The financial crisis
Andy Leung
Undergraduate/Biology
The financial crisis started last year with the collapse of Bear Stern. It affected not only the U.S,. but almost every part of the world. Many people around me did not even notice it hitting the Midwest, even an agricultural state like Wisconsin. There’s hearsay that La Crosse lost 5,000 jobs on the upper half of last year. Moreover, the worst is yet to come.
It began by somebody and some companies who made wrong decisions together in the same period of time, such as when Fannie Mae and Freddie Mac tried to get more mortgage loans out. They had underestimated the ability of the debt owners to repay the mortgage when the interest rate is about to change. Hence, when the interest rate went up, lots of people can’t afford to pay their mortgage, and are forced to have house in auctions. Later, it lead to the collapse of investment banks like Bear Stern, Lehman Brothers, and Merrill Lynch, which hold lots of equity on three auto companies and affect their liquid fund. After that, this crisis spread throughout the world like a highly transmittable epidemic. Europe was the first place affected by such a crisis because they have a similar situation to the U.S.’s. Despite the effect that will travel across the world, this crisis is a lot more serious than the actual economic downturn and it might last until the end of this year.
The situation on those three auto companies is even more disastrous. They have been doing the loans on cars for more than ten years. Actually, they thought it’s their new plan to enhance their asset profile, and it set them back from doing the right job. Rather than enhancing functions and efficiencies of their cars, they tried to sell more cars by lowering the interest rate, and raising discounts so as to make a better sale. They did all these and thought that it’s a brilliant way to make money. After the long rise of oil prices in the last decade, it dropped their sales seriously, and they lost their time to catch up to make better cars. Then, they sell those mortgages to the investments banks for more money to feed up their costly and inefficient product line. So when those investment banks broke, they ran out of money and can’t get themselves out because of their poor sales and auto performance.
It is a matter of fact that this crisis is involved mostly with two main assets in the public in the U.S., one of which is the house they are living in. This becomes a crucial problem because some of the recent acquisition of some properties that went under financial problems. It becomes important to handle it in a slow but effective way.
Doubtlessly these two main factors lead to the financial crisis today, which brought economic problems throughout the world. However, I doubt if it’s the right thing for the government to subsidize the home owners on their mortgage with public money. When I watched the news recently about the opinions from stock brokers about the new bailout plan for homeowners in Wall Street, they said that it made them feel terrible. The financial critics said the bill is trying to use the taxpayer’s money to help failures, which is “promoting bad behavior” and “giving money to their neighbors with an extra bathroom.”
There is a better way to handle this crisis in a right way. The government can consider buying back the mortgage and allowing the homeowners to pay it at a low interest rate. On the other hand, the deficit can be counted into the 787 billion dollars budget. If the recent bailout policy fails, nobody would know how much money they have to spend on this financial black hole to turn things back to normal.