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World Finacial Crisis - Impact in the American Economy - Term Paper Example

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The main cause of the financial crisis of 2007-09 was the housing market of U.S. From the decade of 1990s policy of financial deregulation was taken by the U.S. government. The monetary policy became loose in 2002-2005. From the year 2006 the delinquency rate on the home loan has increased and it got severe in the year 2007 because the Federal Reserve has started to increase the interest rates…
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World Finacial Crisis - Impact in the American Economy

Download file to see previous pages... From the year 2006 the delinquency rate on the home loan has increased and it got severe in the year 2007 because the Federal Reserve has started to increase the interest rates. The house loan where the debtors have to pay floating rate interest they were in problem. So the increase of bad loans led to the failure of the mortgage lenders mainly the banks. Because of the complexity of the financial products the investors and the banks didn’t know the actual size of the losses. As a result the liquidity of the market became less and the lending decrease, as a result the credit crunch has begun. The other reasons for the financial crisis are the borrowing of the households which were beyond their means, poor lending standards taken by the financial institutions, more over the counter transactions, more reliance on short term debts and the credit rating agencies failure to assess the risk. In the era of globalization the financial crisis of world’s strongest economy also affected the economy of the other countries. In September 2008 Lehmann Brothers was bankrupted and the financial crisis taken place. The report is an attempt to assess the impact on the American economy due to the world financial crisis. This report would find out the GDP growth rate, the changes in the value of dollar, the sector wise impact and the consequent problems caused by the crisis. Growth in the GDP Figure 1: United States GDP Growth Rate Data Source: (Bureau of Economic Analysis, 2011) Gross Domestic Product (GDP) of a country is the representative of the standard of leaving of that particular country and it refers to the value of goods and services produced by the country. The GDP growth of U.S. was affected severely for the financial crisis of 2007-09. The GDP growth has increased 1.9% in the fourth quarter of 2007 from the last quarter. 2008 and 2009, these two years were the two worst years for American economy. In 2008 excluding the 2nd quarter the GDP growth was negative throughout the year. In the 4th quarter of 2008 the GDP growth was -9% which was the lowest for a quarter in the period of Economic recession. From the 3rd quarter of 2009 the GDP growth was tend to positive and after that the growth was always positive. This statistics shows that in that time period the economy was not productive at all. All the sectors were affected by the credit crunch situation more or less, as a result the total GDP of the strongest economy declined. The manufacturing industries were unable to get the credit as they get it in the earlier time. The banks and other financial institutions didn’t get the payment from the debtors, so several banks were declared bankrupted, as a result they were unable to issue credit to the business entities when the business organizations are largely depends on debt from the banks. So the productivity of the organizations became less and the GDP growth rate declined. Impact in the Employment Sector Figure 2: The Layoff due to the Financial Crisis Data Source: (Auer, Auer and Wehrmuller, 2008) From the above graph it can be said that since the 9/11 the layoffs has risen to the highest level. It can be concluded from the statistics that for the financial crisis not only the GDP of the country declined, the layoff rate also reached to the country’s highest level. The cause of the financial crisis was the disability to pay the debts of the households; as a result the bad debt of the financial institutions has increased. Some financial institu ...Download file to see next pagesRead More
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