ANALYSIS OF U.

S FINANCIAL
CRISIS 2008
ANALYSIS OF U.S FINANCIAL
CRISIS 2008

Submitted to:
Ms Farheen Moeen
Course Instructor
Business Communication

Submitted by:
Fasiha Mir
Hamna Bukhari
Sana Javed
Wardah Khalid

MBA IST Semester

November 18, 2008

 KINNAIRD COLLEGE FOR WOMEN
LAHORE
MBA SEMESTER-I

November 18, 2008

Ms Farheen Moeen
Course Instructor
Business Communication

Dear Ms Farheen,

Here is the comprehensive research report on U.S financial crisis you asked us to conduct
on October 21st. This report is submitted for fulfillment of the requirement of the course,
Business Communication for degree of Masters in Business Administration.

This report is based on U.S financial crisis, its causes, and effects on other economies
including Pakistan and proposed solutions for this crisis.

We hope that the knowledge provided in this report will prove to be a good guide for
understanding the present economic and financial condition of U.S.

Sincerely yours,

Fasiha Mir
Hamna Bukhari
Sana Javed
Wardah Khalid
TABLE OF CONTENTS

EXECUTIVE SUMMARY………………………………… v
ANALYSIS ON U.S FINANCIAL CRISIS…

Introduction………………………………………………….
ACKNOWLEDGMENTS

First, we would like to thank our Allah Almighty, who gave us confidence, enabled us to
write this report, because without His blessings, this task would never have been
accomplished.

Our very especial gratitude to Ms.Farheen Moeen, whose exceptional communication

skills, breadth of knowledge and great ability to inspire us, made us capable of writing
this report and taught us the techniques of effective communication.

We are deeply indebted to Mr.Sohail Zafar Rana, Lawyer and Professor of Functional
English and Business Communication & Behavioral Studies, at ‘Professional Academy
of Commerce,’ whose outstanding knowledge of technology, distinguished background
and wealth of communication ability helped assure the reliability of this project.

Also, we are very thankful to Mr.Fakhir Ikram from ‘Sapphire Group of Industries,’ for
his attention to detail, sound judgment and wise guidance, which help us completing our
report.

Fasiha Mir
Hamna Bukhari
Sana Javed
Wardah Khalid
EXECUTIVE SUMMARY

The purpose of our research is to conduct an in-depth research on the financial crisis of
USA. This research was used to compile a full-fledged report.

This executive summary places the findings, facts and recommendations of the U.S
financial crisis.
The global crisis emerged in 2008. The extent of this problem is so severe that some of
the world’s financial institutions have collapsed. Their competitors at very low prices
have bought others out.

The crisis began with the bursting of U.S housing bubble, caused by high default rates of
sub prime and adjustable rate mortgage that began in 2005-2006.

In 2006 prices started declining, the lenders increased rates, which led to the crisis of sub
prime, credit mortgage and foreign bank markets. Other causes include high ratio of
mortgage bank securities and devaluation of assets. Private lenders got greedy and started
lending to risky people.

The crisis led to worldwide inflation. Import prices have risen up to 10%. Export
dependant economies are facing unemployment and slow growth. The unemployment
rate soared to a peak.

These consequences of economic turmoil are especially worrisome in Pakistan where

economy is in the state of crisis. Soaring food and oil prices are not matching with the
budget.

To overcome the financial crisis, U.S should end the wars with Iraq and Afghanistan.
They should increase the dollar value and interest rate and the U.S banks should lower
their federal funds. These are long-term proposed solutions, which will take time to be
effective. A bailout plan of $700 billion dollars has been proposed. The purpose of this
plan is to purchase bad assets, reduce uncertainty regarding the worth of remaining assets
and restore confidence in the credit market. This plan has been described as a risky
investment.
INTRODUCTION

The economy of United States is the largest national economy in the world. Its gross
domestic product (GDP) was estimated at 13.8 trillion in 2007. The US economy
maintains a high level of output per person. Its GDP per capita was $46000 in 2007. The
US economy has maintained a stable overall GDP growth rate, a low unemployment rate
and high levels of research and capital investment funded by both national and, because
of decreasing saving rates, increasingly by foreign investors. In 2008, seventy-two
percent of economic activity in the U.S came from consumers. For the last 230 years, this
great economy has been on growth, it grew to a huge, industrialized and integrated
economy, which makes up quarter of the world economy. The economy has maintained
high wages and attracts immigrants from around the world. The economy has a GDP of
13.81 trillion, GDP growth of 0.8 percent annually, inflation rate as low as 5.6%,
unemployment rate as 6.5%. Moreover, this economy has exports of 1.149 trillion and
imports of 1.985 trillion.

The Great Depression of the 1930s

The great depression was a worldwide downturn starting in the most places in 1929 and
ending in the 1939s. It was the largest and the most important economic depression in the
modern history and it is used as a benchmark in how far the economy can fall. The
depression had adverse effects on the developing and on the developed worlds. It started
from United States (stock market crash) and history call it as Black Tuesday. In addition,
it is believed to be associated with the onset of the World War 2.

1970s Financial Crisis

The 1973 oil crisis began on October 15 1973, when the members of organization of
Arab petroleum exporting countries announced an oil embargo in response to the U.S
decision to re supply the Israeli military during the Yom-Kippur war. OPEC declared that
it would no longer ship oil to the United States and other countries if they supported
Israel in conflicts with Syria, Egypt, and Iraq. At the same time, OPEC members agreed
to use their leverage over the world price setting mechanism for oil in order to raise world
oil prices, after the failure of negotiations with the seven sisters earlier. Foe most part
industrialized economy relied on crude oil and OPEC was a predominant supplier.
Because of the dramatic inflation experienced during this period, a popular economic
theory has been that if price increases were to blame as being suppressive of economic
activity. The targeted countries responded with a wide variety of new and mostly
permanent initiative to contain their further dependency. The 1973 oil shock along with
the 1973 to 1974 stock market crash have been regarded as the first event since the great
depression to have a persistent economic effect.
The Current U.S Financial Crisis

The U.S economy is suffering with a financial crisis; the current financial crisis, which is
said to be one of the biggest of its kind, is having adverse impacts on the economy. The
banks and other financial institutions have reported great losses. The main reasons of this
great crisis are as follows.

1. The housing bubble.

2. The high default rates on sub prime.

3. Adjustable rate mortgages.

There are many reasons for the crisis, and they are complex. The crisis can be attributed
to a number of factors both in housing and financial markets, which developed over an
extended period. There are many views ion causes including the inability of homeowners
to make, poor their mortgage payments, poor adjustments by the borrower and the lender,
speculations that lead to overbuilding during the period (boom period), risky mortgage
products, high personal and cooperate debt levels, financial innovation that distributed
and perhaps concealed default risks, central bank policies, and government regulations.

The declining lending standards, an increase in loan incentives (very easy initial terms)
and long term trend of rising housing prices had encouraged the borrowers to accept the
high mortgages in the belief that they would be able to make enough money and will be
able to pay back all the mortgage in time, or they would be able to refinance to more
favorable terms.

However, what happened was that the interest rates began to rise and the housing prices
dropped drastically, the refinancing became more difficult. The easy initial terms expired
which led to foreclosure and defaults. During 2007, around 20 million U.S housing
properties were subject to foreclosure activity, which was approximately 79% more than
2006. The crisis has its impacts on almost all the sectors even the Dow Jones index which
are the largest companies traded on U.S stock market declined drastically(22%) which is
believed to be the worst week in the index’s 118 years history. The stock market has
suffered a lot. Since 1 January, 2008, stock owners in U.S corporations have suffered
about $8 trillion in losses, as their holding declined in value from $20trillion to about $12
trillion.
Brief History of the Crisis:

In the 1990’s, a trend of rising the sub prime mortgage loan started in the mortgage
industry. It became extremely popular in the 90’s. Sub prime mortgage is a loan given to
the borrower with a low credit score. Normally to those who cannot qualify for a
traditional loan. However, many negatives follow it.
Many of these loans were adjustable rate mortgages with low teaser rate i.e. very low
introductory rate in adjustable rate mortgage that may change according to changes in the
Treasury bill. Then the interest rate rose in later stages.
For a long time, economists warned about the financial problems that could come across.
In 2004, the sub prime lending got out of control and lead to foreclosures.

CAUSES OF THE U.S FINANCIAL CRISIS:

Huge Expenditure on the US Army

In the current fiscal year, America spent huge amounts on the army for defense project
that had no relationship with the nation security. The Department of Defense's
expenditures for 2008 are larger than other nations' military budgets. U.S military
spending for fiscal 2008 exceeded $1 trillion. It is not only morally obscene, but also
fiscally unsustainable. These huge military expenditures are financed through massive
borrowing from China and other nations. The accumulated debt has doubled to $11
trillion.

Spending on Wars

There have been huge expenditures on weapons and munitions, and large standing
armies. It is often believed that wars and military spending increases are good for the
economy. It is infact wasteful economic activity. America can no longer afford to
maintain war and treat military output as ordinary economic product
.
Bursting of the Housing Bubble

The U.S housing bubble is an economic bubble in many parts of the United States
housing market. The prices of houses started rising in 2005, and then started declining in
2006. Increased rates of the home lenders led to the crisis for sub prime, credit, mortgage
and foreign bank markets.
Housing bubble may occur in real estate markets. It is characterized by increased value of
property – until unsustainable level, reaches relative to income, price-to-rent ratio, and
other afford abilities. The causes of the housing bubble are complex; factors like
historically low interest rates, lax lending standards, and a speculative fever.
Top Causes of the Financial Crisis

1. Regulatory law allowed creditors to carry too high ratio of mortgage-backed

securities.
2. New accounting regulations under Sarbanes Oxley are too conservative causing
assets like mortgage-related securities to be valued less than their economic value,
which caused the bank debtor run on the bank.
3. Private lenders got greedy either lowering or violating their own lending
standards in greed for making, more interest income by lending to people who
were very risky.
4. Households borrowed more than they could afford. Therefore, the blame is
equally on both, the citizens and the lenders.
5. New law had been passed several years ago, urging institutions like Fannie Mae
to make more loans to lower income households that carried much more risk.
6. Too high ratio of asset to debt. Banking regulators should have protested against
it.
7. Huge expenditure on the army led to increased debt.
8. Prolonged wars with Iraq caused huge expenditure on the army and weapons.
EFFECTS OF THE FINANCIAL CRISIS:

The collapse of the US sub-prime mortgage market and the reversal of the housing boom
have a ripple effect around the world. Other weaknesses in the global financial system
have become prominent. The extent of this problem has been so severe that some of the
world’s largest financial institutions have collapsed. Others have been bought out by their
competition at low prices and in some cases, the governments of the wealthiest nations
have resorted to extensive bail-out and rescue packages for the remaining large banks and
financial institutions.

• Rise in the Prices of Manufactured Goods

Inflation is rising at the same time. The price of manufactured goods rose 7.5% in April.
This rise is described as “horrific’’ by Ben Broadbent of Goldman Sachs, and “nothing
short of terrible’’ by Paul Dales at Capital Economics.

Import prices are climbing too, as the pound weakens. Import prices in the first quarter
were up 10.1% year-on-year.

However, consumers are spending less and house prices are falling. That points to falling
sales, which makes prices rise. In addition, even if prices rise, rising employment
insecurity will mean workers have a tough time demanding higher wages.

• The End of Cheap Labour

The global share of labour has fallen to a historic low. Now emerging market workers are
battling for their income share. That means the developed world will have to pay more
for its imports.

The other problem is that even though emerging economies are experiencing rapid
inflation, many are pegged to the dollar. There is more money around in terms of dollars
but it can still buy same quantity of products.

So developing economies are now fuelling inflation in both raw materials and exports.

• Debt

Debt is the biggest problem of the developing countries. Inflation decreases the value of
debt, so the government always seeks to inflation. The flipside is that the developed
countries cannot afford to buy all those exports from the developing world, and then
China and other export dependant economies could face rising unemployment and slow
growth.
EFFECTS ON U.S.A

• Financial Sector Downturn

Financial institutions from around the world have recognized sub prime-related losses.
Profits at the U.S. banks declined from $35.2 billion to $646 million (89%) during the
fourth quarter of 2007 compared to 2006, due to loan defaults and provisions for loan
losses. It was the worst bank performance since 1990. Profits declined from $35.6 billion
to $19.3 billion during the first quarter of 2008 compared to 2007, a decline of 46%.

The financial sector began to feel the consequences of this crisis in February 2007 with
the major loss of $10.5 billion. During 2007, at least 100 mortgage companies either shut
down, suspended operations or were sold. Various institutions followed up with merger
deals.

• Market Sector Downturn

On July 19, 2007, the Dow Jones Industrial Average hit a record high, closing above
14,000 for the first time.

On August 15, 2007, the Dow dropped below 13,000. Similar drops occurred in virtually
every market in the world, with Brazil and Korea being hard-hit. Through 2008, large
daily drops became common, a result of the sub prime crisis.

Mortgage lenders and homebuilders faced terrible losses. Metal and mining industries
were worst hit.

Stock indices worldwide trended downward for several months since the first panic in
July–August 2007.

• Market downturn

The crisis caused panic in financial markets and encouraged investors to take their money
out of risky mortgage bonds and shaky equities and put it into commodities as "stores of
value". Financial speculation in commodity futures following the collapse of the financial
markets has contributed to the world food price crisis and oil price increases due to a
"commodities super-cycle." Financial speculators seeking quick returns have removed
trillions of dollars from equities and mortgage bonds, some of which has been invested
into food and raw materials

Many banks within the United States ceased operating. It is estimated that over 100 banks
in the United States closed because of the financial crisis. This had a severe impact on the
economy and consumers. It is expected that it will take years for the United States to
recover from the crisis.
• Indirect Economic Effects

The sub prime crisis had a series of other economic effects. Housing price declined left
consumers with less wealth, which placed downward pressure on consumption. Certain
minority groups received a higher proportion of sub prime loans and experienced a
foreclosure. Home-related crimes including arson increased. Job losses in the financial
sector were significant, with over 65,400 jobs lost in the United States.

Many renters became innocent victims, often evicted from their homes without notice
due to foreclosure of their proprietor’s property.

The sudden lack of credit also caused a slump in car sales. Ford sales in October 2008
were down 33.8% from a year ago, General Motors sales were down 15.6%, and Toyota
sales had declined 32.3%. One in five car dealerships are expected to close.

FINANCIAL CRISIS AND THE DEVELOPING WORLD:

For the developing world, the rises in food prices as well as the knock-on effects from the
financial instability and uncertainty are having a compounding effect. High fuel costs,
soaring commodity prices together with fears of global recession are worrying many
developing country analysts. Uncertainty and instability in international financial,
currency and commodity markets, coupled with doubts about the direction of monetary
policy in some major developed countries, are contributing to a gloomy outlook for the
world economy and could present considerable risks for the developing world.
Market liberalization and privatization in the commodity sector have not resulted in
greater stability of international commodity prices. There is widespread dissatisfaction
with the outcomes of unregulated financial and commodity markets, which fail to
transmit reliable price signals for commodity producers.

ASIA AND THE FINANCIAL CRISIS:

Countries in Asia are increasingly worried about what is happening in the West. A
number of nations urged the US to provide meaningful assurances and bailout packages
for the US economy, as that would reassure foreign investors.

Many Asian countries have seen their stock markets suffer and currency values going on
a downward trend. As many nations in the region are seeing rapid growth and wealth
creation, there is enormous investment in Western countries, and therefore, a lot of
exposure to problems, too.
There is increased foreign investment, mostly from the West in Asia. Asian products and
services are also global, and a slowdown in wealthy countries means increased chances of
a slowdown in Asia and the risk of job losses.
Asia has not had a sub prime mortgage crisis like many nations in the West, but they
were inter connected and are adversely affected.

EFFECTS ON PAKISTAN:

The consequences of economic turmoil are especially worrisome in Pakistan, where the
economy is in a "state of crisis". Soaring food and oil prices coupled with runaway
spending does not meet up with the government budget. Inflation is expected to top 15%
next year.

Pakistan in recent years attracted ample foreign investment and registered strong
economic growth. However, its economic heft remains modest.

"Every day that passes, things get worse. … The economy is in a downspin," said Zubair
Iqbal, a retired IMF economist now at the Middle East Institute in Washington, D.C.

Selig Harrison, an expert on the region at the Center for International Policy, says further
economic deterioration would exacerbate ethnic tensions and undermine already fragile
support for the country's new civilian government. "From a U.S. point of view, the
political fallout from an economic collapse would be very, very dangerous," he said.
 1929 GREAT DEPRESSION VS. U.S FINANCIAL CRISIS 2008

BACKGROUND 1929

• Cheap credit for consumers and businesses

American consumers and businesses relied on cheap credit, the former to purchase
consumer goods such as automobiles and furniture, and the latter for capital investment to
increase production. This fueled strong short-term growth but created consumer and
commercial debt. People and businesses that were deeply in debt when price deflation
occurred or demand for their product decreased often-risked default. Many drastically cut
spending to keep up time payments, thus lowering demand for new products. Businesses
began to fail as construction work and factory orders fell.

• Smooth-Hawley Tariff Act

Congress’s initial rejection of the Bush Administration’s $700 billion bail out plan calls
to mind an unhappy precedent. Back in 1930, the Senate passed the Smooth-Hawley
Tariff Act, which raised duties on some 20,000 imported goods. This is one of the
critical steps that led to the Great Depression.

• Bank Failures

The Depression was triggered by the Wall Street stock-market crash which is
conventionally said to have begun on “Black Thursday”-Oct 24, 1929, when the Dow
Jones industrial average decline 2%- though in fact the market had been slipping since
early September. On “Black Monday” (Oct 28), it plunged 13, the next day a further
12%. Yet the underlying cause of the Great Depression was not the stock-market crash
but a "great contraction" of credit due to an epidemic of bank failures, which led to
stock-market crash.

BACKGROUND 2008

Every great depression had been accompanied or preceded by a monetary collapse.

Because of financial tsunami, some experts have started to ponder whether U.S is
headed for a depression.
The current credit crunch and the reduction in some financial institutions are quite
similar to what happened during Great Depression in the 1930s.
For some past years, people in U.S are taking credit to buy real estate that result in the
emergence of debt-fueled property bubble and losses to bank. These factors are making
the U.S economy to decline and might lead to depression.
CAUSES 1929

• Debt

Debt is one of the causes of the Great Depression. Bank failures increased as desperate
bankers called in loans, which the borrowers did not have time or money to repay. The
problem was that some large, public bank failures, particularly that of the Bank of
United States, produced panic and widespread runs on local banks.

With future profits looking poor, capital investment and construction slowed or
completely ceased. In the face of bad loans and worsening future prospects, the
surviving banks became even more conservative in their lending. Banks built up their
capital reserves and made fewer loans, which intensified deflationary pressures. A
vicious cycle developed and the downward spiral accelerated. This kind of self-
aggravating process may have turned a 1930 recession into a 1933 Great Depression.

• Monetary Contraction

The Great Depression was not caused by the stock-market crash but by the great
monetary contraction, the consequence of poor policymaking by the American Federal
Reserve System and continuous crisis in the banking system and epidemic of bank
failures. In fact, this results in the stock-market crash.

• Margin Financing

Another culprit in the 1929 crash was

“Margin financing,” that caused excessive speculation in the stock market.
Investors needed only to put up 10% capital and borrow the rest from the
bank to invest in the stock market. The collapse of stock prices led to margin
calls and further sell downs

• Tight Monetary Policies

According to Ben Bernanke, the US Fed chairperson, the main reason behind
the Great Crash of 1929 was due to the tight monetary policies adopted during
that period. He said the high interest rates back then caused the US economy
to fall into a recession that led to the great market crash in October 1929.The
Fed continued to increase interest rates in an effort to preserve the value of US
dollar.
As a result, high interest rates caused bankruptcies for many companies. In
that period, bank deposits were uninsured and the collapse of the banks caused
depositors to lose their savings.
CAUSES 2008

• Debt-fueled Property Bubble

Households now owe as much as the entire U.S. economy can produce in a year. Much of
the increase in debt was used to invest in real estate. The result was a bubble; at its peak,
average U.S. house prices were rising at 20% a year. Then — as bubbles always does —
it burst. The house prices in 20 cities have been falling since February 2007. And the
decline is accelerating. In June, prices were down 16% compared with a year earlier. The
U.S. real estate market hasn't faced anything like this since the Depression.

• Credit Crisis

The banking and credit-market crisis was mainly due to the property boom and sub prime
bust. The collapse of sub prime loans sparked the credit crisis, which dragged many
financial institutions into trouble and banks to crippling losses.

Because of the securitization and the creation of innovative financial products like
collateralized-debt obligations and credit-default swaps, the collapse of one financial
institution had a domino effect, leading to the collapse of other financial institutions.

• Political Conditions

Together with the above mentioned causes, the political dithering of recent days, have set
in motion a chain reaction that, in the worst-case scenario, could lead to something like a
21st century version of the Depression — even if a bailout package does eventually get
approved.
EFFECTS 1929.

• Unemployment

Massive layoffs occurred, resulting in US unemployment rates of over 25% by 1933. At

the peak of the Great Depression, the US unemployment rate hit 25%. 13 million
people became unemployed.

• Bank Failures

From the years 1929 to 1932, about 5000 banks went out of business. Banks which had
financed the debt began to fail, as debtors defaulted on debt and depositors attempted to
withdraw their deposits. Bank failures led to the loss of billions of dollars in assets.
Outstanding debts became heavier, because prices and incomes fell by 20–50% but the
debts remained at the same dollar amount. After the panic of 1929, and during the first 10
months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By
1933, depositors had lost $140 billion in deposits.

Massive withdrawals of cash by panicky depositors were the last straw that brought about
the total collapse of financial institutions.

• Industrial production fell by nearly 45% between the years 1929 and 1932.

• Home building dropped by 80% between the years 1929 and 1932.
 EFFECTS 2008
That is where when the buyer ran out of the market…. and this is what happening now in
2008. Investors now are panic and cash out from stock market.

• Losses to Banks

To date, U.S. banks have admitted to $334 billion in losses and write-downs, and the
final total will almost certainly be much higher. To compensate, they have managed to
raise $235 billion in new capital. The trouble is that the net loss of $99 billion implies
that they will need to shrink their balance sheets by 10 times that figure — almost a
trillion dollars — to maintain a constant ratio between their assets and capital. That
suggests a drastic reduction of credit, since a bank's assets are its loans. Fewer loans
mean tighter business conditions.

• High Commodity Prices

The decade of the 2000s saw a “2008 commodities boom,” in which the prices of primary
commodities rose again after the Great Depression 1929 and the Great Commodities
Depression of 1980-2000. However, in 2008, the prices of many commodities, notably oil
and food, rose so high as to cause genuine economic damage.

In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many
price milestones to be passed in the course of the year. By July, the price of oil reached as
high as $147 a barrel.

• Trade

In mid-October 2008, a measure of shipping volume fell by 50% in one week, as the
credit crunch made it difficult for exporters to obtain letters of credit.

• Unemployment

The International Labor Organization predicted that at least 20 million jobs would have
been lost by the end of 2009 due to the crisis - mostly in:
1. construction
2. real estate
3. financial services
4. auto sector
- bringing world unemployment above 200 million for the first time.

• Inflation
In February 2008, global inflation was at historic levels.

Reuters reported that:

1. excess money supply around the globe
2. monetary easing by the Fed to tame financial crisis
3. agricultural failure
4. rising cost of imports from China
5. rising demand of food and commodities in the fast growing emerging markets,

-are the possible reasons for the inflation.

In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries.
However, inflation was also growing in countries classified by the IMF as "non-oil-
exporting LDCs" (Least Developed Countries) and "Developing Asia", because of the
rise in oil and food prices. Inflation was also increasing in the developed countries, but
remains low compared to the developing world.

RECOVERY 1929
In the United States, the massive war spending doubled the GNP, either masking the
effects of the Depression or essentially ending the Depression. Executives ignored the
mounting national debt and heavy new taxes, redoubling their efforts for greater output to
take advantage of generous government contracts. Productivity soared: most people
worked overtime and gave up leisure activities to make money after so many hard years.
People accepted rationing and price controls for the first time as a way of expressing their
support for the war effort.

The stock market started to recover eight months before the US economy ended its
depression.

RECOVERY 2008

As much as there are similarities between the two crises, the damage caused by the
current disorder is likely to be less severe given the swift actions of central banks.
Now, the important question is whether we are in a long bear market and heading for a
depression. We believe a depression like the one in 1929 may not happen exactly the way
it did before.

Central banks around the world have been putting in intensive efforts to make sure the
global economy will not fall into a depression.
The rescue packages being implemented throughout the world will help stabilize the
financial system.

Besides, deposits placed with most financial institutions are guaranteed by central banks.
Even though the US unemployment rate may rise to 10% from 6.1% currently, it is still
far below the peak of 25% hit during the Great Depression. Lastly, we believe the stock
market will eventually recover.

Solutions Proposed
End the war in Iraq and Afghanistan

USA will face national insolvency and a long depression if they do not end the wars in
Iraq and Afghanistan, close over 800 military bases around the world that no longer play
a role in USA’s national security, cut from the defense budget that bears no relationship
to the real national security needs of the united states, and not use the defense budget as a
jobs program. Many economic models have shown that military spending by the United
States Government has ultimately resulted in slow growth and reduced employment.
Estimates project that by 2017 these wars will have cost the U.S budget between $1.7
trillion and $2.7 trillion.

In order to strengthen the USA economy and country they must cut their military
spending and stop building smart bombs and start educating smart people. They must
stop building hydrogen bombs and start building hydrogen-fueled cars. In this way,
America will prosper again when they stop spending so much on the military and spend
more on the needs of their people.

Trillions of dollars are being spent on the war against terror and billions of dollars are
spent in form of military aids

So the war has to end, this would not only increase the confidence of the investor but also
add up in the image of USA as a responsible super power.

Increase the dollar value and interest rate

The dollars value responds to the economic fundamentals of supply and demand. An
increase in the supply of dollars will reduce the dollars value. Similarly, anything that
increases the demand for dollars will increase the dollars value.
Interest rate is the price of borrowing, when the price goes up the demand goes down.
This discourages people to take money from the banks and money becomes more
valuable. Buying bonds increases the interest rate and an increased interest rate makes a
dollar stronger. Therefore, both the dollar value and interest rate are inter-related. The
government can also assure the investors to rebuy the stocks at a slightly higher price of
what they paid for it, So that the investor is confident about his stocks being sold again in
market. This would automatically finish the liquidity crunch and attract the investor to
keep investing in market. The root of the problem is a loss of confidence by investors and
the public in the strength of key financial institutions and markets. The crisis will end
when comprehensive responses by political and financial leaders restore that trust,
bringing investors back into the market and allowing the normal business of extending
credit to households and firms to resume.

USA banks need to lower Federal Funds

Federal fund is a kind of interest rate that the central banks of USA decide and all other
banks decide their interest rate according to that. The banks in US need to gradually
lower the Federal Fund, this is going to encourage people to borrow at lower rates and
invest. This will encourage economic activity and avoid liquidity. The main objective is
to maintain price level stability, which will maintain long-term strength of the economy.

The Bailout Plan

Bailout plan is a law authorizing the United States Secretary of the Treasury to spend up
to US$700 billion to purchase distressed assets, especially mortgage-backed securities,
and make capital injections into banks. The bailed-out banks could be U.S. banks or
foreign banks, and they don't even have to be banks. The Act was proposed by U.S.
President George W. Bush and Treasury Secretary Henry Paulson during the global
financial crisis of 2008.

The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the
worth of the remaining assets, and restore confidence in the credit markets.

The proposal called for the federal government to buy up to US$700 billion of illiquid
mortgage-backed securities with the intent to increase the liquidity of the secondary
mortgage markets and reduce potential losses encountered by financial institutions
owning the securities. The draft proposal was received favorably by investors in the stock
market, but caused the U.S. dollar to fall against gold, the Euro, and petroleum. The plan
was not immediately approved by Congress; debate and amendments were seen as likely
before the plan was to receive legislative enactment.

Reaction to the Plan

This plan can be described as a risky investment, as opposed to an expense. The MBS
within the scope of the purchase program have rights to the cash flows from the
underlying mortgages. As such, the initial outflow of government funds to purchase the
MBS would be offset by ongoing cash inflows represented by the monthly mortgage
payments. Further, the government eventually may be able to sell the assets, though
whether at a gain or loss will remain to be seen. While incremental borrowing to obtain
the funds necessary to purchase the MBS may add to the United States public debt, the
net effect will be considerably less as the incremental debt will be offset to a large extent
by the MBS assets.
Alternative Proposals

Suggested alternative approaches to address the issues underlying the financial crisis
include: mortgage assistance proposals try to increase the value of the asset base while
limiting the disruption of foreclosure; bank recapitalization through equity investment by
the government; asset liquidity approaches to engage market mechanisms for valuing
troubled assets; and financial market reforms promoting transparency and conservatism
to restore trust by market investors.
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