Economic Crisis



Economic Crisis

Introduction

The global financial crisis is one of the biggest issues that concern humanity since last few years. This disaster has touched virtually every country. Reduced profits, loss of jobs, rising prices, delayed wages, stipends, pensions and unemployment. People is just in a panic. The word "crisis" sounds throughout the newspapers. The newspapers comprise of shocking notes that some businessman committed suicide because he could not feed his family. Unfortunately, such cases are rare.

Thesis Statement

To find causes of Economic Crisis and assess measures used to rescue the economy.

Discussion

The Economic Crisis was mainly fueled by the use of Derivatives including options, futures, and warrants). They are a mirror reflection of the underlying assets like main stocks and bonds. People started selling securities and derivatives regularly, which triggered panic and crisis situation. Everyone followed the path and sold securities in pursuit of speculation and prices eventually fell down.

The situation was developed as a result of the Economic Boom, which countries witnessed in the previous years. Companies started buying goods and services resulting in increased demand and thus higher prices. Of special interest are construction companies, which started many construction projects by taking a lot of investment credits. And all this has happened largely without any insurance coverage. The principle was simple: why stop a construction project and finance it from own pocket, when you can easily get the credit. This created huge issues for the American Economy. Investment funds created aggressive investment portfolios, thus engaging their money in securities and other funds, which further exaggerated the bubble. The citizens of United States began to live beyond their means. Mortgage was often granted without checking the creditworthiness of the applicant. The situation kept on going worst, which eventually led to serious economic crisis (Mangir & Erdogan, 2011).

The crisis led to mortgage loans granted by banks at high risk of repayment, often those with marginal financial opportunities. These in turn were mass marketed in the form of structured bonds, based on real property, investment and speculative purposes by private financial institutions, including the largest U.S. and European banks. Awareness of these bonds was limited, because in the last real estate boom, leading rating institutions issued high ratings to the bond. Individual Insolvency of an unexpectedly high percentage (9.2%) resulted, in turn, the lack of cash in the credit market and instability of these institutions (Kose, Rogoff, 2007).

The genesis of the crisis dates back to 1998, when President Clinton insisted on the possibility of extending mortgage to borrowers with low income. In order to stimulate the economy with an injection of new loans, the state made a change in the laws liberalize the rules on the protection against excessive risk of banks and insurance companies. This allowed the banks to provide loans to much more people with lower incomes. In 2001, after the bursting of Internet bubble stock market share prices fell significantly, which also gave rise to concerns about economic growth. Fed decided to cut interest rates in 2002, which reached at ...