Free The Economic and Financial Crisis in America Essay Sample
The economic and financial crisis has been the cause of many problems in America. The slump in the economy has caused economic recession which has subsequently led to loss of jobs, inflation, lower real wages and rising cost of energy and food. The economic crisis in America has impacted many Americans in a negative way. There are many who have lost their jobs and this has led to stress for many as they cannot afford to maintain their lifestyles. It is also important to examine the economic crisis in America because it has been the cause why some Americans do not have confidence in their leaders as they believe that enough is not being done to avert the dire situation. Many believe that the war in Iraq led to spending of billions of dollars which somehow contributed to the financial crisis that has been a looming shadow in America’s economy. It is also believed that bad government policies, especially monetary policies have also contributed largely to the economic crisis. It is postulated that the government has failed to seal loopholes in the regulatory structure that allow financial institutions to increase returns and to gain leverage. The monetary policy is also stipulated to be loosely formulated allowing the credit boom and low interest rates.
The economic and financial crisis in America is also an issue of concern to many Americans because of the fact that it results in cut backs on retirement benefits and health insurance. The fact that many Americans cannot afford health care due to unemployment and lack of money is unfortunate. Health care is a basic need for any human being and lack of it can have deadly consequences. Pension benefits also help the elderly get by in their old age so lack of it means that the society has failed to take care of its elderly which is very unfortunate. America experienced the first big financial crisis in the 1930s. This was the Great Depression which started in 1929 in Wall Street. There was also a stock market crash in 1987 where the stock market went down by 23% in a span of one day alone. The bonds market almost came to a standstill in 1998 when the Long Term Capital Management Hedge Fund almost collapsed. America also experienced another financial crisis in 2000-2001 with the ‘dot com’ crash where billions of dollars were lost in the stock market. Markets were also closed and payment systems disrupted after the September 11 2001 terrorist attacks.
America’s Economic and Financial Crisis
Since mid 2007 America’s economy has been unstable. The economic crisis started in August 2007 with a liquidity crisis in the sub-prime division of the housing sector in the US. The subprime market is described as the one which would normally not qualify for a mortgage. The financial institutions especially banks had been giving loans on a 100% value of property meaning when the subprime market could not pay their mortgages, the banks got into a financial crisis. It is stipulated that leading to the 2007 financial meltdown, there were low interest rates on government bonds leading to low yields. This led to investors looking for higher yielding investments and they found these in mortgage backed securities. The credit worthy population became exhausted and lenders turned to the subprime market. This move was enabled by the Gramm-Leach-Bilely Act of 1999 which provided lax regulatory measures for lending and investment. Political authorities also sought to have the low income population own homes through this initiative. The economic crisis then led to various companies going under; this included Bear Stearns, Merrill Lynch, Morgan Stanley, the Lehman Brothers Holdings Inc. and others. The inter-bank lending rates soared in the midst of the crisis, and the Federal Reserve Bank could not be able to respond effectively to the crisis. The Federal Reserve Bank however recognized that the decline in the financial markets was a major blow for the American economy. The Federal Reserve Bank then reduced its federal funds target rate from 5.25% to 2.25%. It also provided liquidity to the financial institutions in order to ease the crisis. The Bank also bought securities from depository establishments in order to give them the optimum interest rates and give them money to lend. The measures taken by the Reserve Bank were however too little too late and the crisis catapulted into a global crisis. The crisis saw the share price of major companies also fall in the stock market. The bankruptcy of the Lehman Brothers Holdings occasioned a drop of 812.23 points in the Dow Jones Industrial Average (DIJA).
The financial and economic crisis in America has been triggered by various factors. One of them is the decline in the rate of profit. It has been said that the general rate of profit in America has drastically declined since the 1970s. According to Davis (1996) Karl Marx who proposed the Marxist theory explains that the decline in the rate of profit leads to the twin evils of high inflation and high unemployment rates. This has been witnessed in America. The loss of jobs has been a main concern for many Americans. There is also low real wages that has been occasioned by the economic crisis. This means that some Americans are living below the poverty line while others are forced to live beyond their means through credit. The rate of business investment has also declined in the US. This means that there is no job creation and the rate of unemployment continues to grow. Many Americans also believe that the country is facing financial and economic problems because a lot of taxpayers’ money is used to lend to the developing countries. It has been stipulated that America is a donor and a lender to many countries, and while it is doing this, it is slowly depleting the American economy. This has been seen with the recent budget deficit where the government had to eventually agree to raise America’s debt ceiling in order to meet the budget target.
The economic crisis has also widened the gap between the rich and the poor in America. This is a major problem that has been witnessed in America. The rich are seen to be getting richer while the poor are getting poorer. This means that America has multi billionaires, who are ranked among the richest people in the world but it also has homeless people and people who live below the poverty line. As the economic crisis gets worse the poor bear the brunt of it all. This has also led to the elimination of the middle class as loss of jobs and income leads to middle income people slipping into poverty. Aristotle (2009) believes that the strengthening of the middle class is the solution to economic problems. According to the great philosopher it is only through ensuring equal distribution of wealth that the economy of any nation can be strengthened. The philosopher Aristotle also believes that masters use slaves to secure their livelihood. This means that there are those who forever remain slaves and there are those who forever remain masters. In Book I of the Nicomachean Ethics, Aristotle explains that there are those who are by nature slaves and those who are masters by nature. Even though Aristotle used this view to support the vice of slavery, it can be applied to the case of inequality between the rich and the poor in America. The laborers are seen as the ‘slaves’ who are used by the rich enrich themselves. This is why the gap keeps widening as the economy gets worse; as the economy gets worse the poor cannot afford the rising cost of living due to loss of employment and so they become poorer. The rich on the other hand become richer as they are able to find other means of making money.
The slump in the American economy has also been blamed on the rise of China’s economy. This is because as China rises in economic power America is seen to be declining. This is because there are many Chinese products that have flooded the American market. There is no longer much flow of goods from America to China. The trend has been reversed, whereby China exports most goods to America. The recent economic slump in America has seen the American dollar decline as the Chinese currency soars. China is also steady economically as it has been said that there are enough gold reserves in the country. China has also made enough trade ties with several countries. To this, Aristotle comments that goods like food and clothes not only have a use value but also an exchange value. This means that not only can one make goods for their own consumption but also for commercial purposes. Aristotle also concludes that in a society where trade is a common practice, the monetary currency becomes the catalyst for exchange. This explains why the American dollar is a dominant currency in world markets. The Chinese currency is however slowly taking centre stage.
Aristotle however expresses contempt for the accumulation of wealth stating that it is not natural to accumulate wealth. Accumulation of wealth means that some people will have to be relegated to the position of have-nots while others will be the bourgeoisie or the haves. Karl Marx also comments about accumulation of wealth. According to Marx the working class is the one that provides labor for the rich. The rich in return use the state and the laws to enable them to further accumulate more wealth. Accumulation of wealth is however the basis of any capitalist state, like America. The economic crisis has also been attributed to America’s capitalism. The financial markets are seen as evidence of accumulation of wealth by individuals and so a major characteristic of capitalism. Market failure has been identified as one of the causes of the economic and financial slump. The financial markets in the US have drastically declined.
The economic and financial crisis in America has spread to the rest of the world especially Europe and the developing world. This has seen most stock exchanges around the world including the London FTSE drop drastically. This is because there were many companies that had invested in the mortgage backed securities in the US. There are also many countries especially in Europe which have considered and implemented austerity measures. One such example is Greece.
The economic crisis in the US has also been further fuelled by the energy crisis in the world. Fuel prices all over the world have sky rocketed making the cost of production rise and subsequently the cost of living. There is also the ongoing war in Afghanistan is also draining a lot of money from the American taxpayers.
There are various measures that can be implemented in order to avert the economic crisis in America. One of them is the austerity measures like those being undertaken by most of Europe. This means cutting down on government expenses in order to sustain the economy. This means that America has to cut down its expenses including giving billions of dollars in grants and loans especially when it cannot afford to do so. Avoiding funding of wars such as that in Iraq has also been termed as a solution to averting future economic problems.
The economic crisis has also affected many employees as there have been many who have been laid off. This means there are many who have despaired because many have lost their means of income and thus cannot sustain their livelihoods. This has prompted many to live beyond their means using credit cards and loans. Hull (2009) explains that it is important to encourage those workers who have lost hope. This means that as workers are struggling to maintain their lifestyles they need encouragement from their employers and supervisors. This means that they need to be given hope for life. This helps to avert the cases of depression that people face due to the economic crunch and loss of income. St. Augustine of Hippo explains that hope bears two daughters whose names are anger and courage. Courage pushes a person to face their adversities while anger is directed towards the status quo. Hope is usually underestimated in the face of economic crisis and it has been stipulated that in the face of distress hope is the only thing one can have. This is a more realistic approach to the economic crisis because so many other economic solutions have proved to be non efficient in the face of the crisis. People who have lost their jobs in the economic and financial crunch need to know that there is hope beyond their adversity.
According to Karl Marx, the only way to avert economic problems is to avoid the stratification of society into classes. This means there should be no economic inequality. This means that the gap between the rich and the poor in the American society needs to be bridged. This can be done through creating more employment for the middle class and empowering them as Aristotle suggests. It also means that there should be wealth distribution. It should not be the case that 90% of the wealth is shared among 10% of the population.
There is no doubt that the American economy and financial systems are facing serious problems. Many people believe that the economic problem may not come to an end soon and with the dwindling global economy, the war against economic problems in America is far from over. There are several reasons why America is experiencing financial as well as economic problems, one of them being lax financial regulatory laws and a loose monetary policy. This means that government policies also need to be improved in order to create laws that can avert an economic crisis like the one witnessed in 2007. This means that a case in which banks lend all their money to clients and cause a disastrous outcome should be controlled. The American people also believe that enough is not being done by the government to help them cope with the economic crisis. This is contrary to the social contract theory advanced by Thomas Hobbes. According to this theory the government is put in place by the people in order to protect their rights. It is a contract between the ruler and the subjects that if they surrender their power, the ruler will in turn protect their rights and interests. This means that more needs to be done by the government to help the suffering subjects. St. Augustine also proposes that in the face of adversity all we can have is hope. Americans can also be hopeful for now, that things will indeed get better.