Complexities of the U.S. Financial System



Complexities of the US financial system

Introduction

The United States is having the largest and certainly has the feature of being a technologically powerful country in the world. The country has the biggest factor of having the large level of output in the world, with GDP having value of more than US$14 trillion. As one of the world's most advanced economies, the country has an edge of having the best resources of information technology and to have expertise in the areas of technical innovation. The U.S. economy is diverse, that has large number of industries including aerospace, telecommunications, chemicals, electronics and military equipment. Therefore, all the issues and aspects related to Complexities of the US financial system will be discussed in detail.

Discussion

The U.S. mortgage crisis is a set of financial failures that began in 2006. The crisis caused several million Americans to lose ownership of their homes, cost other homeowners up to $4 trillion in lost property values by 2010, severely damaged or ruined financial institutions, and affected economies around the world. Along with bio fuel programs and unfavorable weather, it contributed to the global food crisis that began in 2007 and persisted at least through 2008 by causing nervous investors to put money into conservative investments such as commodities futures in foodstuffs such as corn, soy, rice, and wheat. With the new demand, prices of these goods rose several-fold in just a few years, threatening to push about one hundred million people worldwide into hunger in what the United Nations termed a silent tsunami in early 2008. The U.S. mortgage crisis occurred partly because banks created millions of subprime mortgages. A subprime mortgage refers to a loan given to a borrower who has a history of not paying back loans (poor credit history) or has a small income relative to the size of the payments he or she must make on the mortgage (Garrett, 1998).

Banks take a bigger risk when loaning to such persons, so they make the loans more quickly profitable to themselves. Many banks sought to increase profits by offering adjustable-rate mortgages (ARMs). In an ARM, after a certain time (often two years), the interest rate on a subprime mortgage and therefore the monthly payments increases, usually in accord with an economic index rate. At times the increase is large; the monthly payment may even double. When the mortgage rate increases by ...