4th Assignment: The government action and the credit crisis

The credit crisis, those two words have been in our mouth of quite a while, and unfortunately most of the people don’t know everything about it. I must confess I’m a part of those people as I’m not an economist. My essay will not be 100% fair and I’ll try to deal with the issue the best I can.

I chose to talk about the crisis by focusing on the government actions which lead to the crisis, and then explain what has been done during and what can be done in the future.

To understand better why the US government is responsible for the crisis we have to go back to the past and to clarify some points. We need to understand how the real estate market is working. Fear and greed are the two components of this market. Fear from the people who have to borrow money and greed from the people who land the money. The origin of the crisis is when the government has removed the necessary counterbalance of fear from the equation. This phenomenon is known as subprime crisis. Due to an increase in loan incentives, easy credit condition and thanks to easy initial terms facilities to obtain a loan, borrowers didn’t fear to assume difficult mortgages in the belief they would be able to quickly refinance at more favourable terms. That when the problem starts: interest rate became higher and at the end they weren’t able to refinance.

We all know the consequences of the crisis. The first companies touched were the mortgage companies. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. The crisis had its peak in 2008 when several investment groups like Lehman Brother collapsed.

Then the crisis hit Europe, and brought several bank failures.

The governments tried to save some of the companies by doing bailout: but sometimes it wasn’t enough and companies would go bankrupt anyway.

Here comes the issue we’re dealing with, the crisis started by the intervention of the government in the market, so how will the crisis end up? Even if a liberalist approach seems logical, it’s quite obvious that the market can’t regulate itself in situations like these. The government has to repair its own mistakes in the financial crisis. So it must interfere in order to regulate the market and minimize the effects of the crisis. The question is how?

Governments and central banks (US and European) have been injecting money in the credit market. Indeed, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history.

We also saw case of bailouts. But are the bailouts working well? In my opinion government should give money to industries which really needs it. It will avoid bankruptcy and reduce the layoffs.

In think that the effects of the actions of the government will only be seen in a few years and not immediately.