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State of the current economy (Economics) - Essay Example

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“The recent failure in the U.S. housing and credit markets have resulted in a slowdown in the US economy. 2007 GDP growth was estimated at 2.2% but in 2008 it is projected to…
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Download file to see previous pages rici declares "we are in a depression (Shinkle, p1)."  He signifies a recession as an economic decline from which an economy can eventually recover but poses that the state the American economy is in today is much worse and can’t be resolved with a quick fix. "My feeling is that . . . if (the president) doesnt fix whats structurally broken, what caused this, well be back into this after the federal stimulus has had its effect," says Morici (Shinkle, p1).  Many different aspects of the American economy have come under fire as the cause of this financial crisis, most infamous of these methods to date are credit default swap contracts and short selling.
The very first credit default swap contract was constructed in 1997 by JP Morgan and it is given credit for what initiated the market to balloon up to a $45 trillion value in 2007 (Pinsent, p1). In a CDS contract, credit risk from emerging market bonds, mortgage-backed securities, municipal bonds or corporate debt is transferred between two parties.  It is a bilateral contract in that both parties are obligated to carryout their end of the contract.  CDS contracts were designed because as Stephan Teak puts it in his article Did Credit Default Swaps Cause the Financial Market Meltdown?, lenders were encountered with a problem they needed solved.  He best describes the factors leading up to this revelation by lenders when he says, “When a lender provides financing in the form of a loan, it has to keep a certain amount of cash, called capital, on hand to cover any problems with the loans such as defaults. For larger financial institutions like JP Morgan, this meant having huge amounts of money tied up and doing nothing. The credit default swap was designed to deal with this problem (Teak, p1).”  The basic goal of the credit default swap is to free up the unused ‘safety-net capital by selling off the risk of the loan to a third party for a premium.  Once the capital was freed-up it would be available for ...Download file to see next pagesRead More
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