Background Of American Debt Crisis
The financial debt crisis of America, as is known has been prompted by an insolvent banking system. In this article, you will gain an insight on background of American debt crisis.
Many causes have been projected, for the cause for the debt crisis and with varying weights assigned by experts. The caving in of large financial institutions, the bailout of the banks by national governments and slumping of the stock markets all around the world are just a few repercussions of the American debt crisis. The housing market too has suffered, leading to several evictions, foreclosures and long-drawn-out vacancies.
Read on to know more about the backdrop of American debt crisis.
Many economists consider the current debt crisis to be the worst financial crisis since the Great Depression of the 1930s. Although many sources have been suggested for the reasons behind, this economic period has often been referred to as "the Great Recession" by leading economists.
Going in to the background of US debt crisis, it is seen that large inflows of foreign funds along with low interest rates had generated easy credit conditions for a number of years earlier to the crisis. This encouraged debt-financed consumption, while bringing a boom in housing construction. Loans of various types were easily available to get. Such financial innovations led to the institutions and investors around the globe to invest in the U.S. housing market. The disintegrating of the global housing bubble, which hit the highest point in the U.S. in 2006, plummeting the values of securities tied to real estate, thus damaging financial institutions globally.
With the decline in the housing prices declined, major financial institutions across the world that had borrowed and invested heavily in US reported major losses. The damaged confidence of the investor had an impact on global stock markets. With constant decline in credit availability, there were important questions regarding bank solvency. Late 2008 and early 2009 saw large losses in securities. International trade declined as credit tightened, while eroding the financial strength of banking institution. Governments and central banks countered the problem with unique fiscal stimulus, monetary policy expansion, and institutional bailouts.
According to critics, the credit rating agencies and investors failed to price the risk involved with mortgage-related financial products precisely. The governments too did not amend their regulatory practices to address 21st century financial markets Total losses are estimated in the trillions of U.S. dollars globallyThe background of American debt crisis reveals that while the housing and credit bubbles grew, a series of other factors caused the financial system to both inflate and become increasingly flimsy. Policymakers failed to identify the increasingly important role of financial institutions such as investment banks and hedge funds. Although these institutions had become as important as commercial banks in providing credit to the U.S. economy but they were not subject to the same set of laws. Assuming large debt burdens while providing the loans, they did not have a sufficient financial support to absorb the large loan defaults and losses. The Governments came forward to their rescue by implementing economic stimulus programs, and thus assuming major added financial commitments.