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Causes of the US financial crisis and solutions (Coursework Sample)


Causes of the US financial crisis and solutions


Causes of the US financial crisis and solutions Name Paper name Professors’ Name Date
Introduction 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 of common commodities rose up (Brown, 2009). Literature Review There are many reasons given to what caused the crisis, some true and others untrue. Many people attribute the beginning of 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 which were reflected by fluctuations in the real estate. To know the truth behind the crisis and the way forward, these scenarios should be looked deeply. The general agreement was that the losses in the housing market started the US financial crisis since the great Depression. The United States economy plays a significant part in the world’s economy. The crisis then spread to all parts of the world due to impact the US economy has worldwide (Mosley, 2009). Methodology There are many methods employed to collect data, and in the case of the topic on US financial crisis, two methods were employed. The first one is to get informational from written materials like journals and books. Journals and books contain a lot of information on the US economic crisis and the measures taken to stop the menace from getting worse. Information about the crisis is also available in the media. Discussion The 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 housing was increased by profligate lending. However, this demand produced remarkably different results in different metropolitan areas, depending on the micro-economic factor of 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 land regulation was not severe, there was a relative increase of the housing prices. These pose two different worlds experiencing different periods (Mosley, 2009). The financial losses would have been extremely little if 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 more concentrated in regions with formidable and strong land regulation. 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 or compact city. On the other hand, metropolitan markets that had the traditional land use and were more liberal experienced the little increase in the prices of housing. The traditionally regulated markets, unlike the strong regulated markets, allowed a normal supply response to the high market demand created by the profligate lending (Brown, 2009). The basic principle of economics in operation states that shortages and rationing lead to increase in prices. There were no enough goods and services available in the market for customers to buy. Some businessmen with the little commodities withheld them. The repercussions of these deeds were the sharp increase in the prices of commodities and the US citizens had to dig deep in their pockets to get their usual services and food. This resulted to changes in the lifestyle of many citizens those who could not afford the common goods and services due to lack of money (Brown, 2009). Among the fifty metropolitan areas with more than one million population, twenty five had significant land use restrictions the rest were liberally regulated. The liberal land use restrictions markets were capable of absorbing from the excessive profligate lending at price norms, that is, medium multiple divided by median household income of3 or less, while this was impossible with the restrictive land use regulation. In addition, the demand was high in liberal markets than the restrictive markets. Since 2000, there is a high growth of population in the traditional metropolitan markets, about four times the growth in the more regulated markets. There has also been an outflow of 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 or reckless lending. There was greater availability of mortgage funding, which in turn led to exceptional demand for housing. The excessive consumption was due to loosening of lending standards prompted by the US government to increase homeownership rates. These resulted also due to record low saving rates. People, who could not have qualified 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 and prime borrowers 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. This lend to undermining the mortgage market, resulting to failures of prominent and well known firms like the Lehman Brothers and Bear Stearns. Since we are in the era of interconnected or intertwined markets, these unprecedented effects in US economy reverberated across the world (Mosley, 2009). Solutions to the Financial Crisis The US stakeholders together with the government took several measures to avert the crisis from becoming worse. Below are some of the measures applied to solve the crisis Financial investment For a sustainable, long term growth, the US Economy desperately needed high levels of financial and real investment to rebuild the economic foundation. The saving rate was increased significantly in order to start generating household wealth, which is su...
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