US Economy Crisis (1)

Posted on February 03, 2008 by Warren Wen | Category: Real Estate

What Can We Do with the Current US Economy Crisis?

Contrary to what most of the main stream economists hope, the current US economy crisis will prove to be the worst economic crisis since the Second World War.  It began with the slowing down of the housing industry back in 2006.  As the subprime mortgage storm situation worsened in the past few months, it caused the stock markets to slump nationally and even globally.  Finally, on January 22nd, 2008, it reached a mini-climax.

Monday, January 21, 2008, during the birthday of civil rights leader Martin Luther King, Wall Street closed for the day.  But outside the US, all of the world’s major stock market crashed.  The whole world’s financial system looks increasing shaky, foreboding a coming storm.

In order to prevent the collapse of financial markets and economic recession, the Federal Reserve Board held an emergency meeting on Monday night.  At this meeting, the Federal Benchmark interest rate was cut 75 basis points, effectively reducing it to 3.5%.  This is the biggest rate cut of the Federal Reserve since the 1980s, and the first time since September 17, 2001 that the board made a change of the Federal Benchmark Interest Rate outside the normal monetary policy meeting.  This shows that the United States Federal Reserve was very anxious about the current financial system stability and the direction of the United States economy.  For the short term, the Feds’ emergent interest cute has brought the result it wants to see.  At the beginning of Tuesday morning, the Dow Jones index plummeted 465 points, then gradually began to recover lost ground, and ultimately was only down 128 points by the close of trading.  Had the Federal Reserve decided not to sharply lower the interest rates, the stock market would surely have been a blood-bath on Tuesday.

At this point, for most of the people, the number one question they have is: Can the Federal Reserve’s decision prevent the economy from sinking into a recession or a serious slump?

Personally, I believe the decisions made by Federal Reserve on Monday night in cutting the rate sharply and the further interest cuts the Feds will certainly do in the near future will stabilize the financial market of the US and the rest of the world temporarily, but at this point it is too late for the Feds to prevent the United States economy from going into a recession, no matter what it decides to do.  In fact, it is funny that the mainstream media is still debating whether the US economy will plunge into a recession.  Even though official figures show that the US economy is still growing, anyone with common sense should know clearly that the US economy has already entered into a recession, if you bother to ask any consumers or business people you know.  When it’s wintertime, we do not need people to tell us that winter is coming.

More importantly, the measures being taken by the Federal Reserve may play a stabilizing role in a short term, but they did not address the fundamental problem of the US economy: the collapse of the US modern financial system and the real estate bubble caused by the former chairman of the Federal Reserve Alan Greenspan.  What the US is facing today is not a normal economic downturn, but the most severe financial and economic crisis since the 1930s.  The consequences will be very serious if not properly handled.

We cannot be optimistic in seeing what the Feds have done so far in handling the current economic crisis.  First, with the bursting of the housing bubble, former Federal Reserve Chairman Alan Greenspan refused to take his responsibility.  He continued to claim that the real estate bubble could not have been discovered before and that the Feds had no way of preventing it.  This is ridiculous because it is Greenspan who created this housing bubble.  Since September 11, he kept the interest rates artificially and unreasonably low for very long.  This encouraged irresponsible financial innovation and real estate speculation wave in Wall Street.  Years ago in one of our articles I pointed out this issue and made it clear that what Greenspan was doing would bring huge harm to the US and its economy.

To make the matter worse, even the present chairman, Ben S. Bernanke, did not realize the seriousness of the challenges the United States is facing.  Both of them have misjudged the seriousness of the impact the housing bubble and the accompanying crazy financial innovation will bring to the US and its economy.  What the United States has to face today is not only the subprime loan crisis or even recession, but the downfall of the US modern banking system and the worst financial crisis since the 1930 depression.  This crisis cannot be dealt with just an interest rate cut and increasing the supply of liquidity.

All of us need to be very careful now and we need to be well prepared.

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