What Is The Cause Of Global Economic Meltdown And Its Solution?


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Discuss the global economic melt-down in relation to nigeria
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Control of economic meltdown in nigeria
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Cause Of Global Economic Meltdown
low GDP
less exports
more imports
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It is my contention that this crisis is nothing short of a manifestation of the overall forces that are in control of the world economy.

Those who have chosen to emphasize the failure of personal rectitude of the borrowers by their failure to exercise proper caution and by agreeing to overextend their available resources miss the point. They conveniently dismiss the possibility that the consumers have always been willing, ready and able to throw caution to the wind if the opportunity of great financial gains presented itself.

And so the real question is not why is it that consumers acted "irresponsibly" by agreeing to take on risk that they could not handle; the real issue is to find out what were the conditions that led the financial institutions to lure the unsuspecting consumer to carry excessive debt burden. Furthermore, the reason the crisis could not be contained had nothing to do with the borrowers and everything to do with the fancy financial packaging and creative marketing techniques that the debt originators resorted to. The urge to come up with the new and, in retrospect, unsound methods of debt financing was driven by greed; the urge to participate in amassing what appeared to be easy - though albeit- unethical profits , arose from the excess liquidity injected into the global financial markets by the major central banks.

This crisis is essentially a result of the developments in the world since Neo- Liberalism became the major guiding philosophy. Without the forces of globalization, at least globalized capital, then the financial institutions would not have been able to borrow, lend and collateralize then borrow, lend and collateralize again.

The triumph of the market economy in the mid 1980's set in motion the forces that gave us the Asian contagion of 1997-99 and the current financial meltdown that exploded on the scene in the US in August 2007 and whose final effects have not been felt yet. Make no mistake about it, the whole world will be affected by this crisis and all individuals will be called upon to carry part of the cost of this debacle. The naysayers go so far as to predict that this crisis carries within it the seeds that will lead to the total collapse of the international financial system. This irresponsible behavior of encouraging households to assume debt beyond their means in order to "mint" huge profits from packaging these mortgages into collateralized securities of dubious quality has resulted in creating conditions that do not augur well for the world economy. The drive to enrich the few has bankrupted the many, not because of the irrationality of the borrower, but mainly because of the totally unregulated economy which permitted unfettered socially destructive behavior.

How are we to explain the element of surprise and unpreparedness that seems to have accompanied this crisis? This is one event that should not have been difficult to foresee, especially by the originators. Since many of the loans and mortgages were made to look artificially appealing through teaser rates, it should have been reasonable to expect the originators to plan for the consequences of a sudden rise in the cash flow required of the borrowers to service the assumed debt once the teaser rates were set upwards. An upward setting of the interest rates resulted in a larger debt service burden for the same size loans and it should have been clear that the additional sums of money required to finance the newly set rates had to be found somewhere. But since it was also obvious that wages were stagnant, these additional monies had to come from reallocating the relatively constant flow of income. The implications of an additional debt service burden combined with relatively stagnant wages and negative personal savings rate are close to devastating. The only way that the additional debt service payments can be made is to spend less on food, transportation, medical care and other expenditures that are deemed to be necessary. This was a classic case of a "wealth effect" in the reverse. It is estimated that the $1 trillion worth of contracts that were reset in the period 2007-08 resulted in an increase of 31% of the cash flow requirement to service the debt in question. Those who found the additional money did so by reallocating their expenditures and those that did not went into foreclosure. In both counts the economy suffered domestically and globally.

Easy money policies increased the availability of liquidity to the originators but these funds had to be lent if profits were to be derived from the easy money policies. That could be accomplished only through an increased volume of transactions. Unfortunately, the originators followed the path of least resistance by appealing to the sector of the economy that is the most vulnerable and the one with the most pent-up demand. During 1994 only 5% of total US mortgages were classified as sub-prime but by 2006 that proportion had risen to over 20%. Studies suggest that the same was true of the UK and also of Spain. This demand for homes was not difficult to understand since the governments own figures demonstrate that the majority of households during the early part of the 2000's had become worse off in real terms. It is true that the US economy had grown during that period, but most of that growth stayed at the top of the pyramid. The trickle down effect failed to materialize. What ensued is nothing else but the immoral pursuit of profits at the expense of the weak and vulnerable and the irrational belief that this time it is different: The music will never stop and no one will be caught holding the hot potato and no chair to sit on. Ironically the financial institutions that took the most risk and that profited most from the new financial instruments are the ones who were caught unprepared and thus had to take numerous write offs, recognize large losses and seek to improve their depleted capital base. That was done to a large extent through the acceptance of the oil producing countries' sovereign funds to provide the needed capitalization. And so the easy money policies that were adopted in the first place to help avert an economic slow down initiated by terrorist attacks and to finance a war precipitated by fundamentalists on both sides has led to appreciably higher fuel prices which helped the accumulation of huge sovereign funds that were used to save the system.

Unfettered markets, as promulgated by the US, turned out to be their own best enemy in this case. They helped bring about an unplanned and unanticipated redistribution of wealth that does not favor the developed economies. So maybe the markets do work in a perverse way by eventually promoting a more even wealth distribution among nation states. But there should be a more civilized way of attaining the ultimate objective of equality without recourse to these periodic but devastating shocks to the system. Culled from other sites. Good luck.

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