The state of economy Essay

In what has been touted as the worst economic crisis the world has ever seen, the current economic crisis that is affecting the United States economy has spread from the collapse of the subprime market into the other sectors of the country.  It was reported that between the periods of June 2007 and November 2008 the per capita value of Americans had been reduced by over a quarter.  By December of 2008, the S & P 500 had shed over forty five (45%) percent of its value.

  In relation to this, the prices of houses all over the United States had dropped one fifth of their total value from record highs in 2006.  With the collapse of Fannie Mae and Freddie Mac, the futures market had also taken a large dip, losing over thirty (30%) to thirty-five percent (35%) of its value.            The losses in value that these properties and investments had was not immediately considered as a sign of recession as many felt that the government reaction, in the form of a US$ 700 billion bail-out, would be sufficient to deal with the problem.  Six months after the bail-out was approved, there still seems to be no end to the crisis in sight.  Instead, there are reports that times are going to become harder due to the domino effect that the slump has had on one of the largest consumer markets in the world, the United States.

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            In 2008, the home equity market of the United States collapsed in value.  Worth over US$13 trillion at its peak in 2006, the home equity market held many of the individual and corporate investments of the United States.  By 2008, it had dropped nearly a third in its value to US$ 8.8 trillion with signs of it dropping even more.  This resulted in several companies and pre-need firms losing on their investments and having problems covering their payments.  Given this situation it is clear that the economic problem now is but a function of the global business slowdown.  Since there are fewer financial intermediaries, business that have taken a hit from the crisis as brought about by the decrease in consumption of consumers have no access to funds that are necessary to keep their business afloat.  The lack of efficient financial intermediaries and the lack of available funds make it difficult for new business to perform and also restrict the flow of cash in the market.

  This contractionary effect has resulted in moping up excess liquidity in the market which explains the decrease in sales for most industries.Analogous to the collapse of the Housing sector is the collapse of the very houses that are erected.  It may be unfortunate to state that the woes of the Housing sector have only just begun but that is the case at the present.  The overbuilding that has happened in coastal areas and earthquake territories can result in massive property damages.  As the aftermath of Hurricane Katrina has shown, a single powerful hurricane could instantly wipe out billions of dollars worth of infrastructure.The reason that this is a problem can be explained through this simple GDP explanation.  The basic GDP equation includes the amount that the government spends on infrastructure and the rechanneling of funds into the private sector.

  In this model, the investment that a government makes in preschool programs creates more jobs and better opportunities for young students.  This directly affects the productivity curve of the populace therefore making it into an economic activity.  On the other hand, the new military weapon system is also another way of increasing the GDP because it creates more jobs and increases government spending in that economic sector.  The spending on healthcare and the controls that are placed on the internet can also be considered as economic issues because they directly and indirectly affect the amount of money that people will spend on these activities.

  Stringent government regulations on the internet could stifle its economic growth.  Alternatively, by subsidizing the cost of healthcare, the government could make it more available and increase human capital investment.An examination of the basic principles of economics reveals that the current economic crisis is a result of poor financial fundamentals.  History shows that in order to deal with an economic problem of this magnitude it is important to introduce economic reform in the form of a combination of monetary and fiscal policies.  Quick fix solutions such as multi billion dollar bail outs and cash incentives to consumers are definitely the stimulus that economies need but they cannot be sustainable solutions if they are not coupled with long term reforms.The collapse of the subprime market was a good indicator of the fact that the market was over exposed and had invested heavily in poorly backed securities.  Several investors had packaged these liabilities and sold them off as lucrative investments.  This was the bigger problem because when it came to call in the debts there were no funds to pay for them.

  In fact, the funds that were promised to pay for the liabilities had been used to invest in packaged liabilities as well.One lesson that Asia learned from their own brush with financial crises is that speculation can lead to disaster.  There is no substitute for solid economic fundamentals and investments in reliable commodities.  The price that America had to pay for such a lesson, however, was a rather steep one that resulted in massive job loss and decrease in investments.Works CitedBaker, D. (2005).

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Bantham Books: 103-105.Mishkin, F. (1995) The Economics of Money, Banking, and Financial Markets, New York, Harper Collins.

United States.Stone, Diane. (2007) “Market Principles, Philanthropic Ideals and Public Service Values: The Public Policy Program at the Central European University”, PS: Political Science and Politics, July: 545—551