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Question:

Discuss about the Economics for Financial Crisis.

 

Answer:

Introduction

The paper mostly focuses on describing the major causes that led to global financial crisis, which urbanized in the United States in the year 2007-2008. This essay, by disparity is an effort to comprehend the major cases of the GFC. Between the year 1996 and 2004, there was noteworthy decline in the long-term rates of interest in the US. This was related with a high as well as increasing current account deficit (Erkens, Hung and Matos 2012).

The US as a result, had to make use of huge sums of money from overseas, mostly from China as well as the other oil producing countries in order to fund the deficit. As a result, the long-term rates of interest were lowered due to huge inflow of capital and it was re-loaned by US financial establishments to homebuyers as well as economic investors (Treeck 2014).

Body

Research Question

  1. Will the US financial crisis lead to end of the US?
  2. How does the price of gold influence the health of an economy?

Literature Review

As opined by Thornton et al. (2015), the large investment banks of the US increased their asset-to-equity ratios from 23 in the year 2004 to 30 by the year 2007. In other words, for each one dollar of justice or capital the banks had twenty-three to thirty dollars in resources financed by lending. Due to the large increase in the price of gold that broke its record for the highest rise in a one-day period, Morgan Stanley and one of the last two US asset banks left standing. Morgan Stanley and Bear Stearns had attained asset-to-equity ratios of thirty-three to one. The commercial banks were also hazardously leveraged however; it was not apparent as they kept a huge amount of their proceeds, off their balance sheets.

At that same time, lending became costless as mortgages as well as commercial loans were being bundled up and sold on to other shareholders. As a result, Goldman Sachs and the Morgan Stanley are the only gigantic left standing. According to the Marxist economists, the major cause that led to stagflation in the US economy was a noteworthy fall in the overall rate of profit. The rate of profit in the US declined by almost 50 percent from around 12 percent (Yamamoto 2014).

The major fundamental causes of the US financial crisis were the broad as well as increasing inequalities of income and prosperity between households in the US society. Industrial capitalism was supported by only 42 percent of the total population and the number was mostly higher among the group of older individuals. Internationally, free market capitalism is coming under fire as countries across Europe questions the merits of the US (Kilian and Hicks 2013).

The US financial crisis, lowered business expenditure as well as employment and economic growth. The price of gold mostly reveals the true state of US financial health. If the price of gold increases, it indicates that the economy is not healthy. Investors mostly purchase gold as it acts as a security against both economic crisis as well as inflation. However, on the other hand the low price of gold indicates that the economy is healthy. The prices of gold are mostly influenced by the laws of both demand and supply  (Karanikolos et al. 2013).

 

Quantitative Approach

According to the data from the World Bank Group, the US financial crisis mostly increased due to increase in lending to the crisis-hit developing countries. The overall lending is likely to increase from US$13.5 billion to more than US$35 billion. Since the year 2009, programs related to loan modification have helped thousands of borrowers to remain in their homes.

Year

Inflation

Gold Price

1977

560

300

1987

450

500

1997

500

430

2007

800

520

2017

1600

1500

Between the years, 1979-2007, real output per hour raised by 1.91 percent while the real average hourly earnings of non-supervisory employees declined by 0.04 percent. In the year 2008, the price of gold increased by 2.6 percent however; the PPI for gold decreased by 12.8 percent as the US was delayed in the monetary as well as fiscal crisis of the Great Recession. The unexpected moves by the US Federal Reserve to instill liquidity into the economy helped subordinate the value of the dollar. The prices of gold jumped by 50.6 percent during the year 2011. This was mostly due to assumption surrounding an irregular recovery as well instability in the US financial market. The increase in the price of gold slowed down during the year 2012. In the year 2012, there was a 5.4 percent increase that led to smallest annual profit. During the same year, the Producer Price Index (PPI) for completed goods advanced 1.3 percent. The downward shift of prices for intermediate energy commodities led to deceleration in prices for transitional goods (Domhoff 2013).

The types of incidents that are associated with the US financial crisis include isolated incidents or just economic noise. The indents are mostly related to the incidence of a financial crisis. The US financial crisis, led to worldwide depression that also led to lack of global coordination. This is mostly due to the fact that most governments as well as economic institution that turned inwards (Peters et al. 2012).

Recommendation

It is highly recommended that there should be a better coordination between agencies as well as stronger collection of data and augmented regulation on insurance firms and non-bank financial services. The Federal Reserve also requires doing rulemaking that will help to lower the financial crisis. The price of gold should also be lowered so that the US capitalism does not get shattered.  

Conclusion

It can be concluded that the US borrowed huge sums of money from overseas, mostly from China as well as the other oil producing countries in order to fund the deficit. It can be also be concluded that regulatory backbones matter as far as financial crisis is concerned. Morgan Stanley and Bear Stearns had attained asset-to-equity ratios of thirty-three to one. It has been found that chief cause that led to stagflation in the US economy was a noteworthy fall in the overall rate of profit.

 

References

Domhoff, G.W., 2013. Finding meaning in dreams: A quantitative approach. Springer Science & Business Media.

Erkens, D.H., Hung, M. and Matos, P., 2012. Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of Corporate Finance, 18(2), pp.389-411.

Karanikolos, M., Mladovsky, P., Cylus, J., Thomson, S., Basu, S., Stuckler, D., Mackenbach, J.P. and McKee, M., 2013. Financial crisis, austerity, and health in Europe. The Lancet, 381(9874), pp.1323-1331.

Kilian, L. and Hicks, B., 2013. Did unexpectedly strong economic growth cause the oil price shock of 2003–2008?. Journal of Forecasting, 32(5), pp.385-394.

Stowell, D., 2012. Investment banks, hedge funds, and private equity. Academic Press.

Thornton, J., Glasgow, S.M., Hamza, H.R. and Ismael, I.M., 2015. Bear Stearns: A Financial Analysis of the First Domino To Fall.

Treeck, T., 2014. Did inequality cause the US financial crisis?. Journal of Economic Surveys, 28(3), pp.421-448.

Peters, G.P., Marland, G., Le Quéré, C., Boden, T., Canadell, J.G. and Raupach, M.R., 2012. Rapid growth in CO2 emissions after the 2008-2009 global financial crisis. Nature Climate Change, 2(1), pp.2-4.

Yamamoto, S., 2014. Transmission of US financial and trade shocks to Asian economies: Implications for spillover of the 2007–2009 US financial crisis. The North American Journal of Economics and Finance, 27, pp.88-103.

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