Thursday, January 7, 2016
Cost to the U.S. economy of second great depression
The
great depression of 2007/8 is not because of decline in the output, it was
result of the downturn of all economic indicators. The National Bureau of
Economic research has identified of the last boom cycle in December 2007, the
U.S. economy has been in decline ever since. The crisis has caused the
recession of 2008, which reached bottom in summer 2009. As hundreds of billions
of dollar transfer into the U.S. economy from the abroad to make high profit.
These all turned into to the real estate. Every one invests with hoping ‘Buy
high-sell higher”, they think that higher price paid to the house the higher
profit would be made. The financial crisis of 2008 is the one of the worst
disaster since great depression in the year of 1929 in the world economy especially
to the U.S. economy.
Due
to multiple crises which force to pulling down major financial players, Almost
20% of American mortgages in 2006, collapsed as well as brought by the Bank of
America. One of the largest banks named Bear Stearns went to the government
arranged a sale to JPMorgan Chase. Due to that incident, stock holder lost
almost 90% of their investment. On 7th
September 2008, the government took control of the two largest mortgage holders;
one is Frannie Mai and Freddie Mac. These two lost almost $ 20.40 trillion in
mortgage. Looking about that scenario, people even started to think if the
American treasury market can collapse then why can’t other? It might be reason
that stock market in China and Russia plunged 50%.
In
September, the major banks were no longer lending money and losses of the banks
were increased by huge number. Most of the short seller sold large amounts of
stock which causes panic as driving down share prices. The largest bank named
Lehman Brothers went bankrupt on 15th September, nobody there to
enhance finance standard of bank. The collapse of Lehman with its $639 billion
in assets had a multiplier effect worldwide.
When the value of the collateral decreased the lenders demanded for the
security, as a result borrower has to sold their assets no matter how much they
would be suffer which creates depressed prices.
Apart from the above, the biggest
effect, Merrill Lynch was sold to Bank of America for $50 billion around almost
about half of their full value before some months ago and on the other hand,
AIG could not no longer honor the insurance policies it wrote therefore, share
price dropped by 95% and lost $13 billion which was biggest blow for the AIG.
Now the debt of the U.S. government
is reached $18 trillion, still the economy is in the deficit situation which
may be cause to start climbing in the near future. For that, U.S. needs to
consider how its uses borrowed funds. As many circumstance shows that, while
borrowing to finance consumption is not sustainable. If debt is used to expand
output, the debt to GDP can remain stable even though there is large number of
borrowing. In the near future, there will be rivals to the U.S. treasury market
in terms of market dept as well as liquidity. To remain the world’s reserve
currency, U.S. government must provide the world with stable currency.
After
the crisis, the economic condition of the U.S. is not as it requires and world
market is shifting towards to the Chinese market. During the crisis, U.S.
government issued the government bond to enhance the economy. People of the
world are so much confident regarding the U.S. economy; even the U.S. economy
facing the problem, all wants to buy that.
All most all bond bought by the Chinese. Hence, this shows that, U.S.
economy is dominating by the Chinese people.
The U.S. government knows, if the U.S. government stand strongly against
with Chinese then definitely they would be in trouble.
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