Financial Crisis Effects on America - Essay Example

Financial Crisis Effects on America Task: Financial Crisis Effects on America The financial crisis and subsequent economic recession had a vast effect on different sectors of America’s economy in diverse ways. Over a long period, the 2008 financial crisis presented one of the most challenging economic scenarios for the United States. The effects further spread to what turned to be the great recession experienced a long period after of near economic stability. The crisis is traceable back from a flaw that occurred in the sub-prime part of the housing economy of the United States and spread over a considerable portion of the economy by the end of 2007 (Robert 2008, p.3). Being of a vital contribution to the global economy, the United States economy’s challenge had a wide range of implications on other countries’ economic situations, including Japan and others in the European Union. Slowly, the effect of the crisis evolved to a number of countries, and by the mid of 2008, the economic crisis had spread over an appreciated region, worldwide. Many countries with emerging economies felt the influence of the recession that had its manifestation in a number of ways including increased poverty level. Among the countries that experienced a hard hit were the South Africa, Turkey and Mexico. Some like China, however, managed to have a fair time during and after the recession since it records an appreciated rate of economic growth. Notably, the recession had emanated from a number of factors and got policymakers and investors unaware. Multilateral agencies and analysts of economic situations underestimated the effect of the financial crisis and the great depression, at the beginning. Signs as the high current deficits, mainly in the United States and United Kingdom, were a clear show that the economy was at under challenge. The lax financial regulation in the United States, coupled with the loose monetary policy experienced were among the different various signs of a financially unstable period. However, after Lehman Brothers experienced a collapse, the situation received attention from policymakers and investors. Investors, for instance, revised their strategies. Noteworthy is the transmission effect of the financial crisis to the country’s real economy. The effect of the real economy on occurs through five notable ways. The wealth effect on the real economy relates to the reduction in net worth of households. The crisis experienced had considerable effects on the well-being of households in the United States. A significant number of households experienced financial distress because of the reactions to economic stress. The first three quarters of the crisis in 2008 experienced a substantial reduction in asset values for households (Bernanke 2008, p.1). The reduced stock value also reduced the net worth of households. There was a nota reduction in the prices of houses, as well. A significant percentage of households had little value in ownership of stock market holdings. Direct ownership of equities went down to a low record in 2008. Mutual fund holdings reduced and initiated the effect of reduced household net worth. The reduction in prices of stocks triggered a significant hit on households nearing retirement period. The wealth effect also reduced the level of consumption among since there was high need for households to make savings. The need for savings was prompted by the urge to make up for the reduced value of wealth and maintain the level of life that households had, prior to the crisis. The confidence effect of the economic crisis relates to the implications on the portion of the population that lost wealth and experienced a reduction in asset value. May citizens underwent losses in the stock market. Other people experienced unstable credit ratings while others lost employment. These affected their level of commitment and prompted keenness in consideration of financial commitments. Their confidence level reduced remarkably, as they gained caution regarding the possibility of loss of wealth. The economic crisis also prompted the credit channel effect. The ease of acquiring credit reduced significantly while terms offered for credits tightened (Schechter 2011, p. 391). Automobile as well as commercial loans went high as the standards for issuance of credit cards escalated to high levels. Repayment period for credits saw a considerable reduction and, therefore, rendered it challenging to take credits. In addition, the minimum repayment required for credits rose to a considerable level, escalated by the financial crisis. The ability to obtain a home equity loans reduced for a considerable portion of the population since the level of required credit worthiness went up (Cato Institute 2008, p.379). It is noteworthy that the credit channel effect of the financial crisis had considerable implications on business activity and consumption level. The implications of the economic state experienced spread to strain the state and local governments’ finances, alike. The states’ fiscal policy assumed a pro-cyclic nature. States had a challenge of achieving a balanced budget, the state’s economic situation notwithstanding. The target prompted avenues as reduced expenditure or a high level of tax. Cities that depend on taxes as the main source of revenue underwent a challenging economic situation and announced reduction in social expenditure. The credit channel effect, consequently, incited increased expenditure in selected areas of the economy including unemployment insurance. The multiplier effect came up because of the effects of reduction in expenditure among households. The decline in household expenditure emanated from a number of factors including scarcity in credits offered by credit firms and institutions. The massive reduction in investments by businesses had a notable contribution as a cause of the multiplier effect. This effect of the economic crisis would have extensive implications that spread over an estimated period of one or two years. The magnification of the effect, in turn, had negative implications on the level of consumption level of the population over time when it spreads. There were extensive negative implications of the financial crisis on both employment and labor markets. A high percentage of Americans at their old age are dependants of benefits from employment. There was a notable increase in the unemployment rate among the aged in the United States. The reduced the amount of consumption among Americans in their old age reduced by a considerable level during the period of 2008. The effect of the challenging economic times spread to the reduction in the value of financial assets. Stock prices in the S&P underwent serious changes and reductions during the economic crisis. The blend of reduced stock market values and fall of treasury bonds serious implications on older citizens of America (Rix 2008, p. 4). At the wake of the crisis, there were uncertainties over the extent of the liabilities related to the deterioration of the housing sector. This caused the liquidity to undergo rapid drying up. This caused a considerable downturn on the financial system of the world economy. The great downturn in the financial system attracted questions towards America’s capitalism. As a reaction to the crisis, policymakers, in coordination with other sector agencies responsible worked to find possible remedies. There was a high injection off credit into the financial sectors of the economy including financial markets as well as nationalizing banks. Interest rates went down after slashing. The use of high discreditory expenditures was among the principal avenues employed to rectify the economic situation. This was effective using fiscal stimulus strategies. The use of such packages was effective in avoiding the spread of depression in other countries. By December of 2007, many of the private sector operations fell under the role of the Fed. Many banks could not transfer short-term credit to other banks, a situation that prompted the Fed to take the most appropriate reactions to the situation. Such avenues included the TAF as well as the dollar swap lines. To offset the crisis that the banking sector underwent in September 2008, the Fed reacted by using its own liquidity (Schwab, Roubin & Bilodeau 2008, p.38). Such efforts by Fed helped stabilize the economy of the United States. The Fed also intensified lending strategies to help address the condition. It established the Term Auction Facility (TAF) that aided the lending of banks. The lending, under TAF, was conducted for a period of one month, contrary to lending overnight. In the implementation of the lending program, Fed auctioned the TAF by swap lines. The Fed also undertook measures that ensured the accommodation of the lending strategies introduced. The Fad increased the portfolio of loans as well as that of securities. The Fed also expanded its lending programs by using a diversity of collateral for loans that many people could afford. Securities expanded its collateral to lenders as mortgages. The different efforts taken by the Fed were responsive and satisfactory in dealing with the emergency experienced during the period from 2007 to 2008. The Fed transformed from its initial role as a participant in the treasury to undertake other duties that were under other agencies as the commercial banks. Acting as a direct lender, the Fed’s decision was satisfactory and effective in dealing with the crisis that struck the economy. The various strategies were effective in stabilizing the money markets of the United States (Russo & Katzel 2008, p.2). The decision to loosen the required security for lending was effective in increasing cash flow and cushioning the households from the effects of the crisis. References Bernanke, S 2008, Speech at the Federal Reserve Conference on Housing and Mortgage Markets, Washington. http://www.federalreserve.gov/newsevents/speech/bernanke20081204a.htm Cato Institute 2008, Cato Handbook on Policy, Cato Institute, New York. Rix, S 2008, The Employment Picture, October, 2008-Mostly Grim News for Older and Younger Workers, AARP Public Policy Fact Sheet 148 (November). www.aarp.org/ppi. Robert, S 2008, The Sub-prime Solution: How Today’s Global Financial Crisis Happened, and What to do about it, Princeton University Press, Princeton. Russo, T & Katzel, A 2008, The 2008 Financial Crisis and its Aftermath: Confronting the Next Debt Challenge, Thomas Russo, New York. Schechter, D 2011, The Financial Crisis Inquiry Report: The Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States Including Dissenting Views, Cosimo, Inc., New York. Schwab, K, Roubini, N & Bilodeau, J 2008, The Financial Development Report 2008, World Economic Forum, New York. Read More