The U.S. economic cycle was due to many factors that had roots for over a decade. Much of what has been seen was due to the high levels of confidence built over the years as a result of healthy and fast growing economy, and to the improper steps taken by many of the financial institutions as well as the U.S. government to take advantage of this growth in the economy. As the economy eroded significantly in the last two years, impacting not only the U.S. economics but the world economics, several short term and long term steps have been taken to control, contain and reverse the erosion and to finally expect to bring it back to healthy growth levels. In this essay, we will review the potential factors that have contributed to the U.S. economic slowdown, the impact it has brought over to the U.S. and other countries of the world and potential steps suggested or taken to improve the economic stability in gradual steps in several years.
[...] The impact of the crisis had moved into other banking sectors as well, for example corporate loans and risky investments. As the economic slowdown had started hovering over the industry, the new borrowings have slowed down and payments suffered. Corporations were requesting for credit increases without showing much of assurance for healthy payments. Banks also have invested significantly into risky instruments that have eroded the assets and impacted the health and operation of other financial institutes that have exposure into other sectors than mortgage Impact on credit markets During September 2008, the crisis hits its most critical stage. [...]
[...] Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, caused the collapse or takeover of several key firms Impact on the global economy The crisis rapidly spread into a global economic shock, resulting in European bank failures, declines in stock indexes, and large reductions in the market value of equities. Liquidity crisis continued and there were fears of a global economic collapse. By October 6th, a clear global recession was seen, with recovery unlikely for at least two years. [...]
[...] This phenomenon has lead to recurrent financial bubbles and is the deep cause of the financial crisis of 2007- Incorrect economic forecasting One other key factor that has led to the financial crisis was the claim that economists mostly failed to predict the worst international economic crisis since the Great Depression of 1930s. The Wharton School of the University of Pennsylvania online business journal examines why economists failed to predict a major global financial crisis. New York Times reported that economist Nouriel Roubini had warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions. [...]
[...] The savings and the cash available from these refinancing instruments have spurred the economic growth around the world. Bankers have continued to attract the buyers with lowered initial rates as part of Adjustable Rate Mortgages (ARM) even as the house prices have gone up sharply. This has caused a situation that when the owners started paying at higher interest rates on their mortgage loans after the initial periods; many home owners have found the loan payment unaffordable. As the prices started going down by around loan defaulting and foreclosures have increased leaving the banks with significant losses Easy credit conditions During the early 2000's, the Federal Reserve has lowered interest rates from the likes of to around to soften the effects of the prior collapse of the dot-com bubble. [...]
[...] Predatory lending has in the process intensified the risks of loan defaults leaving a significant financial burden on the banking system Deregulation Critics also argue that the regulatory framework did not keep pace with the financial innovation that has led to shadow banking, derivatives and off- balance sheet financing. There were several instances such deregulation can be seen over the time that has weakened the financial system over time. Key examples of deregulation that has caused long term financial impact include: - President Reagan has signed an act in 1982 on banking deregulation that has led to savings and loan crisis by late 80s and early 90s. [...]
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