Financial Crisis in the US

Date: Nov 3, 2017

Introduction

The Global crisis occurred in 2007-2008. During this period the world experienced a downfall in economic growth in several countries. The financial crisis of 2007-2008 is considered to be worse than the great depression of 1930s; it resulted in nearly total collapse of financial institutions in the world, decline in stock markets and also the national governments bailing out financial institutions. Also, the financial crisis caused the housing market to collapse and increased unemployment. It also played a major role in making key businesses fail; this led to decline in consumer consumption in the market causing production of goods and services to reduce.

There are several factors that had contributed to the financial crisis in the US, such as easy access to credit facilities which was enabled by the inflow of foreign funds, especially after the Russian debt crisis and Asian financial crisis and decrease in interest rates, which led to housing construction boom, when loans were made available for consumption, and since credit was easy to acquire and consumer spending was largely dependent on credit, this led to a financial crisis. There was also lack of proper regulations to control financial institutions in terms of lending and designing of financial products like mortgages and credit cards which made credit easily available. The collapse of housing programs or industry also led to the financial crisis in the US.

What We Have Learned from the Crisis and what We Need to do Differently

A lot can be borrowed from the global financial crisis of 2007-2008; several scholars have given their take on this issue and what we can learn from the crisis. For example, economic activities of advanced countries should be restored in order to conquer the crisis, the use of conventional monetary policies as a tool of economic management should be reconsidered. New ways of dealing with credit mechanism should be put in place in order to make availability of credit facilities more difficult.  Also what the policy makers should do differently is to advance credit facilities to small and medium enterprises through government agencies and private sector to boost the growth of economy; this will lead to creation of employment. In terms of fiscal policies, the government should get involved in the economy for example, through spending; this will stimulate the economy by increasing production and hence creating employment. There should be a change in education system whereby what is learned in school should be applicable in working place and people should be equipped with technical skills which will boost their competence at work.

We can also learn that keeping inflation down and interest rate at zero is not crucial in economic growth since low interest rates will make credit facilities easily available. In order to control this, the government should work towards maintaining inflation at a reasonable rate which can sustain economic growth. Global financial crisis affected both advanced and emerging economies; in emerging economies, there should be a clear policy of redistributing income to middle and lower economic classes, this will give them spending powers. Also, there should be control of imports and exports; this will prevent markets from becoming saturated. We can also learn that there is no economy that is independent in the world, and if one economy is affected, the whole world will be affected, hence there should be proper coordination of all economies; this will make the economic growth of each country possible.

In the financial sector, the bailing out process which was implemented set a dangerous precedent whereby a financial institution may use it as the power to manipulate the government, and may work carelessly knowing that the government can bail them out.  Instead of bailing out financial institutions, the government should lay down proper rules and regulations that will govern the way financial institution are managed and also the government should set the minimum and maximum interest rates in the market.

Conclusions

The global financial crisis has affected every economy in the world.  In order to prevent this crisis from occurring again, every government should put down clear policies both fiscal and monetary. Also financial institutions should be regulated, and the availability of cheap credit should be controlled in order to prevent further crisis and making the economies get back on the growth path.

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