The and investors to invest in the housing

The global financial crisis of
2008 is considered by many people to be the worst financial crisis since the
great depression happened in the 1930s. The beginning of the global financial
crisis started in 2007 with the housing subprime mortgage market in the United
States of America, when the investment bank Lehman brothers filed bankruptcy in
2008 the crisis was developed into a global financial crisis.

The global financial crisis
hit countries all over the world and with the collapse of the banking systems
took a heavy toll on the world economy. Due to this the U.S was one of the
countries where government had to bail out its banks that were facing bankruptcy
because of the high losses that had affect the country as a result of the

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The global financial crisis in
2008 was similar to any other major financial crisis that occurred as a result
of many systemic failures that eventually led to the collapse of the economy. There
are many factors that have root to the cause of the crisis, the housing market
bubble burst in 2007 is one of the major factor believed to have led to the
financial crisis. The U.S housing market was booming and to most people believe
that it is the safest investment of all investment and this in turn led many
banks and investors to invest in the housing market resulting the eventual
downfall of those investments which spelled doom to the economy. (Khoo, 2008)

This article discusses the
underlying causes of the global financial crisis in the United States, the
impact on the economy and society cause by the global financial crisis and also
the economic policies implemented by the United States government in respond to
the financial crisis.






Cause of Financial Meltdown

Many economists believe that
the collapse of the United States housing market is the major trigger of the
2008 global financial crisis.  In the
past mortgage lenders had very strict and required critical evaluations to
ensure that the money were lend to the right individuals with appropriate
income level. However due to most investors believed that the housing market in
the U.S. would ever crash and housing mortgages were considered one of the best
source to generate profits and resulting on many mortgage policies from
mortgage lenders became lenient. With such lenient mortgage policies more and
more Americans are able to afford housing even the average Americans household
income didn’t increase much throughout the years, with the demand of housing
out-weighting the supply, U.S. housing prices in the country increase at a
compound annual growth rate of 8%  (Cate, 2009).   

Source from:  S/Case-Shiller National Home Price
Indices; U.S Census Bureau (Anon., 2017)

Many of these high risk
mortgages were given to Americans, many without appropriate income and bad
credit, this in fact fuelled the housing growth from the later 1990s to the
mid-2000s driving the U.S economy, creating many jobs in the real estate sector.
Despite driving the U.S economy, a household debt of 2 trillion dollars via
loans and refinancing was created and the debt was doubled from 50% of GDP in
the 1980s to a 100% by the mid-200s. The last time household debt was in a 100%
of GDP was during the start of the Great Depression in 1929. (Cate, 2009)

In the year 2006 Americans
starting to default on their mortgages when there was news about the housing
bubble was starting to burst. This news created a ripple effect throughout the
financial market as many more Americans hastily and without careful consideration
defaulted their mortgages, more housing came onto the market and housing prices
fall (Cate, 2009).

In the past risky mortgages
loan where extremely lucrative, when prices began to fall and loan default rate
began to increase, many of the big Wall Street companies stopped taking in
these riskier mortgages. This in turn leaded to many of the small banks and
mortgage companies left burden with many loans that they had borrowed to
investing in housing in the first place and ending up could not sell. Resulting
many banks faced bankruptcy as they owed more money than their possessing
assets, credit markets started to freeze up and many individuals and businesses
were unable to get their loans. Suddenly in the next several months a series of
banks started to default their loans and going bankrupted which ending up
triggering the downward spiral in the world economy in 2008.



During the time when the world
economy went spiral downwards, many Americans mostly invest their saving in the
housing sector or in stock market and the fall of these markets negatively
impact their wealth and assets. A (Federal Reserve
System, 2016)
survey shows that the average net value of U.S citizens was decreased from
$126,300 to $77,400 from 2007 to 2010. The housing market prices fall from
$250,000 in 2007 to $175,000 in 2010, about 75 percent of the decline was caused
by the fall of home prices (Awan, 2015).




on GDP

The United States GDP growth
rate had fallen at an approximately 6.4% annual rate at the fourth quarter of
2007 to fourth quarter of 2009 according to (Trading Economics, 2009) comparing to the
period in a year ago.

Source from: Trading
Economics, United Stated GDP Growth Rate (Trading Economics, 2009)

Many of the overseas producers
depend on export to the United States for their country’s economy. Once the U.S
is affected by the financial crisis, many overseas producers will be seriously
affected as many of the American consumers will cut back spending on items like
clothing or housing appliances.  



In addition, many of the
labour, stocks and housing market where the American household were dramatic
affected. According to The (The National
Bureau of Economic Research, 2010), many U.S household
average lost nearly $5,800 in income due to the reduced on economic growth and
it cost average of $2,050 the U.S federal government interventions for each
U.S. household to reduce the burden of the financial crisis. The loss of income
of propel brought many Americans into the poverty trap and as much as 46 million
citizens went to the U.S government to for food stamps which cost the U.S.
treasury more than $75 billion a year and most of those went into the food
stamp programme were children whose parents were unable to provide them with
proper daily meals. A survey was done by (The Pew
Charitable Trusts, 2010), nearly three quarters of Americans
cited that household spending had reduced due to a reduction of household
income, change of employment status and decreased in the value in their housing
and stock holdings.



The decreased of income and
net value of assets caused many society unrest among Americans in the U.S, many
large group of citizens staged protest throughout the country. These staged
protest gathered in front of the White house and many other government building
to demand the end of capitalism to be replace by an economic system which is
able to provide equal distribution of income. Many of Americans blamed the
capitalist system for income inequality and the growing of poverty and many
argued that the economy of the U.S had failed due to highly corruption of many
politicians and during election campaign they were promised job security,
reasonable wages, food, and housing and their retirement benefits.

In the U.S economy majority of
the U.S companies shifted business overseas in search of cheaper labours this
resulting an approximately 25 million Americans unable to search for full time
jobs. With most of the job wages were constantly falling resulting one in every
six U.S citizens was in the state of poverty, affected the most were the middle
working class citizens. For many older retirement citizens more than half of
them did not receive their retirement benefits and pensions, many were unable
to afford the high cost of medical with price of health care constantly
increase and society budget were being reduced. Many of the students were
unable to afford to pay up loans causing many to default higher education (Awan, 2015).



to the Crisis

The United States government
took a quick and decisive action to implement policies which were necessary to
prevent and support the U.S economy from a second financial Great Depression. The
U.S congress signed couple of policies between 2008 and 2010 to help support to
the end of 2008 Financial Crisis and the subsequent economic recovery.


Easing – Monetary Policy

During the peak of the
financial crisis in 2008, the U.S government implemented a monetary policy
which its central bank purchased the securities which is a fungible or
negotiable financial instrument that has of monetary value. Quantitative Easing
programme works by simultaneously injecting liquidity and pulling down interest
rates. This, in turn, stimulates borrowing and spending activity which in turn
promotes economic growth, it also provide banks with money to help promote lending
and liquidity by increasing the money supply in the market (Investopedia,

The U.S government launched
three rounds of Quantitative Easing process, the first round of Quantitative
Easing started in November 2008 by proposed to purchase $100 billion of agency
debt and $500 billion of mortgage backed securities. It was extended in March
2009 with another $850 billion of mortgage-backed and debts, and in late-2011
the U.S government bought $300 billion worth of longer-dated treasuries.

In the second round involved a
$600 billion worth of longer-dated treasuries were purchased in mid-2011 and in
September 2011 the U.S government initiated a new maturity extension program
named Operation Twist, with the aim of increasing the average maturity of the
bank’s treasury portfolio. $400 billion worth of treasuries with maturities
between 72 and 360 months, and sold off an equal amount of treasuries that had
maturities in the 3-36 month range.

In September 2012, the U.S
government launch the third round, where the central bank would spend close to
$40 billion per month in mortgage-backed securities. With this together with
Operation Twist, was supposed to account for $85 billion worth of long-term
bond purchases. In December 2013, the U.S government indicated a taper, where
the $85 billion spent per month would be reduced by $10 billion going forward.
In October 2014, the U.S government indicated an end to the Quantitative Easing
programme (Fobes Trefis
Team, 2017).

According to the economic
factors report by BBC News (Walker, 2014) that Quantitative
Easing has worked for the U.S government. Most studies found that the first
round of Quantitative Easing was most effective with the subsequent rounds
having less effective. Factual evidence suggested that Quantitative Easing
successfully lowered nominal interested rates on many financial instruments e.g
agency debt and corporate bonds, however the successful rates depending on the
type of instrument and maturity. BBC News (Walker, 2014) also suggested that
first round and second round of Quantitative Easing were responsible for increasing
economic activity by 3% and creating close to 2 million jobs in the private
sector in comparison to a world without Quantitative Easing programme. Other
sectors in the business expansion, car and housing sales recovery were also attributed
due to the low interest rate which Quantitative Easing programme had created.

In spite of being a powerful
stimulus, the potential disadvantages of Quantitative Easing that it is a
Monetary Policy that provide very low interest rates. It may end up benefitting
the wealthy in profiting and thereby worsen the already extreme income
inequality and increase the social tensions. It can also lead to high inflation
which consequence of injecting liquidity into the economy (Walker, 2014).


Recovery and Reinvestment Act – Fiscal Policy

The American Recovery and
Reinvestment Act of 2009 of known as ARRA was a fiscal stimulus policy that
provided the support U.S government needed to end the financial crisis. It was
a policy created and signed by then U.S. President Barack Obama in February
2009. The ARRA was set in place in response to the weak economic state the U.S
government. The ARRA was created to stimulate the economy through individual
and corporate tax cuts, provide unemployment benefits, increased domestic
spending, and increased social welfare funding (Investopedia, 2017).

The immediate relieve for many
Americans families were to receive approximately $250 billion of the ARRA funds
in the first two years through tax cuts, tax credits and unemployment benefits.
Each Americans will receive a tax cut of $400 for individuals and $800 for
families, a payment of additional $250 for each recipients of social security, veteran’s
pension and supplemental security income benefits. Better access to child tax
credit for the working poor, expanded earned-income tax credit for the families
with three children and above and college students will also receive a $2,500
college tuition tax credit. For first time home buyers and car buyers, each
will receive $8,000 tax credit and deduction on car sale tax. Unemployed
Americans were entitled to unemployment benefits with extension of another 33
weeks and a suspension of tax of $2,400 through 2009.  In the area of American’s healthcare $24
billion went into subsidiary for 65% of healthcare premiums for up to nine
months for laid off workers and $24 billion in matching funds for two years to
help pay for additional medical needs during the period of crisis (E. Weller , 2012).

Source from: Bureau of
Economic Analysis, National Income and Product Accounts (Anon., 2017)

Many American’s personal
after-tax income dropped in the mid-2008 as most people lost their jobs. After
the implementation of ARRA, many American’s personal incomes starting to increase
in the mid-2009 due to the unemployment benefits, social security payment and
lower personal taxes. Many families with more money in their pockets even
though job were lost but still there was a slight increase on consumer spending
which was critical to economy recovery

ARRA helped created new jobs
by funding many public projects with $46 billion went to transportation
projects, $31 billion to modernisation of government buildings and $6 billion
to water projects (Pollin & Peltier , 2011).

Small businesses also
benefited from the $54 billion business tax deductions, credit and loan
guarantees which included increasing the deduction for machinery and equipment
deduction, cutting capital gains taxes for small business investors who hold
their stock for more than five years and tax credits for small businesses that
hire long-term unemployed veterans or students.

Source from: Bureau of
Economic Analysis, National Income and Product Accounts (Anon., 2017)

As a result of more jobs were
being created due to ARRA implementation, job lost dropped by 82% with an
average of 138,000 jobs lost compared to 780,000 job lost in the first quarter
of 2009 which was a period of highest job losses during the economy crisis (E. Weller , 2012).



The U.S financial crisis began
in December 2007 ended in June 2009 according to (The National Bureau of
Economic Research, 2010), due to decisive and swift action by
the U.S government by implementing the two policies Quantitative Easing and
American Recovery and Reinvestment Act turned an anticipated Global Financial
Crisis into a tough but steady economic recovery. As there are plenty of room
for debate by many economist about the decision to which economic policies the
U.S government should focus on but there is no reason to question that the U.S
government thoughtful economic policies does its trick in bringing back the
economy from a potential prolong financial crisis like the 10930s Great