This economic crisis is affecting millions of people in America and across the globe as many major financial institutions are absorbed by other financial institutions or just crash. Some may be propped up by bailouts but this is seen by many as a short-term fix and fails to address the needs of the future. Firstly, lets try to understand what is actually causing the economic crisis. Put simply, the economy is based on consumption and debt and companies can only keep going while the purchasers continue to buy their products. For this purpose, many people borrow money. When the people stop borrowing, they spend less. When people stop borrowing from banks to purchase goods from retailers, the economy shrinks and employers have to sack workers due to a drop in profits. This in turn means that consumers are going to spend even less money because they are unemployed. There are many factors that caused the current market instability but the one that really stands out is the inability of banks and other financial institutions to continue providing loans. This in turn slowed the growth of the economy and also slowed down the buying and selling of assets. For the financial institutions, this meant that mortgage backed assets that were no longer of a high value werent able to bring the money required to pay off the loans and consequently dried up their reserve cash so they could no longer lend as much. There is also the factor of cheap credit where it became easy for consumers to borrow money for purchasing assets. Cheap credit put more money into the financial system and consumers were more than happy to keep on spending. This increased demand and thus the economy became inflated. Because the American economy is built on credit (and many other Western countries as well), it is quite easy to go into business and create employment. While this in itself is not a bad thing, if left unchecked it is downright disastrous. This is what has happened in the past ten years or so and the credit has just spiraled out of control. People became greedy and took out loans which were way beyond their financial reach, believing they could either refinance later at a lower interest rate or sell at a profit. This worked for a while and people got quite wealthy so they wanted more. Unfortunately, many of these loans were bad and so the housing market eventually slumped. The chain reaction soon affected the entire economy and the mortgages were no longer affordable, causing many mortgages to become defaulted. This left the investors and financial institutions with the problem. There were huge losses in mortgage backed securities and many investors and financial institutions hit the wall. It also caused a slowing of the growth of new home construction. Homes were often worth less than what owed on them and owners defaulted. The massive losses caused by this meant that banks and other lending agents were forced to tighten up on requirements but it was too late. The damage was already done. The idea behind the economic bailout is to give these institutions the ability to continue lending in order to spur on the economy. Although this may seem ridiculous, it is actually not a bad thing. Credit is responsible for economic growth and employment. It is only when the credit is allowed to go unchecked and is used poorly that it leads to a catastrophe. For those of us who have to ride out the crisis, it is devastating. Bankruptcies are on the rise as is unemployment. Homelessness will also rise as a result of these factors. For some, it will be okay as they will look for and find alternatives such as alternative employment, retraining, or even an online business. People will do whatever it takes to provide for themselves and their families.
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