Economic Crisis: Bailout Plan as Solution

Table of Contents

Introduction
Main body
Conclusion
References

Introduction

The financial crisis that is facing our country is the biggest since the great depression. No one expected that the countrys industrial capitalism could end up in huge financial crisis like the one that the country is experiencing right now. This paper is going to tackle how the bailout can act as a solution to current financial crisis and how the economies of the country can secure the future through a bailout plan. It is therefore important for Americans to understand how this crisis started, what the government is doing to fix the mess and lastly what are the possible effects of this crisis.

Main body

The current financial crisis has been traced back to the Clinton administration. The administration pressed for expansion of mortgage loans to be given to the low income earners and the middle class. The Fannie Mae Corporation did give out the loans but it had to loosen its lending requirements. One of the causes of the current financial crisis is the mortgage melt down. It has been documented that the mortgage crisis started over a decade ago. Mortgage brokers enticed by the lure of commissions, talked buyers with poor credit into accepting housing mortgages with little or no down payment and without proper tax documentation and credit checks.(foreclosuredataonline 2008).This therefore set the trend for the mortgage meltdown that is being experienced today. The mortgage loans are supposed be at an adjustable rates. But during this period the interest rates were made to be sub prime. This means that during the first few years of repayment the interest rates are low but increases later. This simply made it impossible for the borrower to repay for the monthly payment shot up to as much as 100%. The heat was felt when eventually two Bear Sterns hedge funds finally went down this year. The effect was quickly felt in the other parts of the world financial markets. This momentarily froze the money market sector that vitally important to the banking and financial operations. Rick wolf a professor of economics at the Massachusetts University views the causes differently It is not a financial crisis. It is a systematic crisis whose first serious indication happened to be finance. He says finance is just but an indication of the crisis. This crisis has its foundation in the manufacturing services. He gives other causes like the social, and political. The crisis has developed from the relation of wages to profits across the economy. There has also been some legislation that has led to the current economic crisis. The 1999 repeal of the Glass Steagall Act, divided both banks and investment institutions. As a result the two kinds of institutions were left to big risks as they competed to create higher profits in the mortgage market. The competition was dangerously stiff but neither the Federal Reserve nor the SEC was regulating the situation. President has admitted quiet frankly that the problem has developing for a long period of time. The hefty influx of money of money into the financial institutions in the US together with small interest rates created an easy way for the American people to get credit. This progress made it easier for the citizens of the country to acquire houses, college tuition, and cars cheaply. In addition business entrepreneurs got money easily to start businesses which also created employment opportunities in the society. This has a huge impact on the countrys economy and it has led to the current problem. For instance, the mess in the housing industry.

Even though the country is in deep economic crisis, the government is taking some steps towards curbing the problem. It has considered by many economists as the worst financial crisis to hit America and the whole globe since the great depression. President George W Bush in his speech to the nation on the crisis admitted to the problem Were in the midst of a serious financial crisis, and the federal government is responding with decisive action he said. (International Herald Tribune, 2008). He confirmed that the government was working with the congress to tackle the main reason for the instability in the US financial markets. The administration is to pump the money that is required into the economy so that banks, investment houses and other financial institutions can prevent the fall down that has been the case with some financial institutions. This he said will enable the institutions to go back to lending the money that is much needed to the American society. Apart from efforts by the government to curb the financial crisis the law makers from both the Republican and the Democrat have come up with a pact that will rescue the US economy. The congress is waiting to pass two crucial bills that will see$ 700billon to stop any further rout in the stock markets. The treasury has also come up with an insurance plan that will that will see the addition of insurance funds. The bills if passed by congress will give the treasury the capacity to attain ownership stakes in the larger companies that sells its assets under the program. The treasury will also be allowed to buy mortgages and mortgage related assets. Rick Wolf has given his own opinion on how the financial crisis can be dealt with he proposes that the business enterprises have to be democratized that is by making the people in the organization to become their own directors.

The economic crisis has several effects. David Dreman Chairman of the Dreman Value Management of Jersey city I wince at the $700 billion bailout. It was a necessary evil but it doesnt make me feel good as an investor. He warns people not to buy speculative stocks. He further insists that people should keep money to buy some stocks that are going to become cheaper and also keep their Bond maturities short. He has pointed out this caution by saying that the inflation that is going to follow because of bailout plan is inevitable. One of the other effects is that the financial crisis has caused panic in the financial institutions especially commercial banks. This panic has resulted into a number of problems; credit for businesses has been blocked, commercial paper market has been shut down and lending of auto loans has been curtailed. These results could further complicate the situation by leading to a harsh and long recession. The economic crisis has led to other effects that have been felt worldwide. The crisis has affected several industries like tourism especially in the African countries. Tourism has been known to generate money into the pockets of so many African citizens especially in the commonwealth countries. This has led to the meeting by the heads of states of most common wealth countries to discuss on the way forward on how to tackle the challenge of the current economic crisis. It is worth noting that African countries depend on the Tourism sector to develop their economy. In Europe the current financial crisis in the USA has affected the economies of Europe. Several countries have been hit by this crisis including Britain, Germany and Russia. In Britain for instance the crisis has extended also into their money lending institutions and the mortgage industry. On the other hand the head of Russian bank hinted out that many of the Russian financial institutions would start experiencing the effects of the economic crisis in the second quarter of the 2008 financial year.

Conclusion

In conclusion the paper has been tackling the current economic crisis in the US and how the bailout plan can be a solution to the current problem. The bailout plan involves the pumping of the money into the US economic sector. This will enable them to lend money to the public. It will also prevent the financial institutions and the mortgage institutions from collapsing.