The United States have been going through the great financial and economic crisis started in late 2007 and especially since September 2008. That is the greatest crisis after the Great Depression in 1930 and is affecting the overall economy and households in many ways.
There were many reasons that led to the current financial crisis. In fact, the decline of the housing market since 2007 mainly caused the financial hardship, which led to the substantial losses of many financial institutions and spread the disruptions to the credit market, and finally these disruptions plus some public policies have spread to the real economy and have had negative impacts on economic growth, affected the households and employments negatively in many ways for a number of years.
The causes of financial crisis came from multiple factors and the financial crisis is usually examined firstly in the real estate market. As the matter of fact, the housing market began to decline in the early of 2006. Specifically, the housing market was slowing significantly and the median home prices dropped by 3.3% from the fourth quarter of 2005 to the first quarter of 2006. Millions of people have lost their jobs and increased the defaults on their mortgage payments. The numbers of foreclosures are rising. Moreover, the resulting decline in mortgage lending and increasing foreclosed property sales have caused the median single- family home fall 6.5 percent in December 2007, the first time for at least in 40 years, the national median home prices have fallen on an annual basis. Furthermore, the decline in price has fallen from in the range 10 percent to 15 percent in many major metropolitan areas. Because of the decline in the housing market since 2007, the financial institutions lost substantially and therefore influenced the credit market. These disruptions spread out to the economy and led to the recession.
Originally, roughly from 1995 to 2004, the United States economy had an economic growth in productivity and increased in income. Furthermore, The Center for Housing reported that between the year 1996 and 2006, all the homeowners expenses increased faster than incomes. For example, the mortgage payment increased by 46 percent, utilities 43 percent, property taxes 66 percent and property insurance 83 percent. Instead, homeowner incomes increased only by 26.3 percent. So far, the households predicted the conditions would likely to continue and therefore created a huge demand for housing and housing prices. Unfortunately, the economy growth started to weaken in 2005 and therefore it influenced the consumers abilities to pay for the mortgages. Later in 2006, the whole real estate was in bubble in response to the huge demand for financial assets and as a result, it underestimated the subprime risks and other mortgage instruments. The excess capital pushed the enormous amount of money into the US mortgage market thanks to the securitization and because the US mortgage market securitization makes up about 80%.
In fact, part of the problem with securitization of mortgage is mortgages were pulled together as securities and sold to investors and then resold. Securitization created diversification and liquidity and also helped to smooth out the risk of defaults and bankruptcy. These low-risk regular conforming mortgage backed securities were sold to in-country investors and also out-country investors even those mortgage backed securities lack of clarity. After that, the high yields ideas were generated. The borrowers were now offered with mortgages at higher rates. Those subprime mortgages were called Mortgage Backed Securities. Mortgage of the same types were collected and together reformed and finally, those actions looked like a great solution to the excess demand of assets, and the idea of such securitized subprime mortgages would be higher was originated. Nevertheless, securitization did not protect against systematic risks and lately subprime borrowers started defaulting on their mortgages.
Because of the decline in the housing market since 2007, many specified financial institutions have lost substantially, have filed bankruptcy or been sold which slowly marked the crisis. For instance, in August 2007, the American Home Mortgage Corporation filed chapter 11 for bankruptcy protection. In summer 2008, the less risky mortgages Fannie Mae and Freddie Mac were sponsored by the housing government enterprises, and were placed into the conservator ship by the newly created Federal Housing Finance Agency. In September 2008, a series of failures happened, for instance Lehman Brothers collapsed; Wells Fargo acquired Wachovia; Bank of America bought Merrill Lynch; Goldman Sachs and Morgan Stanley investment banking companies applied to become bank holding companies; PNC Financial Services Groups purchased National City Corporation; The Federal Reserve and the Treasury Department gave assistance to the American International Group. Especially, the stock market has been fallen increasingly after the bailout plan was passed and lastly, there was the occurrence of the spreads between interest rates on different types of loans and the interest rates on US Treasury securities of the similar maturities. In general, the bank capital has estimated and lost about $150 billions.
On the other hand, there were also a series public policy decisions that probably fueled the housing boom to some levels that are inconsistent with the current market conditions. For instance, The Federal Reserve pursued accommodative monetary policy in 2001 and then in 2003 and 2004, the Federal funds rate was held from 2 percent to 3 percent. As such this policy created an environment where the credit grew quite freely. Other than that, the long-term interest loans were held down significantly that might lead to the investors interest in investing and reaching the yields by taking greater risks.
Since the housing recession began, millions of people have lost their jobs and have struggled to pay their monthly mortgage payments. Under the current circumstances, the credits get tight and home refinancing gets much more difficult. Many of them are unable to refinance their loans to lower rates. Defaults on mortgage payment keep rising. According to the National Association of Realtors, the overall foreclosures and short sales made up to 1/3 of all sales in the second quarter of 2009. Those foreclosed homes create a self-reinforcing cycle. Falling prices lead to more foreclosures. Foreclosures lead to an excess supply of home for sale. The excess supply then leads to further price declines. The chief economist at Goldman Sachs, Jan Hatzius, says the massive amount of excess supply means that home prices nationwide will probably fall an additional 15 percent.
In hoping to help the 9 millions homeowners this year, The President Obama administration passed the program called Making Home Affordable. This program includes The Home Affordable Refinance program and The Home Affordable Modification program, and signed into law The First-time Homebuyers Tax Credit up to $8, 000 in claiming tax return to reduce homebuyers income tax liability. . The Home Refinance program ends in June 2010 and it is applied to homeowners that have their houses lost in value and have payments owned by Fannie Mae and Freddie Mac now can refinance to lower mortgage rates or refinance their adjustable rate mortgage into 30-year fixed rate loan. Furthermore, the Home Affordable program helps homeowners who are at risk of their mortgage defaults and foreclosures by working with lenders to lower their monthly mortgage payments. These programs are unique and are clearly created in response to the housing market crisis these days.
In regard to the unemployment resulted from the economic and financial crisis. The Labor Department reported the adjusted unemployment rate in the United States went up to 9.8 percent in September 2009 and that was the highest rate in 26 years. According to the United States of Department of Labor released o November 6 2009 and Bloomberg News on November 11 2009, the unemployment rate rose to 10.2 percent, the highest rate sine 1983.
CNN Money released on October 21 2009 the state- by-state unemployment rates for September 2009. The Pacific West, Midwest, and South Atlantic regions were the most affected regions in America. Those are the leading unemployment states: Michigan (9.6%), Rhode Island (9.3%), California (8.4%), South Carolina (8.4%), and Oregon (8.1%). Texas with 5.7% unemployment rate is in the rank of 19 which is equal to Arkansas, Idaho, and Vermont unemployment rates. The lowest unemployment states are Wyoming (3.2%), North Dakota (3.3%), and South Dakota (3.4%).
The Labor Department reported on November 6 2009, the economy has lost 8.2 million jobs since the recession began in December 2007. Particularly, the Texas Workforce Commission said that the unemployment rate rose slightly to 8.2 percent in September 2009. Total non-agricultural employment in Texas fell by 44,700 positions during September and the Texas Civilian Labor Force continued to increase above the mark of 12 millions workers for the third consecutive month. The Chairman of Texas Workforce Commission, Tom Pauken said The Texas job market continued to tighten as most industries experienced job losses in September, and While unemployment in Texas remains well below the national rate of 9.8 percent (in September 2009), this serious national recession continues to affect us adversely in Texas.
As the Texas labor force is growing as many graduates enter the job market, but job seekers are having troubles because of fewer jobs offered. According to Houston Community Paper published on October 28 2009, The number of employed Texans declined by 6,100 persons for an estimate of 11,073,400. Since January 2009, Texas has added 95,800 individuals into the ranks of employed population. Annually, the employed population has contracted by 94,300 persons. The unemployed population increased by 13,500 for an estimate of 996,000 job seekers.
The Troubled Asset Relief Program was designed in October 2008 under the administration of President Bush in dealing with the subprime mortgage market. The TARP is managed by the newly created Office of Financial Stability. Originally, the goals of this bailout program were to rescue the banks during the financial crisis, to lend money to small businesses which could not get loans from banks. Lending the money to the small businesses is believed to create jobs or to boost the job growth. With the TARP, the U.S Department of the Treasury is allow to buy back any troubled assets issued on or before March 14, 2008 such as commercial and residential mortgages, securities, or any other instrument related to mortgages with the value up to $700 billion. For this purpose, these assets are exercised by using the secondary market mechanism which allow financial institutions and banks to liquid their assets, rebalance the balance sheets and income statements, and avoid any further loss. The fund of the program will be distributed to these administrative units: whole loan purchase program, equity purchase program, homeownership preservation, insurance program, Mortgage backed securities purchase program, executive compensation, and compliance.
Surprisingly, some financial institutions have recovered from this program. According to the New York Time published in December 9, 2009, the TARP program was found effective. This $700 billion program will be extended to October 3, 2010.
The U.S. recession is slowly over and the economy will slowly recover from the deepest recession since 1930 as the rising unemployment curbs consumer spending and high federal debts persist. After the last two recessions, it normally took two to three years for the unemployment rate to return to pre-recession levels. The average job search now takes 27 weeks or more vs. 19 weeks last year. But for the severe downturn now, it may take even longer for the jobless rate to drop below 5% as it was in 2007. Now, we are just at the beginning of the economy recovery, and we are still affected by the crisis in many ways. It is just about the matter of time, effort, and patience to overcome our current recession.
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