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America headed for possible depression |
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Tuesday, 22 July 2008 |
For months, economists have told us that America’s economy is in a crisis, a slump and a downturn.
So what exactly does this mean?
It goes back to the classic principles of supply and demand - goods and services.
The people in America just aren’t going out and buying things.
A lot of them don’t have the gas to do it. Some are afraid the economy will get worse. And others don’t have any money to spend.
When the economy is bad, money doesn’t circulate as it should. We get
laid off our jobs because our employers can’t afford to keep us.
Inflation increases; costs rise too high for the amount of money we are making.
So, how bad is it?
According to a CNN poll, 75 percent of Americans believe the nation is now in a recession.
But we aren’t technically in a recession.
That’s good, right?
Not necessarily. Economists only declare a country to be in a recession
when two consecutive economic quarters have a negative Gross Domestic
Product (GDP) rate.
Basically, if America produces more, it should make more profit.
America is producing more, but is it making more profit?
The GDP is a measurement - an estimate and estimates are subject to error.
America’s last two economic quarters have had a very low, practically negative growth rate.
Some would even say we are, or will be, in a recession, even though statistics don’t show it.
A major cause of our weakened economy has a lot to do with building and buying houses.
You’ve probably heard about it.
America is in a housing crisis.
When people want to build or buy a house, they have to ask the bank to loan them the money to do so.
Unless they have thousands of dollars floating around, they can’t buy a house using the money from their piggy bank.
When people pay a mortgage, they’re gradually paying back the bank.
Back when the 1920s were roaring and people had money to spend at their leisure, banks were loaning money to whoever needed it.
But after the stock market crashed, Franklin D. Roosevelt passed legislation to regulate banks.
FDR established FDIC, the Federal Deposit Insurance Corporation.
The FDIC insured every bank account up to $5,000.
So, no matter what, Americans were guaranteed not to lose their money.
This legislation discouraged people from withdrawing from the bank.
FDR then had to regulate bank loaning.
He passed the Glass-Stegall Act, requiring banks to make sure each loan they gave could be paid back.
FDR’s policies worked well for several decades.
Those who applied for mortgages had to meet strict income, job, and credit requirements.
Then, in the 1980s and 1990s, banks across America began to rebel
against these requirements; what they considered to be overly
restrictive government regulations.
Lobbyists representing the banking industry persuaded Congress to repeal the Glass-Stegall Act and other New Deal legislation.
The banks began engaging in a wide range of risky financial behavior.
Just like the banks of the 1920’s, the banks of today began loaning money to people who couldn’t pay back.
And because of the fact that the government still promises to insure
its depositors (now up to $100,000), banks began to feel as if they
could loan more money and still be funded by the federal government.
So, banks began to loan money without many regulations.
The strict income, job and credit requirements of those who applied for mortgages were disregarded.
And all of a sudden, people couldn’t pay their mortgages.
Millions of people can’t pay.
They’ve lost their jobs in our slowing economy.
The banks are stuck with the houses they’ve bought, instead of reaping
the profit from the mortgages that people were supposed to re-pay them.
And since the government uses the money of taxpayers to fund the banks
from going bankrupt, the value of the dollar is going down, inflation
is rising faster than wages, and the budget squeeze is put on the
average American.
But we’re just college kids.
I mean, why should we care?
Because we’re the ones who will be stuck paying for it.
Emily Melton, a junior communications major from Charlotte, is an intern news reporter.
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