The financial crisis in the United State of America began in the year 2007 and was described as one of the worst of all times. The crisis affected all sectors of the economy leading to a slowdown in the economy (Letica). The American currency is used in international trade; America is also an economic leader in the world; therefore, other countries in Europe particularly felt the impact of the crisis. The world economy experienced a 2% decrease in GDP at the end of 2009 (Ase.tufts.edu). Countries which depend on the United State as the primary destination for their exports suffered from reduced demand. The effect of the economy made more than 100million people around the world to fall into poverty (Ase.tufts.edu). Before the crisis, United States economy was run primarily by petroleum fuels. The crude oil was imported from oil-producing countries such as Nigeria and Saudi Arabia. The crisis affected the importation of oil which in turn affected the operation of the organization of the petroleum exporting countries (OPEC). The crisis led to a massive loss of jobs in the economy. Since the crisis begun, the rate of unemployment sunk to a record low of more than ten percent (Letica). Due to the unemployment, the purchasing power of many citizens was highly reduced leading to enormous loss of financial assets estimated to more than twenty trillion dollars owned by the USA households.
Many economists have tried to explain the causes of the financial crisis. On a keen analysis of the economy, economists identify a number of issues that contributed to the economic slowdown. Many of the causes were policy related while others were related to the recession that preceded the crisis. The primary cause of the crisis was inequality among householders in the economy. The economy of United States is made up of three types of householders; the wealthy, middle class and the low class. The gap has been significantly proportional since 1920s, however at the beginning of the 21st century, the income of the middle class and low class began to decline (Ase.tufts.edu). The gap between the rich and the poor increased significantly.
Policymakers had to take an action; they choose to leave the issue of inequality to be adjusted by the market forces but choose to make credit more available to the low-income earners (Letica). The borrowing rate was therefore lowered making many low-income earners access credit. Many householders began using credit to supplement their income in financing consumption cost. The real estate sector was highly affected by the credit availability. Many Americans rushed to purchase houses. Mortgage companies developed new products to tap into the increasing demand for houses. Credit was given to people who were not legible to receive it under ordinary circumstances. Such householders include those with very little income, high amount of debt and those with poor credit record (Ase.tufts.edu). The banks lowered the interest rates for mortgages with the lowest rates in the last fifty years. The demand for houses was too high prompting the increase in prices of the product. When the crisis began, many people filed for bankruptcy because they were unable to repay their debts (Letica). Bankruptcy did not affect individuals only but also larger companies leading to the massive layoff of workers.
Other factors that contributed to the economic crisis were inappropriate corporate incentives for the managers and economic globalization. Managers in many companies were remunerated based on the performance of the company and the price of the company stock. The trend prompted managers to adopt short time goals in order to earn higher remuneration thereby putting the company’s future in jeopardy (Ase.tufts.edu). The increasing deficit in the balance of trade for the USA foreign trade meant that foreign cash was flowing in the economy (Ase.tufts.edu). The foreign money fueled the inflation rate that was already high since it was borrowed and invested in the local economy by the Americans.
At the wake of the economic crisis, the world economy was shaken. There was little production going on in companies. The OPEC, led by its largest oil producer, Saudi Arabia, started experiencing the effect of the crisis. The result came in two ways; decrease in demand and fall in the price of oil (UNESCWA). As the world economy was stagnating, and companies closing down lines of production, the demand for oil begun decreasing throughout the crisis the demand of oil reduced by 64%. The reduction in demand led to excess supply in the world market that in turn led to decrease in the price of the oil barrel. The cost of an oil barrel had risen from $29 at the beginning of year 2003 to $147 in 2008 (UNESCWA). However, the effect of the crisis made it decline to $40 at the end of year 2009. The decrease in the prices and demand for oil hit the economies of the OPEC countries significantly because many of them depend on the revenue generated by the oil business. OPEC members decided to cut down on their production to address the effect of the crisis (UNESCWA). The decreased production countered the effect caused by excess supply hence stabilizing the price of oil. In 2009 when America began a recovery process through increased government spending, the world economy also began recovering with the demand for oil increasing by an initial percentage of 43 percent.
- Ase.tufts.edu, ‘The Financial Crisis and the Great Recession’. Web. 5 May 2015. http://www.ase.tufts.edu/gdae/Pubs/te/MAC/2e/MAC_2e_Chapter_15.pdf
- LETICA, BARTOL. The First Global Financial Crisis in the 21st Century Reasons and Consequences. 1st ed. 2010. Web. 5 May 2015. http://www.southeast-europe.org/pdf/03/DKE_03_A_E_Bartol-Letica_GFC.pdf
- UNESCWA, ‘The Impact of the Global Financial Crisis on the World Oil Market and Its Implications for the GCC Countries’. N.P., 2009. Web. 5 May 2015. http://www.escwa.un.org/divisions/div_editor/Download.asp?table_name=divisions_other&field_name=ID&FileID=1107