The Circular Flow

Friday, April 03, 2009

David Brooks weighs in

Be sure to read the link above-- too simple, but points you in a couple of other directions to write your post...

Off to the play!

posted by Rob Wedge at 6:31 PM

1 Comments:

  • Currently, inflationary pressures and risks are diminishing because of the further weakening in the economic outlook; inflationary rates are at an unhealthy rate of less than 2%. The stock markets are experiencing all time lows that have severely weakened economic activity throughout the world. Since the middle of 2008, inflation fell from 2.1% in November to 1.6% in December. The weakening market demand for goods all around the world has diminished, confirming that inflationary pressures are diminishing and giving no significant long-term sign of a turn-around. Unemployment rates spiked after 9/11 as about 538,000 Americans filed for unemployment.
    Commercial Banks began handing out more and more loans to people who could not afford to pay them back based on a variable rate loan. When times were good, the variable rate was very low however, as the time came for the variable rate to adjust to the market rates, people realized they could not pay back their loans. Many believed that as long as the housing market was thriving, these loans were not worth denying because in the event of a loan going bad, the bank could foreclose on the house and put it back into the ever increasing market; this proved to be untrue. After this, we see a domino effect of people not paying back their loans and losing their houses; as a result, the housing market collapsed.
    As more people defaulted on their loans, the national economy began to falter. The destabilization of the credit market quickly spread to the national financial system where lenders began to fear borrowers could no longer repay their loans. Then, on Monday October 6, the stock market began a weeklong decline in which the Dow Jones Industrial Average would fall about 18.1%. On a larger scale investors began worrying that investment banks, such as Bear Sterns, would not be repaid and began pulling their money out. As a result, Bear Sterns merged with JP Morgan and lost 90% of its value. Once a market it destabilized, a number of events trigger an even larger decline in the market.
    Hedge funds have been criticized based on the assumption that a highly leveraged hedge fund could have a strong impact on prices in the financial markets by launching provisional attacks on certain companies. The Hedge funds have also been accused of manipulating asset prices. If one hedge fund made a bad investment, then they all had made a bad investment. Also, many people put their life savings into these funds so when the funds went under, so did Americans’ retirement.
    Insurance companies had been investing peoples’ savings in the stock market in order to maximize their profits. Naturally, people were worried when they saw the markets declining. Some insurers are owned by companies which have a wide range of businesses and may have invested unwisely. However, the financial condition of the insurance company is closely regulated and may not be subjected to the same types of risks as those in unregulated industries. The companies keep a certain amount of required reserves but is this reassuring? In case of a company going under, the state insurance department has a law that guarantees the claims will still be met.
    Regulators have failed to fully regulate the risky manner and debt that the banking system had developed. Economists within the government realize that it was a mistake not to have taken regulatory action when the expansion of credit became too risky.
    Regular Americans took on loans they would not be able to pay back which caused the investors to question the safety of their investments in banks which resulted in a mass pull out of the market economy which caused the banks to go bankrupt and our economy to enter dark times.

    By Blogger erin, at 9:08 PM  

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