By: Todd Long
Submitted: 2010-06-27 06:41:13 | Word Count: 640
The global community has been going through one of the challenging moment in the modern history. From the west to the east, north to the south, everyone has been crying of economic crisis. The nations of the world, both the weak and the mighty have been going through a period or recession or they are preparing for recession. The superpowers such as the United States have not been spared. The global economic crisis that is currently facing the whole world can only be compared to that of the 1930s.
However, as in any crisis, there are various factors that have led to this crisis. According to Arrington (2008), the government of the United States of America came up with a national policy in the late 1990s to ensure that people who did not have financial capabilities were able to access loans that would enable them to acquire mortgages. As a result, housing prices skyrocketed and the housing units became very expensive because of the high demand. However, as time went by it was realized that these people could not service their loans. Therefore, Fannie Mae plunged into a huge debt that could not be covered and clearly secretly by the government.
On the other hand, investment banks are required to keep a certain percentage of capital assets for every loan that they issue. Yet, as prices of houses reduced, there was a decreased value in the total capital assets held by the bank. This means that the banks can only manage to issue fewer loans, an issue that causes a downfall in the value of houses, something that causes people who have acquired houses during the recent time to have debts that is higher than the price of the houses they have bought. The international banks were also caught in this wave whereby they were involved in securitization of assets. Similarly, there are various monetary policies that were made between 200 and 2004 that also contributed to the financial crisis in the United States. These monetary policies set in motion a high growth in prices of assets in the United States thus increasing the number of people who invested in these assets using loans that had been borrowed from banks (Bjornland and Leitemo).
Sub-prime mortgage crisis is one of the major factors that triggered the current economic crisis in the United States and in the rest of the global economies. Sub-prime crisis can be defined as the crisis that arose when there was an increase in mortgage foreclosure and delinquencies in the United States. As a result, there was pressure on the financial institutions leading to a weakening of the financial regulation systems. This causes bubbles in the market that leads to adverse effects on the financial markets (Stock Market investors).
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There are several measures that have been taken by the government to respond to these situations. These measures are meant to slow down the effects of the crisis on the economy and salvage the status of the financial institutions. One of these measures is the lending by the government to financial institutions that were affected by this crisis. On the other hand, there have been programs that have been formulated to insure financial institutions against the risks of loosing their financial status on the market. These responses from the government have been able to bring to a halt the effects of the crisis on its financial and mortgage institutions. However, the responses have affected the economy negatively in that there is a slow down in economic growth, and in some sectors a total stagnation. Similarly, the responses have increased the national debt as the government has been forced to borrow in some cases to rescue its institution and guard its investors against the risk of loosing their investments (Stock Market investors).
