Homework Economic crisis

I think we should blame everyone! I think that the first ones that we should blame is us, the ordinary people. I say this because, first it was our need to have more material stuff that bring us to borrow lots of money to the banks. Money that the people didn’t had so they would never ever pay back the money to the banks. Then, here the banks are the ones that we should blame. Why? Well, because the banks started to borrow credits and money to people that they knew that will never pay them up. People like inmigrants and people that have a very small quantity of money. Why did the banks did this? I don’t know. I think they did it because they could. Now, in my opinion here is where the governments are to blame. If the governments had come up with laws and regulations to manage better the money this problem would have never happened. Now, for example if the government would have said that instead of borrowing 90 percent of the money of the savers they would save i don’t know maybe 50 percent of the money it would have been less off a problem and no one would be in a reccesion or coming out of an economic crisis. I think that we should change our points of views and governments and banks work together to manage the money better.

Blog Homework: Economic Crisis

The crisis has been a very popular problem since it began; it is a little obvious because it affected a lot of countries around the world. The title of the blog I read is “The Economic Crisis: Who is to blame?”, and by reading this I think that there not a specific culprit, but thousands. I think we should blame the irresponsible conscience or attitude of all the borrowers who didn’t make their payments on time, because of this fact the flow of money became slower. Things like this made the savers to lose their confidence and wanting to retrieve their money and cause and even worst situation for some banks, which at the end collapsed in few days. Also we could blame the banks for giving so many loans without having control over them.

I don’t like the idea of being looking for someone to blame, instead of that we should be trying to look for solutions for this global problem, and we can’t depend on the government because we are not sure if the government would be able to find the solution. There are a lot of countries suffering because of this crisis, and we must help them. I understand that if we find the real culprit, we could prevent any other similar situation like the one we are passing through today. But anyway, it is more important to find solutions instead of looking for someone to blame. I still don’t understand why this happened, I mean, didn’t we learned something from the last great crisis? Well, during times of crises the societies must be together and help each other because union is strength, and maybe then we should be able to solve any problem.

The Economic Crisis: Who is to blame?

It is true that we are always trying to find someone responsible for each action made in this world but most of the time people turn around because they do not want to be the ones to blame for the action committed.

I find this crisis to be much more than that. This problem if not only because of one person or a small collection of people, it a whole cycle caused by several groups in diverse places. This starts with the banks and the people who borrow money from those banks. Not all the people who borrow money from the banks are people that will pay back, there are also high risk people which the bank approves for them to borrow money, also giving them a high interest in case they do not pay back. This affects all the people who do pay and the people who are saving their money in that bank, because it’s not the banks money that they are lending it is the people’s money, that is how banks lose money and the crisis is created.

On another hand government are also included in this cycle, because they are in charge of commerce, economic trading and our well-being. I think that it is right that they step in once in a while when it is necessary like know, to be able to save banks they need to inject money in the system, but the problem might later occur when the government themselves create a new crisis and then will have no were to turn.

Maybe were are all to blame, but then we must all help recover our economy, a way to start recession of the crisis could be to lower taxes and create jobs, that way people will have more money to pay back the banks and buy more things which will the economic growth.

HOMEWORK - The Economic Crisis: Who is to blame?

As the world economy verges towards some kind of recovery, albeit a fragile one, analysts continue to look back trying to understand why experts didn’t see the signs of crisis in the first place, there remains a lot of questions about exactly what caused the crisis, and more specifically, who is to blame.

We appear to live in a world where blame is thrown around like a tennis ball – a tennis ball that everybody seems to have an allergy to. But the blame has to land somewhere, or at least, there has to be some notion of collective responsibility, and action to ensure that we as a society are prepared for economic crises in the future.

We must stop short of saying however that collective action is the ultimate solution to the crisis. Coordination between countries already existed somewhat beforehand – the problem is however, that some countries were lax on their rules, whilst others changed them altogether, perhaps somewhat provoking the kind of risk-taking conditions that could lead to a crisis, then what would have otherwise occurred in a more risk-averse environment.

But as the world digests what has occurred (and is still going on) since 2007, blame is an unavoidable part of the menu. As the crisis evolves from one that initially started out through record levels of borrowing in the US, inside the rather large bubble of the housing market, with loans characterised as high risk, to a crisis that resulted in massive Keynesian government intervention all over the world, the question is “What next?”

A simple yet accurate way of portraying the crisis to come is “How are governments going to finance their extensive borrowing?” Although ultimately this question is focused towards the United States and United Kingdom, the perilous result of extensive borrowing is all too evident in Greece at the moment of writing. The European Union finally came forward on Thursday 25th March 2010 to offer a package designed to “save” Greece, but the underlining lack of agreement in the Union, as well as questions about its ability to be able to do what it says it is going to do, is highlighted clearly by the fact that the International Monetary Fund is involved. There is no clearer indication that the Eurozone appears unable to manage its own problems – but of course, the whole issue is linked to whether Greece should have entered the Eurozone in the first place.

What is pertinent at this stage is to take stock of just where we’ve been, where we are, and where we’re going. We may examine these stages through the context of the eternal background question of “Who is to blame?”

One may be tempted to blame those who borrowed money in the first place. If ordinary people had been responsible in their personal finances, they might not have found themselves in the dangerous situation of possible default, and the snowball effect of debt that this brings – in many cases, leading to personal bankruptcy. What has happened to us a society? Didn’t we learn from our grandparents and older generations that you only spent what you had? Didn’t we learn that you never “lived beyond your means?” What happened to make us disregard one of the basic laws of personal economics? Did we just become greedy? Did we just want to live now, and not worry about debt because it’s gone when we’re gone? How do we explain individuals’ behaviour?

Sub-prime borrowers would have been classified as such for various reasons. Perhaps they had a bad credit history, or perhaps the hadn’t built sufficient economic connections to be offered a competitive interest rate (as might have been the case for immigrants arriving in the United States) One way or the other, house prices are but a reflection of the overall economic environment, and when there is economic growth, prices rise. This in turn fuels demand for borrowing, with the major motivation for buying to get on the property ladder before it’s too late, or just to make a profit from selling later.

Either way, people wanted to borrow. When times are good, and jobs are generated, there are also more deposits into the financial system in the first place. People feel more secure to borrow, and confident of the future. Who can blame them for that? At the end of the day, choices were made, and consequences have to be followed. The consequences are today, with record foreclosures and levels of personal debt, and consequences shall continue to come.

This is where we might want to introduce the banks into this equation. After all, they fuelled the borrowing by providing it, and low interest rates, although good for demand on the one hand, are not necessarily good for making a long-term profit. For a high return therefore, one must be prepared to take more risks. Were the banks really irresponsible, or just following their business model? With lots of cash available in the financial system, and risk appropriately calculated, what’s the issue?

It seems like one could finish their analysis there, but let’s dig a little deeper. Let’s not forget that banks are not lending their own money to make a profit – but OUR money. And let’s go straight to the point of where the banks must have some liability – securitisation. The supposed financial innovation of packaging sub-prime mortgage debt with lower-risk debt, having it graded as the latter, and selling it to other financial institutions without disclosing the exact content of the debt, calls to mind various adjectives that one could use to describe such behaviour. The subsequent actions of hiding sub-prime debt off-balance sheet brings further colourful descriptions of these financial institutions that are charged with protecting our money and diversifying risk, not storing risk for eventual exposure and collapse.

The final part of this economic crisis equation is governments. They have been accused of deregulating the financial services industry to the point where such innovations such as securitisation were not illegal. Although we can fairly acknowledge that it is one of the responsibilities of government to promote commerce, trade and overall economic development, they also have a responsibility to maintain well-being. If one thing is clear, the fall in world wealth, particularly in the developed world, could not be described as meeting this responsibility – and a certain amount of understatement is needed as one speaks this fact through gritted teeth. So why did the government deregulate and put us all at risk? Is the crisis their fault then?

But governments have two angles that need to be analysed. Deregulation is one, and the other is what has happened as the extent of sub-prime exposure became obvious. Governments, spooked by the massive loss of confidence, particularly between banks themselves, have been desperately trying to save the world economy. The end result at the time of writing is the kind of intervention that socialists could only dream of beforehand. Government intervention is here – and ever-more resources are falling under their control. Is this right in a free-market economy? Is this what Keynes intended when he said that governments should intervene in the economy to stimulate demand?

Not disregarding governments’ motives of wanting to restore confidence and economic growth, as the only sure way to recovery, the consequences of their actions could be to provoke another crisis - a crisis that would not now originate from personal debt, but government debt. Some countries, such as Greece, Spain and Portugal, and increasingly the United Kingdom, are in serious, serious trouble. And it is wrong of people to think that governments have the capacity to solve all problems – the institution of Government has to pay its debts like anyone else. But the same governments are under pressure to not cease public spending – not only because it could be political suicide (Greece, Spain and the UK are all currently ruled by left-wing governments) but also because the act of Government borrowing, ironically, is the only mechanism stopping various economies from slipping back into a serious recession. In other words, increasing debt is supporting government intervention plans with a view to economic growth. And governments are desperately hoping that growth will come – because it is the only real way that debts can be repaid. Fail that, and tax rises and the associated social consequences are all that would be left - anyone else for a dose of IMF medicine?

To close this post therefore, the central substance of its subject remains. Who is to blame for this crisis? Given that governments have stemmed recession only through massive borrowing and cash injections, will growth now come? Will this be enough in the long-term to bring overall public debts down? Finally, how will we prevent such a crisis happening again? These relevant questions all remain for both now and the immediate future. Let’s just hope that these questions still do not exist in their current potent form for our children and grandchildren. So the questions are: “What can we do now?” “What should we have done?” and “What should we go on to do?” Lots of reflection to do, and comments extremely welcome.

Thank you for reading.