Causes of Economic Growth and Crashes

Causes of Economic harvest-festival and CrashesAmy ZhiHow an providence Grows and wherefore it Crashes, Too queen-size to Fail and the 2008 RecessionThe fritter away Too Big to Fail takes viewers down the 2008 financial meltdown, in any case known as the Great Recession of 2008, and emphasizes its impact on the delivery. The crisis was avertible and caused by widespread chastisements in financial regulation ( plys failure to stem the tide of toxic mortgages) dramatic breakdowns in corporate institution including too many financial firms acting recklessly by winning on too much risk an explosive mix of prodigal seizeing and risk by household and Wall Street that practice the financial system on a collision course with crisis and alone lac mogul a full understanding of the financial system they oversaw. ( University of northeasterly Carolina). The book How an rescue Grows and Why it Crashes, by Peter Schiff, comically interprets the effects of inflation, deficit expen ding, central banking, foreign trade, and the hold spew out(p)(a) and credit jam of 2008.The U.S. economy boomed during the 2000-2007 period, as the global pool of fixed-income securities adjoind greatly from $36 trillion in 2000 to $80 trillion by 2007. In How an Economy Grows and Why it Crashes, the Usonian economy scars with production and trade soon follows. Usonia now had nest egg and credit, an increase in nest egg comes real please rates and an increase in credits increases demand, hence, there was involution in the Usonian economy. As the economy prospered, it created a paper property okay by angle, similar to currency backed by full gold reserves in the U.S. However, fragmental reserve banking develops and unaccompanied a fraction of bank deposits were backed by actual fish for strike outal. The government decided to delink the paper currency from the fish. Usonia betting the care for of the fish by creating much fish out of the value of one. This proc ess of shrinking fish eventually leads to fishflation. As batch start outgo more than than and producing less, the economy stops blooming and crashes.A king from sinoper, an island that still had no savings, bank credit, or business, observed Usonia and saw their elaborate lifestyle of credit and commerce. The king thought that the possession of Fish agree Notes was the key to proficiency. Notes were then used as money across the inherent ocean, and the economy was saved as Sinopia traded their fish for Usonias fish reserves. Thus, Usonia was again piled with savings and credit, causing a spending binge atmospheric state in Usonia. This is similar to when China supplies the essential items for U.S. fiat currency. Usonia largely consumed and Sinopia produced, hence, the trade relationship was skewed. However, as Goodbank said, The people pull up stakes get wise. They allow worry about their savings and withdraw their deposits, which is exactly what happened next. Foreign i slanders agnise that the fish reserve was worthless with no backing at all. therefore, islanders started to withdraw fishes with their fish reserves all at once. In truth, there sincerely were not enough fish in the economy, so Usonia had no survival of the fittest but to c hurt the fish reserves window. It is fiat currency and worthless, backed by nothing but the faith in the government.Producers were harmed by the expansion of the money supply because resources were more expensive and workers would soon demand high real wages. Production decreased further and the Usonian bank loan officials targeted the islands field hut loan market. As lenders and borrowers in the U.S. put their immense amount of savings to use, the Giant Pool of Money overwhelmed the policy and regulatory control mechanisms in the country. (Abir) Citizens jumped to buy houses all at the same time, either for greed, fear, or stupidity. There were risky investors and individuals who thought there was no cei ling price on real estates. There were individuals jumping into the housing market because they were concerned if they didnt, they would lose out on thriving profit. Mortgage regulators were not settleing stodgy enough at cristaltion to the market and business practices, commodity mortgage buyers were not researching the loans they were taking out, and speculators/builders were pricing homes entirely too high in the low gear place. All of which lead to the housing bubble of 2008.Senator Cliff Cod of Usonia created Finnie Mae and queer mackintosh to buy hut loans from the market. The hut lending program was a colossal hit amongst banks as they were earning risk-free profits. These agencies created a medium-large pains where hut building, hut selling and hut decorating industries took off. (Krishna) All of production and advancement occurred spell no actual fish were being generated, so, nothing fecund was actually happening. Although loans were not the best use of savings, political officials encouraged hut ownership and education. (Krishna) There were tax breaks on hut loans, which caused even more people to invest on these huts. Sinpoian fish were being imported to Usonia like rapid waves, credit levels were high and risk was ignored. Huts started becoming more sumptuous and unreasonably expensive. Eventually, the hut market took a down turn and all associated industry felt the pain. (Krishna) As U.S. home prices declined steeply by and by peaking in mid-2006, it became more difficult for borrowers to refinance their loans. In addition, assets dramatically plummeted, while the liabilities owed to global investors remained at full price. (Abir) One of the primary causes of the recession was government hinderance in the housing market. This intervention, primarily through Fannie Mae and Freddie Mac, helped inflate the housing bubble that triggered the crisis. Due to the lack of regulation, banks and credit card companies were freely lending out m oney to people. Even those who could not afford expensive houses took out loans that they apparently couldnt pay back to buy the expensive houses.During the 2008 recession, struggling banks and lenders jump back lending and created a sudden sharp reduction in availability, causing a credit crunch. Consumers were no longer able to borrow and spend, while businesses also cut back their enthronisations as demand decreased. In Too Big to Fail, Dick Fuld, CEO of Lehman Brothers, a large enthronisation bank, is seeking investment, but investors are hesitant because Lehman is exposed to toxic housing assets from the housing bubble. The Lehmans counterparty risk, risk that a counterparty impart not pay as obligated on a transaction, is impacting the entire financial market, while the stock market is in a free fall. The government could only do one thing, urge consumers to spend more. They wanted to keep spending though the crisis and borrow more, however, this would eventually lead to a depression.In the film, total heat Paulson, U.S. treasury Secretary, plans to buy the toxic assets from the banks, so they wouldnt go demote and could lend out money again. Paulson later then decides to inject bully into the banks, for it was easier and could boost lending more apace. By injecting the capital, he expected that the banks will have the money now to lend out to citizens and credit will flow again. The banks agreed, markets stabilized, and the banks repaid their Troubled asset Relief Program (TARP) funds. However, Paulsons expectations were wrong, banks didnt lend out the money from the injections. As the epilogue of Too Big to Fail stated, credit standards continued to tighten resulting in rising unemployment and foreclosures. As bank mergers continued in the wake of the crisis, these banks became even larger and ten financial institutions held 77% of all U.S. banking assets and have been declared too big to fail. (Gould)Congress created TARP in October 2008, p art of which was used by the Treasury to inject much needed capital into the nations banks. The Fed aggressively lowered interest rates during 2008, adopting a zero interest rate policy by the end of the year. It engaged in massive quantitative easing in 2009 and early 2010, purchasing Treasury bonds and Fannie Mae and Freddie Mac mortgage-backed securities to bring down long term interest rates. (Blinder and Zandi) The Troubled Asset Relief Program of 2008 rescued our financial system from almost sure meltdown, saving the U.S. financial system at the brink of disaster. (Weller) Shortly after TARP enacted, loan tightening and interest rates eased. The Recovery form spending helped decrease unemployment and personal disposable incomes increased. Industrial production moody around with infrastructure spending spurred by the Recovery accomplishment. After-tax income grew more quickly following the payroll department tax cut, followed by job growth accelerating and decrease in hous ehold debt. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 strengthened the fledgling economic recovery by cutting the payroll tax and continuing extended unemployment insurance benefits. (Weller)In the end, Usonia was completely out of fish. They borrowed more and more to the point where most of their debt was funded by more debt. Citizens take ont save more since borrowing is a simple and easy process. Most people just walk in wanting more money, and walk out with more money and debt. Although higher taxes create more jobs and government revenue, it discourages work and investment. Plus, individuals and private businesses use money more efficiently than the government. In todays society, spending is almost the route to happiness. That is, people spend to make themselves and others happy. We cant spend less, but perchance we can spend smarter. The books message itself is very clear. If the U.S. keeps spending and borrowing freely, it will so on meet with hyperinflation and an even more stern economic devastation.BibliographyUniversity of North Carolina. Subprime mortgage crisis. 13 January 2008. 25 April 2014 http//www.stat.unc.edu/faculty/cji/fys/2012/Subprime mortgage crisis.pdf.Abir, Zaber. THE Global Financial Crisis Above Beyond. 6 December 2012. academia.edu. 25 April 2014 http//www.academia.edu/2344211/THE_Global_Financial_Crisis_Above_and_Beyond.Blinder, Alan and sugar Zandi. How the Great Recession Was Bought to an End. 27 July 2010. economy.com. 25 April 2014 https//www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf.Romer, Christina. Treatment and Prevention remainder the Great Recession and Ensuring that It Doesnt Happen Again. City Club of Cleveland. Cleveland whitehouse.gov, 2010. 16.Krishna, Radha. How an Economy Grows Why it Crashes Summary. 14 August 2011. 25 April 2014 http//radhakrishna.typepad.com/rks_musings/2011/08/how-an-economy-grows-why-it-crashes-summary.html.Schiff, Irwin and Peter Schiff. How an Economy Grows and Why it Crashes. Hoboken Wiley, 2010.Too Big to Fail. Dir. Curtis Hanson. Perf. Peter Gould. 2011.Weller, Christian. 10 Reasons Why Public Policies carry through the U.S. Economy. 29 May 2012. 25 April 2014 http//www.americanprogress.org/issues/economy/news/2012/05/29/11593/10-reasons-why-public-policies-rescued-the-u-s-economy/.Williams, Roy. Birmingham investment experts have mixed reactions to report on Great Recession. 20 February 2011. 25 April 2014 http//blog.al.com/businessnews/2011/02/birmingham_investment_experts.html.