FINANCIAL CRISIS

Financial Crisis



Financial Crisis

Section (A)

The housing problem in US is the main causes of the financial crisis over the world. It turned down the world-wide economy and bankrupted one of the biggest investment banks in the world, Lehman Brothers. Some economists even say that it is the worst financial crisis since the Great Depression. However, just few people know what really happened with housing in US and how to rescue the economy. So what does experts and economists say about the causes and effects of the housing problem and what solutions have Government suggested? Most experts believed that the problem is a huge amount of deficit of many big firms over the world caused by subprime mortgages and housing bubble. In 1977, the “Congress pass the Community Reinvestment Act (CRA) to address alleged discrimination by banks in making loans to poor people and minorities in the inner cities” (Lamb, 2005, p98).

Lamb argues that this is the beginning of subprime mortgage in US. Since the Federal Reserve believed that banks rejected the minorities' mortgage applications because of racial discrimination, which is, in fact, because most minorities had poor finances, the Department of Treasury issued a formula that consider race, neighborhoods and income group to determine if a bank should accept mortgage applications. As a result, a huge amount of money was lent to the poor people, and this kind of mortgage soon became the subprime mortgage a risky lending as it is from banks to individuals or companies who contained a very low credit-rating and high default rate.

Consumer Demand for Housing

As far as the market for those houses is concerned, which are occupied by their owners, it is relatively sensitive to demand and supply changes in the market. The influence and intensity of such elements, most of the times, clarify the differences in inflation of house prices and within the main areas of the U.S. The ability and the willingness of the buyers to purchase houses are influenced by the conditions of the demand function. Most of the people prefer to purchase privately owned houses, which does a lot of good for such people. When standard of living improves and income level rises, the aggregate demand for houses shows a significant growth, as well as the demand for luxurious and more exclusive properties. It happens because people seek to shift into "up market"(Radford, 2006, p65).

Another vital factor in the housing sector is consumer confidence. If the future performance of the economy is expected to decline, and confidence among the people deteriorates as they become pessimistic about their financial situation, potential buyers restrain from looking for new houses or holdback their access into the owner-occupied segment. In the housing sector, demand is inelastic or not so responsive to a change in price because people see this as a necessity and there are few substitutes to buying a house. As such, people were inclined to purchase their own homes even as prices continually ...