Why is the economy so bad
The current economic crisis has become so concerning to so many individuals and groups alike that people are now referring to it as the worst financial crisis since the Great Depression. While this is under scrutiny by others especially when compared to other events such as the commercial banking crisis of 1988-1992 or the Asian Financial Crisis, this economic state is certainly causing more concern than usual. This is because the current economic crisis not only involves the entire financial system but it is also a complete mystery.
In previous times of financial difficulty banks reassured the public by lending cash to solvent banks so that they could repay depositors and prevent a wide spread panic. However, after the commercial bank crisis banks now own only about 30% of lending. With the rest of it comprised from mortgages, credit cards and other loans. That meant that this time around, a much more highly complex and relatively unknown financial institutions and securities are in place that have escalated in to international panic and fear of the unknown.
The fall of the large non-commercial bank Bear Stearns signified the harsh reality of this situation. As America’s fifth largest investment bank Bear Stearns funded a large proportion of its operations with borrowed money. That meant that the widespread fear and panic was potentially fatal to Bear Stearns as lenders asked for more collateral or pulled their loans entirely concerned about their worth. This potential downfall was realized quickly and Bear Stearns was stripped of its credit and had to be resold for a meager 2% of its previously estimated value.
Whether or not Bear Stearns was a victim of rumor and scare mongering or if it actually just had a lax financial portfolio is unclear but may agree this is indicative of the modern nature of financial crises. All financial institutions are connected through a web of loans, buying, selling, borrowing, credit and more. The Achilles heal of this network of finances has been and probably always will be confidence. Without confidence, funds quickly disappear as lenders withdraw credit and loans and investments suffer heavily. It is in fact a downward spiral of fear which leads to credit withdrawal and then on to fear again. The more concerned we become about our finances the tighter the finances become and the more problems we face to cause concern about our finances.
While the Fed are actively combating this fear to renew faith in borrowing and lending as well as the stability of solid financial institutions the rest of us are still unnerved by it all as it affects our real estate, personal credit and our day to day lives. Everyone is feeling the purse strings pull that little bit tighter and companies are still inciting fear and causing problems for the everyday individual by cracking down on debts and raising prices. Essentially speaking the crisis won’t cease until people start relaxing, or until it reaches epic proportions similar to the Great Depression. Unluckily for us, it seems increasingly much more likely that faith will not be restored in the financial market any time soon.