is any type of mortgage given to a credit impaired borrower, which has a Fico score that is under 660, while a prime mortgage is one given to a borrower above that amount. Records reveal that high default and foreclosure rates were experienced by subprime mortgages in 2002. The economy slowed down immediately after the September 11 attacks. As the economy improved, the subprime default rate fell below the one on FHA mortgages. This changed at the beginning of 2006, when the financial underpinnings of its prosperity began to unravel. By then the default rates of the subprime loans had risen to 13 percent and to 17percent by the end of 2007. (Kolb, Robert, w. page 136).
One main cause of the economic and financial crisis was the subprime mortgage lending boom, which was followed by a rise in home ownership. The disruption of credit markets that began in August 2007 was in the center of deteriorating U.S housing markets mortgage backed security, subprime mortgages linked to them. This then degenerated into a financial and economic crisis that eventually slowed economic activities. The gravity of the crisis particularly led to the near collapse of some of the major financial institutions (which included non bank financial institutions). This made central banks around the world which were led by the U.S Federal Reserve and the treasury to intervene using an assortment of tools at their disposal (Kolb, Robert, w. page 103-104).
There are various solutions to the economic and financial crisis and in the U.S, when the Great Depression was seriously hitting the country; the Congress passed the Glass Steagall Act, (also called the banking act of 1933). There were two main features in the act, one was creation of federal deposit insurance corporation (FDIC).This was used in the issuing of bank deposits and to separate bank functions. This was not until many years later that Steagall's act was chipped off; this was when commercial banks saw the need for a universal banking system, in a global and less regulated market. Stegall's act was repealed by the Gramm-Leach Bliley Act in 1999 (Mathew Richardson, et al, pg.177).
The other solution is that Congress should adopt measures that promote saving, if it is to have the largest impact on the American personal saving rate. The congress should then put about automatic individual retirement account (IRA) for the 75 million workers. This people do not have any retirement plan, the IRA having more than 25 employees who are required to transmit there employers payroll, So as to plan for there retirement. The IRA was introduced by the Obama administration which supported measures to increase American savings. Americans are saving more and spending less as they loose there jobs and depend on mortgages. To constrain the growth of budget deficits in the U.S, Congress should adopt "pay go " legislation that requires each dollar spent by the federal tax cuts to be matched by each dollar of federal spending (Pozen, Robert Pgs.326- 328)
The United States economy has grown due to the successful implementation of modern technology and releasing of strong entrepreneurial forces needed to bring about and sustain production growth in anything but automatic. There has been slow transformation in the U.S economy, but not stopped by the opposition. Unlike Asia and Europe which were stuck to traditions and resisted disruption, the U.S has consistently embraced innovation. This Made the United States to lead the past three economic transformations (Atkinson, Robert, D. pages 180-181).
The recent economic and financial crisis is not new and they can be traced back to the 1980s and 1990s. Mexico was the first of the Latin American economy to face the crisis. The economic crisis began in Thailand in 1997 and spread to Russia, south and north Americas and the European Union. Although this countries all suffered through this crisis, but there was some form of recovery in terms of small economic growth. There was development in the world economy in the beginning of the millennium that is 2000 and early 2001. The Japanese economy being stagnant and the U.S economy slowing down would make this recovery short lived. This therefore shows that the recent economic and financial crisis will soon end in the U.S and other countries. This is possible if the governments take the appropriate measures to combating this menace (Tran, Van, Hoa. Pgs.6-7).
One response to which the U.S responded to the economic and financial crisis is through the Paulson blueprint, it responded through three ways Revamp the presidents working Group (pwg) on financial market, Formulate mortgage origination commission (MOC); and broaden access to liquidity and funding. The Paulson blueprint pushed to expanding membership to include representatives of the FDIC, the OTS and the OCC. The main purpose of PWG is to facilitate better communication and inter- agency coordination in four areas mainly supporting capital markets efficiency and competitiveness, promoting consumer and investor protection, enhancing financial market integrity, mitigating systematic risk to the financial system markets. Also related to the crisis were recommendations regarding mortgage and spaces in oversight mortgage origination. The Paulson plan pushed for the creation of an interagency committee that included representatives of the Federal Reserve, the OCC, the OTS, the FDIC, the national credit union administration and also the conference of state bank supervisors. The Blueprint also wanted the clarification of oversight responsibility to all mortgage originators whether they are stand alone entities or they are affiliates of banks (Linda Allen, Anthony Saunders. Page 52-53).
The current economic and financial crisis was caused by the basic contradiction of capitalism. The contraction between the social character of production and the capitalist form of appropriation resulted to production. One main cause for the Economic crisis was the subprime mortgage lending boom which was followed by a rise in home ownership. One of the main solutions to the economic crisis in the U.S glass steagall act also called the act of 1933. Other solutions include the congress adopting measures that promote saving. The other main response to the Economic crisis is through the Paulson blueprint and it responded through three main ways PWG, MOC AND FDIC. The Paulson plan pushed for the creation of interagency committee that included representatives of the federal reserves the OCC, the OTS, the FDIC, the national credit union administration and the conference of state bank representatives. Through all this ways the Economic crisis, has been combated and let us just hope to find better ways to combat this global crisis.