The housing crisis in the U.S - Coursework Example

Running Head: US Financial Crisis Paper A report on the dynamics of the Current Economic Crisis Plaguing the US. The report culminates in apresentation of recommendations. Economic Crisis Overview The current economic malaise in US constitutes an intertwined cobweb of factors hat have triggered a downturn in various economic dimensions and dynamics, on national and international scales. The crisis has burst the housing bubble which has even aggravated the current economic situation in the US which according to economists is already tantamount to a recession. The crisis can be blamed on various factors characterizing the last 20 years period. The medium to short term triggers of the crisis can be traced back to 2005 when house prices surged and started dropping in late 2006. (John R. Talbott (2006). The raised foreclosure rates in the 2006-2007 period by US homeowners has resulted in a sub prime, mortgage, hedge and various fiscus dimensions even beyond the housing loaning systems. The peak of the crisis heightened particularly remarkably in August 2008 with the U.S treasury declaring the collapsing housing financial system as the highly significant threat to the US economy. Many economic analyses have been misguided in their attempt to break down and unravel the cobweb of factors leading to the build up of the economic and housing crisis held as most phenomenal after the great Depression in the 1970s in the US. Many analysts have attributed the collapse of the global financial system to the destabilisation of the mortgage and housing crisis. Salient provenances of the housing crisis which is inalienable from the economic crisis enlists in its core the lack of feasible and clairvoyant regulatory framework for the moderation and stabilisation as well as sustenance of the financial institutions in the US. The ramifications and ripples of the US economic crisis have swept across global landscapes owing to the long criticized financial system devised after the World wars in which the US economy is the heartbeat of global economic paradigm leaving the entire world susceptible to upheavals rocking the US economy. Root causes Steve Latter (2008) has listed the following as the top six causes of the financial crisis in their perceived order of significance. Although the first three are not directly related to the mortgage and housing paradigms the exploration of the housing or mortgage crisis in the US and in the state of Virginia particularly can not be intact without the streamlining of all variables of the multifaceted problem into perspective. 1. Indefinite and inaccurate regulatory edict which permitted financial firms to move to too high ratios of mortgage-backed securities to collateral debt. 2. The lack of substantial focuses on the banking and financial firms' ratio of assets to debt by banking and financial services company regulators. 3. New accounting regulations crafted Sarbanes Oxley (regulation passed after Enron) were too traditionalist resultantly leading to the undervaluation of assets like mortgage- securities. This in turn caused bank debtors to leverage on the bank. 4. Private companies and their leadership made lending decisions out of greed whilst also flouting money lending standards. This was done in the aims of pulling more interest returns by lending to clients who were in Latter's terms "very risky bets". 5. Consumers borrowed what was more that they could afford. The blame on this aspect can be applied on both the borrowers and the lenders although lenders are overly expected to be firm to principle and economic logic when making lending decisions. 6. Miscalculated financial law promulgations which for instance compelled financial institutions like Fannie Mae to avail more loans to lower income clients which amounted high risk money lending. The unraveling US housing financial system has seen the filing for bankruptcy by various mortgage firms like American Home Mortgage (AHM) which is ranked as the US 10th biggest home loan firm. This has been matched by similar collapse by Banking and financial Institutions like Lehman Brothers which have also filed for bankruptcy as casualties of the pervading economic malaise. The housing in the State of Virginia and across the US had devolved from a mere sub-prime mortgage crisis to a highly critical crisis in the grades of credit risk. Various factors exacerbate the malaise among which rising doubt over the exposure of a range of financial institutions and ensures across Europe to the property slump in America. Financial Markets Volatility The fall of global stock markets can be attributed to the plunge related to doubts on the feasibility of the proposed $700 billion financial system bailout plan by the US Federal Government. Nuances on volatilities of stock markets presented in the Wall Street Journal (WSJ) referred to above relate to the pervading stock market ironies with investors torn in the dilemmas regards the wisdom of selling or buying or whether to invest in stocks or in bonds. The doubts in the interim stock markets in the US and in the world over culminate from the failure by global leaders to restore confidence in financial markets through their capital injection rescue schemes. The crisis in the financial has become a cyclic crisis protracted by the fear to lend and to invest by market players. This has also been exacerbated the voluminous sell of stocks in huge proportions. The Dow on Wall Street plunged to 161.52, or 1.47 percent, to 10,854.17 after surging more than 125 points in the earlier then dropping by over 180. With Monday's 370-point recession worsened by the doubts over the feasibility of the rescue package by the Federal Government were down 534 points, or 4.69 percent for the week. Broader stock indices also dropped in the interim. Standard & Poor's 500 indexes plunged to 18.87, or 1.56 percent, to 1,188.22, while the Nasdaq composite index fell 25.65, or 1.18 percent, to 2,153.33. From another dimension investors were keeping an eye on the oil prices with the contrasting anticipation of government rescue scheme as well as significant short covering driving crude to the biggest one-day gain. Investors also watching oil prices after anxiety over the government bailout and a huge short-covering rally pushed crude to the biggest one-day gain. The pervading atmosphere in the financial and stock markets is marked gloom illumined by poor stock market performances following failure by concerted efforts by US Federal government and other global leaders to restore confidence through capital injection schemes in the stock markets still smarting from the blow of the collapse of the U.S securities firm Lehman Brothers, an incident which seemed to be just a tip of an iceberg. The subprime market has also been dogged by ethics letups on the part of the financial firms. Loan firms have been found responsible for luring home seekers into unaffordable credit arrangements by offering spuriously attractive rates in the opening years only to hike these years or months later. This triggered the surge of foreclosures when many borrowers could no longer afford the loan repayments. A closer look at the crisis will point to three stakeholders in the financial markets as the culprits in the crisis, 'Home buyers played gullible to financial companies' allurements hoodwinking them to make typically uniformed and impulsive loan arrangement fueled by a blinded desire to get a home. On the other end loaning firms are to blame for their ethics letup and getting themselves and clients into uneconomically sound credit arrangements. The Federal government is also to blame for failing to heed practical financial regulatory advice, The Federal has only responded recently when its a little to too late with its short-gun stop-gap measures aimed at rescuing the sagging financial systems. According to the data form Credit Suisse 1,5m debtors were highly probable to default on home loans worth up to $220bn against surging of adjusted mortgages over the short term. A case in point to illustrate the key dynamics of the crisis is the instance of AHM, which gave out $60bn of loans in 2007. The firm had to seek Chapter 11 vindication from creditors. This led to the retrenchment of 7,400 workers following the abrupt gag of access to credit by financial companies and forms. In the development the company cites "a swift pervading impact on liquidity culminating from unexpected disruptions obtaining in the secondary mortgage and real estate markets" The case of AHM differs from those of multiple loan firms in Virginia and the US over. AHM focused in the "Alt-A" loaning targeted to mid-tier money borrowers perceived to be a good credit risk. This case was distinct from those of other 50- sub-prime lenders which ran insolvent in the preceding months. The company had to close shop following the complete drying up of the Alt-A debt market. The outstanding proportion of sub-prime debt has been pegged at about $800bn in the market while the Alt-A category is close at $700bn mostly released within the 2005-2006 period. This implies that in reality the Alt-A loans are somewhat better that sub-prime debt already facing a 12.4% default rate. Many analysts have expressed that under the prevailing circumstances one of the feasible moves that can be adopted by the Federal Reserve to arrest and curtail the malaise will be to slash interest rates. The heightening of the financial crisis entailing in its scale, the housing crisis has been evidenced by the surge of home re-sales by 1.4% by the month of October. The increase of house re-sales for the houses previously owned was by 1.4% against that of the year 2007 in September. The surpassing of years earlier levels was last experienced on November 2005. This has come as an indication that the so called "Bargain hunters" are cashing on the influx of houses set up for re-sales. Despite the amassing of the of house re-sales by the bargain hunters the glut is still staggering at overwhelming proportions. Recent data from the government-supported mortgage investor Freddie Mae has indicated that the increasing borrowings expenses have helped-up the firm's capacity to push down interest rates by directing more money towards the mortgage market. Conclusion The current economic Crisis in the US together with global stock and financial markets under performances are intertwined dynamics which are entrenched than simplistic as it were. Many economic analyses have been misguided in their attempt to break down and unravel the cobweb of factors leading to the build up of the economic and housing crisis held as most phenomenal after the great Depression in the 1970. Several analysts have attributed the collapse of the global financial system to the destabilisation of the mortgage and housing crisis. Justin Lahart (2007) notes, "A salient provenance of the Housing crisis which is inalienable from the economic crisis enlists in its core the lack of feasible and clairvoyant regulatory framework for the moderation and stabilisation as well as sustenance of the financial institutions in the US". The ramifications and ripple effects of the US economic crisis have swept across global landscapes owing to the long criticized financial system devised after the World wars in which the US economy is the heartbeat of global economic paradigm leaving the entire world susceptible to upheavals rocking US financial and stock markets and economy at large. Recommendations The unraveling of US economy which according to Analysts basing on various economic rationale is facing a recession, has not occurred overnight and there can be no quick fixing to be expected to yield meaningful results in salvaging the US economy. Home buyers need to equip themselves to better interpret their world. Buyers have to make adequately informed decisions and make financial arrangements they can afford. Buyers need be cognizant of the reality that in May 2006 a money borrower would require a credit score of 620 or higher to qualify for the best credit rates and in the following year borrowers needed a score of 720 or more. This is a significant rise which has been orchestrated by the financial institutions attempting to safe guard their lendings from highly risky credit arrangements. What it means is that the bar for mortgage eligibility has been upped. The inverse is true for the home buyers with good credit standings. The housing markets have seen a significant dwindling of the housing purchasing market. As such home buyers who genuinely qualify for the loaning schemes become a jewel. Its time for those with good credit records to go out there and negotiate the best deals they can get although nothing is known of what will happen to the value of the house after the purchase. From another angle the Federal Government should devise and implement long term financial system regulatory frameworks that will suffice to govern and maintain the economic and financial soundness of the financial markets. This has to replace the resort to stop gap polices that are a far cry from the much needed solutions to curtail the malaise and restore the financial markets to desired soundness. The federal Government must seriously consider a paradigmatic shift from pro-deregulation behavior which is anti-economic growth and sustenance. This must see the refocusing into a more -pro-regulation governance to reverse the ills of typically populist and uneconomically sound financial systems regulatory framework. References Elizabeth Warren and Amelia Warren Tyagi (2003). The Two-Income Trap: Why Middle Class Mothers and Fathers are Going Broke, New York: Basic Books, p 102 Justin Lahart (2007-12-24). "Egg Cracks Differ In Housing, Finance Shells", WSJ.com, Wall Street Journal. Retrieved on 2008-07-13. Jeannine Aversa (2008-02-13). "Rebate Checks in the Mail by Spring", The Huffington Post, Arianna Huffington. Retrieved on 2008-05-19. Wall Street Journal Oct. 11, 2008 John R. Talbott (2006). Sell Now!: The End of the Housing Bubble, New York: St. Martin's Griffin John R. Talbott (2003). The Coming Crash in the Housing Market, New York: McGraw-Hill Robert J. Samuelson (2006). "Home Is Where the Worry Is", The Washington Post. Justin Lahart (2007-12-24). "Egg Cracks Differ In Housing, Finance Shells", WSJ.com, Wall Street Journal. Retrieved on 2008-07-13. Jeannine Aversa (2008-02-13). "Rebate Checks in the Mail by Spring", The Huffington Post, Arianna Huffington. Retrieved on 2008-05-19, Wall Street Journal Oct. 11, 2008, Clinton, William J. 1993. Regulatory Planning and Review (Executive Order 12866). 58 F.R. 51735, Oct. 4. Hahn, Robert W. (1998). Regulatory Reform: Assessing the Government's Numbers, AEI Working Paper. Luken, Ralph A. and Arthur G. 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