Friday, May 16, 2008

The Blow on the United States' Economy

Red All Over. The price of the stocks is plummeting endlessly, causing havoc in most of the stock markets all over the world

Today, forecasting what topic you will meet often if you read the business or economic section of the newspaper regularly is easy; the United States economic recession. At the present time United States is experiencing a profound drop on its economy. The US Dollar is weakening, the stocks’ prices are plunging, the inflation rate is skyscraping, and the government’s debt is rising. All those predicaments cause The Federal Reserve Bank seem to be very busy these days. Ben Bernanke and Henry Paulson continue to rise off on the newspapers’ headlines by turns. As day changes, things are getting worse for both of them and new policies have to be considered in purpose of controlling the situation.

What’s to blame? First, the excessive number of military spending. America, under Bush’s command, is the player in the game when it comes to firearms. In 2007, United States is the country with the highest military spending in the world, leading the pack with US$ 528.7 billion. For comparison, United States has just recently criticized China for its massive number of military budget, which is ‘only’ US$ 49.5 billion. Yes, President Bush is fully responsible for this economic turmoil. His disastrous decision to respond to 9/11 with invasions to Afghanistan, Iraq, and, will probably be, Iran, leads the United States’ economy to a deep ravine.

Second, the rising price of oil. United States is the biggest oil importer country in the world by far, and the exorbitant price of oil these days really burdens its economy. No wonder, President Bush repeatedly begged OPEC to raise its supply to decrease oil price. The request was rejected, “Well, Iraq and Iran are close friends of ours and look what you have done to them, George. So, why should we help you?”

Third, and most likely is the essential one; the subprime mortgage crisis. In 2002, the United States’ economy was teetering on edge because of the collapse of the dot-com bubble. Not to mention dot-com companies like Yahoo and Google, many corporations running in technological and website went bankrupt at the time. Alan Greenspan, the Fed chairman back then, issued the easy money policy as a respond to the situation. The renowned economic maestro aggressively cut the interest rate (Federal funds rate) to historically lowest level, from 6.5 percent to 1.75 percent. A cut in interest rate lead to a boost in the country’s overall aggregate demand. Also, it reduced the cost of borrowing and, consequently, Americans could easily borrow money as they please. Then, they used the money to buy houses as they saw house as a potential form of investment rather than saving the money in the bank.


Yet Greenspan is notorious as ‘the bubble-diversion man’ with the policy. As I mentioned before, the purpose of the Greenspan’s policy was merely to lift the economy from recession by boosting the aggregate demand. Unfortunately, he tidily –or perhaps frantically- surmounted the crisis caused by one bubble by establishing another bubble. In this case, as a repair of the damage caused by the collapse of the dot-com bubble, he just allowed the housing bubble to develop. Today, United States suffers the outcome of the decision that Greenspan made in the past. After reached its peak in 2005, where price for houses was soaring to the highest level in several populous districts, the real estate bubble suddenly collapsed. All of a sudden, the number of foreclosure rate increased and the house price plunged. Many lenders could not afford to pay back the money to the bank. This actually is the core of sub-prime mortgage crisis, causing massive losses in several banks trading in mortgage-backed securities which lead the United States’ economy to a recession.

One of the cases includes the collapse of Bear Sterns, the nation’s fifth biggest investment bank, whose stocks dropped drastically from $60 to $2 per share in a week. Facing with huge debt caused by the sub-prime mortgage crisis, Bear Sterns went broke. The Fed, playing its role of a central bank, then acted as the lender of the last resort by approving $30 billion bailout credit to assist JP Morgan Chase in the acquisition of Bear Sterns.


This story will be very different if the recession happens in another country and doesn’t take place in the United States. What makes huge concerns to all the economists and policymakers around the world is because this case occurs on the world’s superpower which controls one third of the world’s GDP. Whatever happens in the United States’ economy affects the global economy and, therefore, attracts attention from many economists around the world.
Some economists say that recent US economic blow is even worse compared to the great depression in 1929. Some economists name ‘recession’, while others say ‘just an economic slowdown’. Whatsoever, it definitely is not only the problem of the country itself; it is the problem of the world. As a dominant and influential economy in the world, United States holds the responsibility of the stabilization of the global economy. And with the United States general election coming toward the nation, this economic mess should obviously be the first task to be accomplished for the next president in charge.

1 comment:

Rara said...

mantap sat! seneng gw bacanya hehee

salute to you!! ;D