Essay about American Financial Crisis - 1939 Words

The US Financial System: A Crumbling Empire The financial system has been crucial to the role of free enterprise. â€Å"Financial markets have come to supply non-financial corporations with mechanisms for managing their risks and for comparing and evaluating diverse investment opportunities in a highly complex global economy† (Cindin, 2008). â€Å"However, despite the lifetimes it took to build our financial institutions, bad luck and careless risk management have jeopardized careers and mortgaged these institutions’ futures†(Wallace, 2008). The nation is currently attempting to deal with the biggest financial crisis since the Great Depression. It is now imperative that a way be found which will re-regulate finance without undermining finance’s†¦show more content†¦This is the result of commercial and investment banks lending vast sums for housing purchases and consumer loans to borrowers who are ill-equipped to repay. As consumers begin to default on their loans, banks are realizing the h orrendous fact that they have no tangible cash to carry out business procedures. These profound errors in risk management are taking disastrous tolls on the economy. The U.S. economy is now facing four serious problems. The first problem is that consumers are cutting back on spending in an effort to try and repay their loans. â€Å"Presently, consumers and banks are trying to reduce the amount of money borrowed in relation to their assets or income, a process known as de-leveraging† (Francis, 2008). This will cause a recession since consumers make up seventy percent of all spending. The inventory of unsold homes is now large, so the demand for housing and construction will be low for several years. Other businesses will also begin to reduce the production of goods in order to keep pace with the decrease in demand. The International Monetary fund is forecasting the United States’ gross domestic product to grow by just .5% in 2008 and .6% in 2009. The problem of consumer spending is actually the least of the economy’s worries. The second dilemma that the economy faces is the increase in the number of defaults on mortgage payments and consumer loans. Large quantities of consumers were purchasing homes in belief that the propertyShow MoreRelatedFinancial Crisis And Its Effects On American Economy Essay1834 Words   |  8 PagesA financial crisis involves the value of financial institutions or assets dropping rapidly. It is often associated with a panic on the banks causing investors to sell off assets or withdraw money from savings accounts. This is the result of concern that the value of those assets will drop if left at the financial institution. As the crisis intensifies there is a significant change in the amount of risk that world financial markets are willing and able to accept. 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