Solvency and the US Economy

Solvency and the US Economy - dollars in July of 2008....

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Alex Mayer Econ 102 Professor Rick 9/8/2008 Homework 1 The Economy Has a Major Solvency Problem The lack of solvency in the US economy, or the inability of many Americans to pay all just debts, has had a major impact on the overall US and world economies. Over the past 10 years in particular, major investment banks have been issuing sub prime mortgages to borrowers who’s incentives included easy initial terms, in conjunction with an acceleration in rising homes prices. This encouraged borrowers to assume difficult mortgages on the belief they would be able to quickly refinance their homes at more favorable terms. This however led to one of the greatest financial catastrophes in US financial history when the housing bubble burst in late 2006. As the value of people’s homes dropped below the value of their mortgages, people became unwilling or unable to pay the remainder of their loans. Thus, Mortgage lenders reported losses of 435 Billion
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: dollars in July of 2008. Furthermore, the widespread distribution of credit risk and the unclear effect on financial institutions caused reduced lending activity and increased spreads on higher interest rates. Essentially, these losses led to a major liquidity problem in the US economy. With less money available for investment, business activity slowed, and unemployment levels increased. Simultaneously, more and more people continued to default on their loans. Unemployment coupled with a poor housing market has thus had a spiraling effect. With less money available for loans, business activity has also slowed, as capital is not readily available. Furthermorew, the Solvency problem in America has led to a liquidity crisis, a credit crunch, and slowed business activity....
View Full Document

Page1 / 2

Solvency and the US Economy - dollars in July of 2008....

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online