Issue or Crisis - Essay Example

Issue or Crisis A key issue which has recently developed to a crisis situation is the economic condition of America that has only been exacerbated by the financial meltdown at Wall Street. The present situation is a result of decisions and actions that were taken months ago but no one in government appears to have seen it coming and even if they did, they appear to have ignored it altogether. The financial crisis which began with the subprime lending problems has now extended to a point where major banks, financial institutes and even insurance companies have failed and many investors are hitting the panic button all over American as well as in international markets. In fact, analysts such as Essen (2008) consider it a complete failure of the economic system to check and control the investments made by banks that are supposed to be under government regulations. The finance sector is one of the heaviest regulated sectors of the economy yet the present situation has come to a point where investors and finance gurus are calling it the “worst financial crisis since the Great Depression (Essen, 2008, Pg. 1)”. Of course the full impact of the crisis may only be understood years after the crisis is over but for the moment it is obvious that the basic cause of the crisis was the high risk action of many different banks who loaned out huge amounts of cash to borrowers without the proper risk scrutiny required. In particular, subprime mortgage lending which was done by American banks in recent times made them focus on short term profits, quarterly sales figures and short sighted goals rather than stable business practices that could have given them real returns (Essen, 2008). To fully understand the current crisis, the background must be examined and that shows a story of greed and what is called by Clendenning (2008) as the casino mentality of American banks. During a time of economic health, housing sellers and mortgage brokers suggested and recommended to buyers that they get into mortgages which required little or no cash towards a down payment. Further, these mortgages and loans were given out without a proper examination of the credit risks associated with the loans. Instead of reducing the risks undertaken by banks, these measures only served to expose them more. The crisis might have been minimized had the banks stopped there but the same debts were sold, traded and bartered as high risk investments to several international investors with the expectations of high returns. However, the high returns did not come and the banks simply could not deal with the developing situation. In June 2007, Bear Stearns’ hedge fund collapsed which shook investor confidence in the company itself. Soon afterwards, Bear Stearns became bankrupt (Essen, 2008). Strangely enough, the government did not see the crisis which was coming and the Federal Reserve as well government officials continued to support the position that the economy would get better as market forces came into play (Garrett, 2008). At the same time, many individuals who were working in the financial sector recognized the coming problems and started pulling out of the market. This only added to the uncertainty of the situation as investment advisors often gave contradictory reports in the media. Over the past year, the American public was given everything from warnings to reassurances and it is likely that these contradictory statements only served to complicate matters further. After a time, even the government recognized that something was going wrong and both the Federal Reserve in America and the European Central Bank had to pour billions into the economy prevent a complete meltdown of the global economic system. However, even that was not enough and the collapse of other institutes such as Lehman Brothers and AIG insurance only showed how complicated the problem had become (Essen, 2008). The list also includes bodies such as Fannie Mae, Fannie Mac and JP Morgan as well as other financial institutes who acted as lenders or backers of the subprime mortgage fiasco. As share prices went down, the investors and speculators at Wall Street were blamed for their greed as that was said to have caused the crisis. In September this year, the U.S. government announced its plans to takeover Fannie Mae and Freddie Mac to bailout these organizations and prevent their total collapse (Kaletsky, 2008). The government is still the best stakeholder to look towards for someone who seeks to find a resolution for the situation (Skillings, 2008). For millions of investors who had shares in these companies, their share values and investments eroded overnight. Hedge funds and Real Estate Investment Trusts lost their value and it seems that no one actually profited from the business of subprime mortgages except those who got out of the market early. The list of stakeholders who have been impacted by the financial crisis in America certainly goes into billions as the financial crisis did not remain contained in America and soon spread across the world to places as far off as India, Australia, Europe and the Far East (Clendenning, 2008). It can be expected that the government will respond with new acts and regulations to ensure that the same type of financial crisis is not created in the future. In the final analysis, it seems that without fully understanding and calculating the risks involved, individuals working towards short term goals made disastrous decisions that have impacted millions of people (Clendenning, 2008). Since the overall impact of the crisis is not fully known yet, it is expected that a lot more will have to be done by all concerned parties before things can be said to have returned to normal. Simply put, strong planning from the side of the government in terms of economic checks and balances or careful and strategic decision making on the side of the lending institutes could have certainly prevented the crisis. However, bad planning and thinking that big risks will automatically lead to big rewards has landed both America and the global financial market in a very difficult position. Word Count: 1,008 Works Cited Clendenning, A. 2008, ‘US casino mentality blamed for planets meltdown’, [Online] Available at: http://ap.google.com/article/ALeqM5gOZTtahVNy4kICgeQueTNyWQybJAD93H9HL80 Essen, Y. 2008, ‘Financial Crisis: US calls on world to save banking system’, [Online] Available at: http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=&xml=/money/2008/09/22/cnpaulson122.xml Garrett, E. 2008, ‘Perry: Federal government inept at solving financial crisis, other problems’, [Online] Available at: http://www.dallasnews.com/sharedcontent/dws/news/nation/stories/DN-perryecon_01tex.ART.State.Edition2.26d5efa.html Kaletsky, A. 2008, ‘Financial crisis could get much worse’, [Online] Available at: http://www.theaustralian.news.com.au/story/0,25197,24365062-5014020,00.html Rhee, F. 2008, ‘Round one: Obama, McCain clash on economy, foreign policy’ [Online] Available at: http://www.boston.com/news/politics/politicalintelligence/2008/09/round_one_obama.html Skillings, J. 2008, ‘Ballmer: Congress must stabilize financial crisis’, [Online] Available at: http://news.cnet.com/8301-10805_3-10054252-75.html Read More