The Downfall of an Economy
By Yash Vazirani
Over the years, the United States has emerged as the world's supreme economic power. Since the recession of 2000, the stock market has recovered dramatically and in fact, the country has experienced sustained growth and a healthy job market. However, as often the case, problems undermine a seemingly controlled situation. A variety of factors are contributing to the fall of the economy into an imminent recession, or even worse, a stagflation. Stagflation is a dangerous combination of inflation with stunted growth, which results in prices rising faster than economic growth. The major counterparts in the economy are contributing to a worsening fiscal situation.
The root cause of the economic worries that exist today can be attributed to corporations, especially those engaged in the mortgage lending business. As a result of the booming economy after 2000, companies abused the situation by becoming greedy and at times, unethical.
The mortgage lending business, one that depends on trust on part of the borrower, is the root of the problem which has now spread to the general economy. The largest mortgage lender in America, Countrywide Financial, decided to lower the qualifications required to get a loan. The company loaned large amounts of money to people that did not meet minimum credit-score requirements. In addition, they lowered the required amount of down payments on loans, often offering loans with no money down or at very low interest rates. The company engaged in such practices while knowing that these under qualified borrowers would sometimes fail to make their payments and would have their homes foreclosed.
The marketing tactics of such countries portrayed large loans as easy to get, with remarks such as, "Low credit, bad credit, no credit. No problem." Other mortgage companies followed these practices as well, resulting in large risks for the companies as well as the borrowers. When the results of the unfair practice unfolded, many companies were forced into bankruptcy, many people forced into foreclosing their home to a bank, and many others left jobless as a result of cost-cutting efforts on the part of the companies. The corporations of America, the backbone of the nation's free-market economic system, created the problems that eventually spread to the general economy.
To contribute to the worsening of the economy, the consumers aided the unfair practices of the financial companies. By being irresponsible about their personal finances, consumers put themselves into a horrible position financially, affecting not only themselves, but also the general economy. Although it is largely the companies' fault for engaging in unfair lending practices, it is up to the consumer to decide to take that loan. Consumers acted in a gullible way when they decided to borrow large amounts of money that they could not pay back. The purpose of a credit score is to determine a person's financial reliability and when people with low credit scores decided to take large loans, they acted irresponsibly. When consumers do not pay back loans, the companies' profits are to suffer, thus resulting in layoffs as part of cost cutting methods. It is a trickle-down effect. Additionally, debts and other financial responsibilities upon consumers will lower their buying power. With a lower buying power, the consumers will not spend money on things other than necessities, which is obviously detrimental to the growth of the economy. In fact, the severity of the staggering growth will be intense to the extent that it will lead the country into a recession.
In an effort to aid the economy, the government has taken many actions. For the past three months, the Federal Reserve has continually lowered the federal interest rate, the rate at which mortgage companies borrow money from the federal bank. Rather than improving the problem, the government has aided the downfall of the economy. Lowering the interest rate causes inflation, the cost of goods, to rise. The government is now in a lose-lose situation. By increasing the interest rate, it faces the risk of the country entering a recession and by lowering the interest rate, it risks inflation. A combination of increasing prices with stunted growth is termed as stagflation. In another effort to spur growth the economy, the government passed an "economic stimulus package" that would give additional tax rebates to tax-payers this year, in hopes that they will spend the money.
Although it seems like a good plan, the stimulus package will only worsen the situation because the tax-rebates that consumers get now will have to be repaid to the government in the future. The government is introducing a package that is based on the same ethics as the lending practices of the mortgage companies. The consumers will buy products that they do not need and when it comes time to repay the government, they will have additional debt. The efforts of the government to improve the economy are only worsening the situation and rather, risk a stagflation.
The three counterparts that make up an economy, the companies, the consumers, and the government, are all contributing to a deteriorating economic situation. Through their actions, all three are complementing each other and leading the country into a recession or even worse, a stagflation. The United States is no longer the world's supreme economic power as the dollar is losing its value. And it will continue to lose value because the fiscal downfall is nowhere near an end.