Thesis on "Causes and Outcomes of the Current Economic Downturn"

Thesis 5 pages (1753 words) Sources: 5 Style: MLA

[EXCERPT] . . . .

Economic Downturn

Causes and Outcomes of the Current Economic Downturn

America has been in recession since the end of 2007. However, it wasn't until the later half of 2008 that the economic downturn hit the country the hardest. Now, the United States is facing economic uncertainty on an even greater scale. The cause of this economic downturn is still being debated, but it is likely that the sub-prime mortgage arm of the housing credit market had a significant impact on the events that unfolded. The United States government too played a role in encouraging the financial industry to accept every riskier loans. Whatever the causes though, the outcomes are significant and center on an effort to restart the failing economy. Economic initiatives such as the TARP and the economic stimulus packages for energy, infrastructure, science and technology, education, and the automotive industry are just being implemented across the country. Only time will tell if they will be effective. Governments abroad, are issuing economic stimulus packages to try to jumpstart the country's economic system back to life also. These countries include: the 27 state members of the European Union, China, India, and Japan. The mirroring of the United States stimulus packages show that the economic downturn in the United States has been seen similarly in countries around the globe.

The Causes of the Current Economic Downturn:

The specific causes of the current economic downturn being experienced in America and rippling outward around the globe may be in debate. However, as Schramm and Litan noted, the housing credit markets certainly are at the root of the problems being faced today. Specifically, securities backed by sub-prime mortgages were certainly a major factor in the downturn. As these markets crumbled due to poorly managed risk, financial institutions that had previously been built upon trust, vanished forever. For this reason, Schramm and Litan surmise that the blame for the challenges being faced in today's economy lie in the hands of the parties who created these instruments, as well as those who misjudged them and thought they were an acceptable risk. However, some of the cause of today's problems also are the result of an overzealous government.

The American government were determined to increase home ownership in the country. Despite the fact that the United States had the highest home ownership rate in the developed world, at 64%, politicians wanted to see figures of 69% or higher. "It was government that pushed financial institution to keep lending to ever riskier borrowers in order to achieve that goal" (Schramm & Litan 4). These factors which led to an over-extension of credit not seen since just prior to the Great Depression, were certainly significant factors, if not primary factors, in causing the economic downturn that's being experienced today.

The Outcomes of the Current Economic Downturn:

There are several outcomes of the current economic downturn. Most of these outcomes have manifested themselves in ways to hopefully shorten the length of this troubling economic trend. One such outcome, according to Schramm and Litan, is the Federal Reserve and their lending to new 'customers'. These customers include: insurance companies, investment banks, and the commercial paper market. In addition, there was the federal rescue of Fannie Mae and Freddie Mac.

On October 14th, 2008, the American government announced the Troubled Asset Relief Program (TARP). This initiative, also dubbed "bailout" by the popular media, was developed to strengthen market stability, in response to the economic downturn, as well as improve financial institution strength, while enhancing market liquidity. With TARP, the United States Treasury "will purchase up to $250 billion of senior preferred shares on standardized terms" ("Troubled Asset"). The purchase of these assets has been under serious scrutiny. In fact, many banks that originally accepted funds under the TARP program have returned the funds, including: Iberiabank, Centra Financial Holdings, Old National Bancorp, Signature Bank, and Bank of Marin Bancorp (McGreer & Barba; Barba; Fajt).

The economic stimulus package is another significant outcome of the current economic downturn, in America. The stimulus package was created to stimulate important industry sectors in America, through the infusion of cash. Areas targeted to received stimulus funding include: energy -- including a transformation of the U.S. energy grid to make it more efficient, science and technology -- including improving broadband access, infrastructure -- such as highways and flood control, education -- including public schools and Pell Grants, and health care -- with a large portion going to Medicaid (Teslik). Economic stimulus was also developed for the automotive industry, according to Crain, in order to save this vital American industry, as well as a large number of American jobs.

Interestingly, the outcomes of the economic downturn in America is being seen in other countries as well. Whether America's economic crisis is the cause of these other countries economic challenges, or whether it's simply a unfortunate coincidence, the effects are just the same. Governments around the world are mirroring the efforts of American legislature and planning to spend billions of dollars in efforts to boost their own economies. Like the United States stimulus packages, these foreign plans saturate some industries, while other industries starve (Marino). These include: the European Union, China, India, and Japan.

The 27 member states of the European Union passed a stimulus package worth €130 billion, at the end of 2008. Although the European Union hasn't specified exactly where the stimulus money will go, there are rumors that it will be spent in industries similar to those who received stimulus money in the United States. French automakers Renault and Peugeot will see funneling of French money for capital. Auto sectors in Italy, according to Marino, are being offered incentives as well as other infrastructure initiatives, worth approximately €40 billion. Spain has pushed through funding for public works programs, in 2008. €18 billion was earmarked for Germany to use in the repair and construction of railway networks and roadways, as well as funds for universities and schools and enhanced Internet access.

Even China has bought into the value of an economic stimulus package. Much of a four trillion yuan economic package will be used on infrastructure, environmental initiatives, and a variety of social welfare programs. These are valued at approximately $586 billion. Infrastructure in the form of railways, roads, airports, and power grids, between provinces and cities is reminiscent of a post- World War II America, notes Marino. Marino further contends that a Chinese stimulus package that is so aggressive shows the country's heightened sensitivity to the threat of financial crises.

India too has pieced together an economic stimulus package. In this country's package, farmers will be offered an $11 billion debt waiver. In addition, $6 billion will be given to support regional governments. This is called a multi-pronged approach by Indian Prime Minister Mamohan Singh. However, Marino surmises that India will not pursue a more aggressive stimulus package as they country is already heavily burdened by debt and high inflation. A more aggressive stimulus program could hurt India's national credit rating.

As mentioned, Japan also has an economic stimulus program in the works. Although a fraction of the United States package, at $300 billion, the Japanese program should help a select few industries. Two industries that will not see a large portion of this government stimulus are the auto and electronics industries. With international demand for Japanese product significantly reduced, and an uncertain political environment with the possible unseating of Prime Minister Taro Aso, Japan may need the economic stimulus just as much as the United States (Marino).

Conclusion:

The economic downturn the United States is experiencing is one that has seen several industries go into a tail spin. From the financial industry to the auto industry to all of those in between, the economic challenges currently being faced have negatively affected everyone. The cause of the current state the country is in? Although no one can say with absolute certainty, it is prudent to say that the housing credit market holds at least a portion of the blame, if not a large portion of the blame. Specifically sub-primer mortgages are significantly at fault for the collapse of the industry. However, the American government too must take some blame. Their wanting a higher rate of home ownership meant that financial institutions were encouraged to accept increasingly risky loans. The outcomes are numerous, but most revolve around the government's efforts to stem the bleeding for the arteries of the American economy.

The Federal Reserve has expanded their customer list. The TARP initiative has been received with both accolades and skepticism, with some banks returning the money they initially accepted from the government. The American government stimulus packages too were developed to help troubled industries -- such as automakers -- as well as state funds to be used in a variety of programs including education ("States Receiving"). However, America isn't the only country feeling the outcomes of the current economic downturn. In today's globalized world it should not be surprising that other countries are looking to mirror… READ MORE

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