The Highest Magnitude Economic Expansion in the US - Essay Example

Global Financial Crisis The impending financial crisis in the globe, has been brewing for a while, and it began to show its adverse effects in 2007. All over the globe, stock markets have declined, leading financial institutions have collapsed or bought out, and governments, even of the wealthiest countries have had to develop rescue packages to help bail out their collapsing financial systems. The global financial crisis have affected and will continue affecting the livelihoods of nearly everyone in the increasingly inter connected globe. As a case study, I will view the economic situation the United States, its progress, and downfall caused by the global financial crisis. From the early 90’s, the United States has been experiencing economic expansion of the highest magnitude. During this period, it’s real Gross Domestic Product increased by 32.9 percent or 3.6% annual growth rate. The major reason for this expansion is consumption. Consumption is responsible for 75% of GDP which has been on the rise at an annual rate of 3.8 percent. What fuelled this increase in consumption is the consumer credit spending. Since the consumer disposable income increased at a slower rate than consumption, people began to spend on credit. The housing bubble is another key reason for growth in the United States economy. The housing growth did not only lead to booming in the construction industry. The machinery sector increased also. Employment in the real estate was high and mortgage industry ballooned. However during the 2006-2009 financial crisis, mortgage and the real estate credit decreased by 53 and 44 percent, respectively. This led to another sharp decline in the United States economy. The military budget is another factor in the American economy. The military budget has been on the rise particularly after September 11. The military represents a direct demand to the United States government. An increase in its spending increases production levels and creates employment to many people. When these employees spend their income, it further increases jobs and income to other people. However, spending on the military does not mean it necessary stimulate the economy. Military spending was able to stimulate the economy during the 1950s when urge for weapons was high than now. The economy needed such stimulation; with the growth of credit over the last several years, United States economic problems lie within the area of innovation and investment (David 15). Military spending has also affected the supply side of the Americans economy. Military spending reduces the ability of the United States economy to develop new goods and renovate its production technology. Countries that have an increased level of military spending tend to have low investment rates. Bankruptcy is another factor that plays a vital role in the United States economy. Bankruptcy benefits the economy since giving debtors ways of discharging their debts should encourage more borrowing and spending of funds. Consumer bankruptcy has affected the United States economy negatively. When there is a high rate of consumer bankruptcy, consumer’s confidence declines, and their spending reduces. This increases the consumer’s savings rate. Increased consumer savings reduce corporate investments, which lead to job cuts. Higher unemployment rates lead to an economic downturn. The economy of the United States has periodically been witnessing numerous downfalls particularly after September 11. There has been extensive financial crisis and housing disaster, but all in all the economy has managed to hold on as the World super power. It is not as secret that the people charged with ensuring that the financial system is stable in the United States helped cause the 2007-10 crises. The Financial Guardians in the United States and Europe established policies that encouraged adverse credit allocation, and a lot of risk taking by their financial institutions. They still stood by the same policies even after learning of the impending financial problems. Financial Guardians in the United States have at many times chose and maintained policies that have always led to the crisis. This counter reacted to the crisis by adding other rules and establishing newer regulatory boards with more powers granted by the Congress. An example gets given where the regulators never reacted to the extra ordinary increase in the financial institutions leverage. This never reacted to the movement of assets worth trillions of dollars from banks balance sheet. This shows how the regulators did not do their work. Increasing the regulators power without checking the problem and trying to regulate it helps in solving nothing (Roubini 46). Researchers studied that the governance of financial regulation the system that becomes supposed to design, implement and reform financial policies contributed highly to the crisis faced in the United States. The senior most officials get blamed for repeatedly designing implementing and maintaining policies that destabilized the financial markets. The Financial Guardians maintained the same policies even after learning that these policies were increasing the instability of the financial system in the country. Also, even after the authorities had discovered about what was happening, the regulators did not adjust their policies even when they had the time and power this came to one conclusion that the regulators never worked in the interest of the public but their own. The group indicated in their book that, the failures of the respective governments in the governance of the financial regulations played a crucial role in crisis by being part of the destructive policies created and maintained by the regulatory agencies (James 15). The proposals laid out by the institutions have not addressed the weighty issues including their weaknesses with governing financial regulation. The public is also not involved in the process, as there is no mechanism laid down through which people can obtain well laid informed assessment of the financial institution. Since the public are the ones affected by these policies, it becomes highly recommended they get involved with the process. It is hard for the public to be involved in policy creation, since the financial authorities have monopolized the information and expertise that gets needed by the public, to assess their performance. The financial institutions have kept valuable information about their financial system activities secret (Roubini 26). Even if, the public became allowed the information concerning the financial guardians, there is no organization with skills in the private sector, to process the information and even evaluate the financial regulation effectively. This is because; assessing such information on the financial regulation requires well coordinated and informed top notch economists, lawyers, accountants and individuals with substantial experience in the private sector. Only the regulatory agencies have the necessary expertise in evaluating the regulatory agencies. This matter becomes even worse by the fact that, the regulatory agencies are not properly designed to act on the public’s best interest in the long run. The financial regulators are not independent of influences of politics, private financial institutions or the combination of the two. The Federal Reserve becomes taken as the best example of an agency that has the best combination in terms of human capital skills and the most information available. Although it became made to be independent of politics, the Federal agency is not independent of the private sector. This is because the financial institutions participate in the appointment of the Feds leadership, and a number of senior managers have worked in the private sector prior to joining the Feds. These senior officials still maintain contact with the private financial institution as they supervise them. Though, the Feds maintain contact with these institutions it is not implied that they are corrupt or using their positions to land generous offers from the private sector. It, however, just goes ahead to prove that, with these close connections, they are not independent. In many other regulatory agencies, officials get subjected to both the short run political pressure and connected with financial institutions that they regulate. This includes agencies such as the Securities and Exchange Commission. This goes further ahead to show that it cannot be assumed that the private interests of the Financial Guardians align with the public interest. According to writers view, globalization of the financial system was dangerous. An example is when a large financial institution gets in a total mess, for example, Lehman, which is the third largest investment bank in the world to get into trouble. Since it does its business globally with everyone, leading banking institutions that are, and with their financial muscle they had managed to amaze. When this company took a hit of the financial crisis the confidence it had built in people fell. There was no other national financial system since the United States did not have one neither did the British. Majority of the assets in the United States in the banking sector are foreign assets and liability. Once these assets began to plummet, these financial institutions become insolvent, and their governments cannot come to their rescue. According to this, it is quite evident that once there are crisis that will in a way affect assets such as households, it is easier for it to become global since all other institutions have their investments in it and these institutions become connected to others (Roubini 29). In conclusion, a number of steps have been taken to correct the global financial crisis. Globalization of financial systems should not be allowed in order to decrease the effects seen from this globalization. United States and other nations have come up with bail out programs to rescue their financial institutions from this crisis. Nevertheless, without effective policies put in place, these issues of financial crisis will continue to affect us. Works Cited James, Poterba. "Stock Market wealth and Consumption." 23 June 2012 . Roubini, Nouriel. "The Coming Financial Pandemic." 23 June 2012 . Shah, Anup. “Global Financial Crisis.” Global Issues. 11 December 2010. 23 June 2012 . Stephen Mihm & Roubini, Nouriel. The Crisis Economics: A Crash Course in the Finance Future. New York, N.Y: Penguin Press. Print, 2010. Read More