Economic crisis in America

 1. Deregulation.  2. Statistics.  3. The reasons for the crisis.  4. Obama’s plan.

Deregulation „Government institutions and self- regulating organizations must play key roles in ensuring that rules are fair, apply to all, and are enforced...” By John D. Sullivan Executive Director, Center for International Private Enterprise

Deregulation  In the 1970s it turned out that much regulation did not increase competition, but had the opposite effect.  That is why government decided to ease controls in some cases.

Deregulation  Transportation  Telecommunications  Banking

Transportation  Companies were allowed to compete by using any air, road, or rail route they choоse.  As a result, new competitors emerged and cheap services appeared.  Some large companies, which had grown due the to government that guaranteed they could cover all their costs, found themselves hard- pressed to meet the competition.

Telecommunications  In 1984, a court effectively ended American Telephone & Telegraph 's telephone monopoly.  New technologies - including cable television, wireless service, the Internet, and possibly others - offered alternatives to local telephone companies.  The competition brought lower prices and improved service.

Banking  Banks are a special case when it comes to regulation, because:  1) banks are private businesses;  2) banks play a central role in the economy and affect everybody, not just their own consumers.

The government:  allows banks to offer long-term home loans (mortgages);  does not control banks’ investments;  does not control the banks’ interest rate, BUT  covers deposit insurance made by insurance companies;  protects banks in case of fail;  regulates the amount of banks’ capitals. Banking

Statistics  The USA produces about 20% of goods existing in the world, although consumes about 35% of all the goods produced in the world every year.  External debt is very big. By the year 2006 the external debt was equal to 66 % of the US economy (13 billion dollars). That means that 66% of all the produce of the country in reality belongs to someone else.

The reasons for the crisis  1) the movement of industry to developing countries (e.g. China or Vietnam);  2) unbelievably high expenses of Pentagon, including the war in Iraq and Afghanistan costs;  3) the increase of oil prices;  4) the absence of structural changes in the economy and an artificial stimulation of economy (external loans, budget deficiency, the increase of the governmental debt).

The roots of the crisis can be traced back to  The government started to get loans and invested money in the economy. The result:  economic growth,  positive changes at the stock exchange and the real estate market.

An artificial stimulation of economy  the market became unstable: the supply at the real estate market became considerably greater than the demand;  banks started to offer packages where paying down was made after some time;  consequently, the government was forced to increase the credit rates from 1 to 35%.

Sub-prime lending scheme  Sub-prime borrowers are the people who have a bad loan reputation (they haven’t returned the loan back) or the people who, under normal conditions, can’t afford getting a loan.  Mortgage lenders decided that it would be, nevertheless, profitable to lend money to such people.  This system worked effectively during 1990-s, as the percentage of those people, with no money down, was around 10% of the market, but later the percentage increased up to 20-25%, and the scheme collapsed.

The consequences  People refusing to repay the loans.  The crash of subprime system.  Banks refusing to give loans to each other.  The general recession of the economy.

Obama’s plan