what are various aspects of the economic crisis?

Question by [the original] Ashley: what are various aspects of the economic crisis?

I’m working on a 3 page paper for my Econ class, and have lots of freedom in what direction to take. I know there are many aspects of the current economic crisis, but I’m not sure what angle to take. I’m leaning toward discussing how the stock market works and how the economic crisis is effecting it. My second choice is discussing the credit crisis and how its effecting the housing market.

just looking for input, or any other interesting angles to research that I may not have thought of. Thanks in advance!

Best answer:

Answer by TK
You might begin with the mortgage foreclosure crisis that has had a tremendously negative effect on home prices and which has produced record losses for the many investors who own asset-backed securities, which were intended to produce high yields from loans secured by mortgages on what was considered a nearly risk-free asset class, namely the American residential housing sector.

You could then examine how the absence of a market for those asset-backed securities created the liquidity crisis that effectively caused the demise of Bear Stearns. Merrill Lynch barely survived, as you may recall, by selling itself to Bank of America. Lehman Brothers, who was in negotiations to sell itself to a foreign bank, as I recall, but did not consummate the deal, was allowed to fail, and that was a message sent by the Treasury Department and the Fed intended about moral hazard to the other financial institutions and their shareholders. But instead of having the desired effect, whatever that might have been given the unrealistic prospects for the realization of any desired effects, the Fed and Treasury Department instead precipitated a credit crisis.

The credit crisis has been abating slowly in terms of the interest rates charged on loans, but there are far fewer loans being made now than before the credit crisis because damaged balance sheets have made for far fewer credit-worthy borrowers. This has exacerbated an economic contraction that many thought would be confined to the housing sector. As the economy continues to contract across more sectors, companies cut costs to make up for lost revenues and unemployment rises, which further contributes to the economic contraction as total consumer demand for goods and services decreases, which causes companies to cut more costs until their choice is either going out of business or seeking protection from creditors through bankruptcy proceedings.

Strategically important publicly traded companies like Goldman Sachs, whose earnings are depressed, won’t go out of business because of the injections of capital it received from the Treasury Department. For companies like GM, whose earnings are also depressed because its products cannot be sold unless consumers have easy access to affordable automobile loans, and whose capital has not been replenished through a federal government loan or stock acquisition program, there is a real possibility that they will be forced to seek Chapter 11 bankruptcy protection, and that this action will beget hundreds more Chapter 7 or 11 bankruptcy proceedings that will further speed the deterioration of the economy.

So that’s a different angle of how and why things have played out as they have. Failing to address the mortgage foreclosure crisis forcefully let the genie out of the bottle. As a result, we have had to address a financial economy crisis, are still hemmed in economically by the credit crisis, are beginning to see the outline of an unemployemt crisis, and are arguing angrily with one another about the merits of extending a financial aid package to the Big 3 auto makers, all three of whom will fail without it since no private capital will be forthcoming.

It could have all been avoided if forceful action had been taken when mortgage foreclsoures began spiraling out of control. But in America it almost always takes a crisis, and even then it is sometimes impossible to find common ground and the political will to do what is right to protect the broader economy from disaster notwithstanding the considerable merit that could be found in the arguments of the do nothing brigade if this wasn’t a global economic crisis of unprecedented magnitude.

Good luck with your economics paper.

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