Economic Decline

When a nation falls under such a disparaging economic decline as the United States has seen from 2007 until 2012, it is important to fully understand the causes, both direct and indirect, to find a possible solution. There are many reasons for the current economic decline: mortgage crisis, bailouts, corporate mismanagement; some of these problems played more potent roles in the recession at hand than others but all significantly increased the odds of a recession and if unchecked a depression. Economists and the government have theorized the possible solutions to avoid a depression and steer the United States back to the financial stability it once held.

To say the housing crisis played a minimal part in the current recession is akin to saying that water is a minimal part of the ocean. In the years of 2006-2007 commercial and investment banks loaned large amounts of money to borrowers who were financially unprepared or likely unable to pay back their loans (Sachs, 2008). During this time of easy lending, banks made exceptions on loans without the perceived idea of a negative outcome. Lenders and banks would charge higher interest rates on more high-risk loans. In this time the housing market was still up and if a borrower were to default on a loan the property was seized by the lender and put back on the market. As time went on, however, the housing market cooled down as consumers began to borrow less and banks were unable to sell the foreclosed properties.

When you talk about financially unprepared borrowers in correlation to housing crisis these borrowers typically had questionable credit and high debt-to-income ratios and were purchasing homes outside of their means by using variable rate loans. These loans appeared at first glance to consumers as good option loans. They offered low interest rates in the beginning that after a period of time would fluctuate and the interest would inflate causing the payments to go up in response to higher interest rates. These boosts in payments caused many borrowers to be financially unable to fulfill their commits to their lenders and pushed their mortgages into default and foreclosure.

As this system of unchecked housing loan issues created a bubble in the housing market that emerged and would result in a portion of the economic decline. At the end of 2007, lenders began to see borrowers decrease their spending on less for homes, automobiles, and durable products - this rapid decline led to a reduction of new construction and manufacturing of durable products which helped to encourage a recession.

Like the housing crisis, corporate management played a very strong role in the economic decline of 2008. During the years leading up to and following the housing crisis many well-known and highly publicized companies were found guilty of corporate mismanagement. It was inferred, and in some cases proven, that company heads were awarding themselves large bonuses, purchasing high-ticket items and charging them to the company, and even writing off personal expenses claiming them as business expenditures. As these companies floundered, many of them sought the assistance of the federal government which to a mixture of government bailouts and company collapses; some companies, like AIG, received the government bailouts, while others, like Lehman, did not.

The capricious nature of the corporate bailouts granted by then President Bush led many economists and government officials to place a majority of the blame on then President Bush (Chan, 2011). His decisions to grant bailouts seemed to be in direct opposition of what the people wanted form then President. During the years of 2001 - 2008 then President Bush approved a total of approximately $3.17 trillion dollars in corporate bailouts. The idea of using tax payer dollars to companies that were mismanaged came across as more than just an insult to the taxpayers; also, company CEOs were not asked to step down and it has been suggested that most of the companies continued to award themselves large bonuses using money provided in the bailouts while cutting corners by reducing jobs. One of the most publicized bailouts was that of the automobile industry in 2008, which included the "Big 3" companies of Ford, GM, and Chrysler.

If we look at the economy now and the history, there are defined moments which coincide with one another and one of the most well defined moments is that of war. It is wildly debated by economists whether war has a positive or negative effect on economic standing. With the exception of World War II, however, most wars have shown to have a negative effect on the economy. The World War II exception is due to a few factors including the United States coming out of a depression, as well as the boost in population. The wars in Iraq and Afghanistan have also helped to plague the economy when coupled with the other issues the economy was facing. Economists have run the numbers and depending on which set of numbers you believe the wars could cost from $570-$830 per citizen per year (Teslik, 2008).

The cost to the taxpayers would be a non-issue when combined with a healthy and stable employment market. If you look at these costs when unemployment is on a rise in a recessed economy the costs per citizen could be debilitating. This effect could also give reason to consumers to purchase less and would thereby hinder the economy more.

If a person were to look at the financial crisis from a political and foreign standpoint the United States is literally giving money to other countries who are allies. The U.S. has long had the practice of contributing funds to countries that seem to be in financial strains; in most recent years the United States has borrowed money from China to help support and stabilize the countries of Palestine and Greece. There has also been a long time practice of the United States rebuilding and reestablishing countries that it was previously at war with. This philanthropic and traditionalized act uses tax payer dollars to rebuild countries that were at one time, or still currently, warring with the United States in hopes of foreign alliances and reduced retaliation. The costs of rebuilding nations added with the costs of the war can create the effects of a financial decline.

Alone each of these causes would do nothing more than to create a political standpoint during a campaign season as a weapon against an opponent, however, when combined in totality they create a perfect storm scenario that seems to be the driving force behind the current economic state of decline. With all of these causes still in play it is difficult to see a silver lining. Economists and the federal government are currently working on a solution to the current decline. There are many theories as to the best course of action in this situation.

Congress has devised a short-term, and rather short-sighted, plan