The Extent to Which the US Has Overcome the Financial Crisis That Emerged in 2007

In the fall of the year 2008, the United States experienced hurdles to a level that had never been witnessed since the Great Depression. This quagmire was as a result of numerous factors such as a housing boom that could not be maintained and which was partly fuelled by the easily available mortgages (Bernanke). The crisis was also caused by the financial institutions embracing too much risk and the quick growth of the US financial system that had regulations set up for another era. Forces escalated over numerous years up to the point where it reached its peak in September 2008. Within a few weeks, a majority of the US biggest financial institutions failed or had to merge so as to prevent insolvency. The capital markets which are crucial for enabling businesses and families to meet their day to day financing needs were crumbling and consequently minimizing credit availability for automobiles, students, and even small businesses. Investors, market participants, and investors were quickly losing trust in Americas financial systems stability. The reality hit the federal government, and thus it moved with speed to stem the panic. This essay seeks to find out to what extent the US has dealt with the financial crisis.

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The first batch of actions which included money market funds, bank account broad-based guarantees, and Federal Reserve liquidity was not satisfactory. The Bush administration came to the realization that more tools were required to address a quickly deteriorating situation. Therefore, a law was proposed that created the Troubled Asset Relief Program (TARP). This measure was passed by Congress with support from both parties and marked into law by President Bush on the third day of October 2008(Reyes). The Bush Administration executed a portion of the projects under TARP. The Obama regime proceeded with these and included others utilizing its power under TARP to keep credit streaming to buyers and organizations, aid struggling property owners keep away from dispossession and avert the crumble of the American car industry which alone is evaluated to have spared one million occupations.

However, ending the crisis would not be sufficient. The underlying causes of the crisis had to be addressed. This could only be achieved by modernizing the existing regulatory framework together with putting strong consumer financial protections in place. To understand this, there is need to analyze the root causes of the crisis which emanated from financial practices way before the year 2007.

The Decline In The Profit Rates

From the year 1950, the profit rates decreased by a substantial percentage in what appeared to be a global trend in that period and which affected all capitalist nations. The Marxist theory explains the rate of profit decline as the root cause of high inflation and high unemployment rates and consequently lower stipends as experienced in the previous decades. In the period after the war, various state governments in the 1970s tried to minimize the issues of unemployment by putting to effect expansionary monetary and fiscal policies which meant the government spent more; there were lower taxes and even lower interest rates. Be that as it may, these strategies primarily brought about higher inflation rates as industrialist firms reacted to the administration's demand stimulation by quickly increasing prices with the aim of restoring the rate of gains rather than by increasing yield and employment. In the 1980s capitalist rebelled against the escalated inflation rates and generally constrained governments to embrace prohibitive strategies particularly tight financial policy. The outcome was minimal inflation and higher employment rates. These truths are a demonstration of how government policies have had an influence on the particular mix of inflation and unemployment.

Strategies to Restore the Profit Rates

Capitalists responded to the decline by trying to restore profit rates by a number of ways. As mentioned earlier there is the strategy of inflation which involves increasing prices and lowering wages so that all benefits of escalating productivity go to increase the profit rates. Another common strategy was to reduce retirement pension and health insurance benefits. Employees had to pay more elevated premiums for medical coverage and many laborers who presumed that they would have pleasant retirement but were in for a reality check: having to labour until agreeable age and leaving fewer occupations for young workers (Kliman).

Another regular strategy to build the rate of profit was to make specialists work faster and harder on the job, such a speed up at work expands the value delivered by laborers and in this manner increases benefit and the rate of profit. The high unemployment rates in the period contributed to the speed up as it compelled workers to contend with each other for the limited occupations. A regular business strategy was by cutting back whereby a percentage of workers are fired then the remaining workforce carries out the responsibilities of the laid-off group. This technique further helps speed up as workers toil harder so as not to be among the ones to get fired.

A more recent procedure was to make use of bankruptcy as an approach to cut wages and benefits definitely. Companies proclaimed chapter 11 bankruptcy which permits them to go on operating, renegotiate their obligations and particularly announce their union contracts as invalid and void. This procedure was spearheaded by the steel business and spread to the airline business later. Half of the aircraft organizations in the United States are presently in the chapter 11 bankruptcy and are making exceptionally steep cuts in benefits and wages.

These strategies used in a bid to increase rates of profit in previous years have generally caused hardships for numerous workers as they suffer stress, exhaustion, and low living standards thus accumulation of wealth by capitalists led to increase in their misery. However, there was a large and almost finished recovery of the profit rate in the US which came to be at the expense of the labourers.

The Search for New Borrowers

The rate of profit improvement did not result in a great increase of investment in business, neither did it lead to an increase in employment rates. Executives and owners chose to use their high profits in different ways other than expansion of their businesses. The executive paid Stockowners high dividend, and they purchased back their company shares which increased stock prices and owner compensation. Thirdly, they loaned out the money. Workers did not benefit with more jobs or higher wage; rather capitalists used the huge profits on luxurious undertakings such as jets, expensive homes, and expensive cars.

A further vital result of the escalated profits and the continued shortcoming of business investments was that capitalists had heaps of cash to loan. However, non-monetary enterprises did not have quite the need to acquire loans. In this manner, financial capitalists went hunting down new borrowers. In the meantime, laborers were strapped with unchanging wages and were very energetic to obtain cash and purchase a house or a car and some of the time even fundamental necessities. Therefore financial corporations progressively focused on laborers as their borrower clients in the course of the last decade, especially for home loans. The rate of bank loaning to family units expanded from thirty percent in 1970 to fifty percent in 2006. The aggregate estimation of home loans tripled between 1998 and 2007. Whats more, the proportion of family unit obligation to discretionary cash flow expanded from sixty percent in 1970 to 100 percent in 2000 and 140 percent in 2007. This was a phenomenal increment of family unit obligation, extraordinary in the US history.

However, financial capitalists finally came up short of creditworthy workers who fitted the bill of prime home loans. They still owned heaps of cash to loan out; therefore they opted to venture into subprime contracts for less creditworthy workers who received fewer wages. These subprime contracts needed next to zero initial installments and practically no documentation of the borrowers salary. It appeared that this strategy by financial capitalists of loaning low salary workers was exceptionally unsafe and not beneficial. There was a big likelihood that the low-wage workers would at some point or another default on payments, and the industrialists would lose cash. However, subtle elements of this system were supposed to take care of that worry.

To begin with, the borrowers were awarded low home loan rates that they could most likely manage the cost of for the initial few years. After the years lapsed, the rates would be revised upwards. The value of their houses would have sufficiently increased so that a fresh home loan could be taken out and the old home loan paid off. This procedure only functioned just for the length of time home values were increasing. When the home values stopped escalating in 2006, the methodology did not work anymore, and the old homes could no longer be renegotiated. The borrowers were screwed over thanks to higher reset contract rates that they could not bear and the rate of default begun to increase.

The Structure of Home Mortgage Markets

The setup of the US home loan market in past decades also added to the extension of loans to low- pay laborers. Commercial banks used to come up with home loans and own them for their whole thirty-year term. Therefore they were incentivized financially to try and ensure that borrowers were worth of the credit and would manage to keep up with their home loan payments. However starting in the 1980s, commercial banks no longer clutched these hoe loan as their own; rather they sold the loans to investment banks which in their part brought together a large number of home loans as mortgaged-based securities. They then sold the home loan based securities to multifaceted investments, benefit reserves, foreign investors among others (Floyd et al.).

A critical aftereffect of the securitization of home loans was that the origins of mortgages which were mortgage companies and commercial banks no longer had a monetary incentive to ensure that purchasers of homes were trustworthy and likely to keep up with their home loan installments. In fact, these originators have unreasonable money related motivations to overlook possible issues with creditworthiness both on the grounds that they will soon offer the home loan to different investors. Also, due to the fact that they gain their salaries from origination fees and not from the month to month contract payments. Therefore, the more the home loans originated, the more the wage for originators regardless of the reliability of the borrowers (Reeves). Investment banks have the same perverse n their work as middlemen or agents in the procedure of securitization. They principally buy contracts from originators, offer them to the final investors and churn profits from broker fees or processing fees. Therefore, the more home loan based securities sold, the more costs and profits for investment banks regardless of whether a borrower will pull making the payments all through.

It was the task of bond rating agencies to determine the risks in the home loan based securities and to award ratings to them just like they rate corporate bonds. However, there was an incentive on duty with the agencies too. They are privately owned profit-making entities and are in a tussle with others for the rating tasks of investment banks. In those decades the rating business was lucrative along with the continuing securitization of mortgages. For that reason, there was a huge likelihood of the rating agencies giving high AAA ratings even to secur...