The Fiscal Cliff

The fiscal cliff has been in the news for quite some time now, so I have decided to gain a better understanding of what it is.

By the end of this year, the Bush tax laws will expire, causing an increase in taxes for Americans.

The government has a few choices when dealing with this issue- it can either let the new laws for 2013 go into action, take measures towards preventing these new laws from going into action, or take an approach that combines the two.

Due to Congress's inability to work together, this situation will most likely be resolved at the last second.

With 2013 weeks away, the government needs to act fast if it wishes to avoid another economic disaster.

                                          cbsnews.com

Source:
http://bonds.about.com/od/Issues-in-the-News/a/What-Is-The-Fiscal-Cliff.htm

This is a reputable source because About.com is owned by the New York Times. 

What You Didn't Know About The Federal Reserve

The Federal Reserve, which is in charge of our nation's money, is not owned by the government. It is a privately owned organization that works with the government; many times this relationship leads to disaster.

Whenever the government needs money, they issue bonds to the Federal Reserve, which in turn gives them Federal Reserve notes - money. This transaction creates more debt for our government, due to the fact that the money is in the hands of this private organization - our government is essentially "buying" it from the Fed.

The Federal Reserve can also set interest rates, which tamper with economic cycles.

Because the Fed kept interest rates low before the onset of the recent recession, it helped create the housing bubble, because people were more eager to take out mortgages, which were cheaper. As we know, this bubble eventually burst because of the abundance of subprime mortgages, leaving many Americans in trouble.

The Fed supports an economic system in which money is constantly being created and where inflation is always prevalent. Changes need to be made.

                                          themoneymasters.com
Source:
http://articles.businessinsider.com/2012-02-09/wall_street/31040431_1_interest-rates-big-banks-member-banks/3

This is a reputable source because Business Insider is a well-known magazine. 

Catastrophe!

In this post, I will be once again examining the role played by the housing market in instigating the economic crisis, however in more detail.

So, we have two groups of people: homeowners and investors. Homeowners buy houses, while investors invest money in businesses to obtain more wealth.

Before 9/11/2001, investors put money into treasury bills, which were very safe investments that offered a good amount of revenue for investors. After 9/11, the interest on these treasury bills was lowered to 1%, which produced too low of a revenue for investors.

So, investors turned to the housing market, where they bundled mortgages into packages called CDOs (which consisted of safe mortgages, average mortgages, and unsafe mortgages).

Investors, always looking to make as much profit as possible, would use a technique called leverage to sell these CDOs. Leverage is when an investor borrows money, sells a CDO at a higher price than they borrowed, and then makes a good amount of profit from the transaction.

When CDOs became limited in availability due to widespread home ownership, investors decided to obtain the homes of defaulting homeowners (people who could not pay off their houses), once they defaulted. They would then have a piece of property to sell.

This caused investors to buy more subprime, or risky, mortgages, which is when things became dangerous.

When more people defaulted on their mortgages (because they were subprime) investors were left with many houses, which then lowered the values of the houses located near these houses because of the oversupply of houses on the market. And thus, the catastrophe was in full swing.

After this happened, even more people defaulted on their payments, causing investors to be left with an enormous amount of debt, leading to bankruptcy.

How can we prevent this from happening again?

                                             www. flickr.com

Source:

http://www.youtube.com/watch?v=bx_LWm6_6tA

This is a reputable source due to its popularity and recentness.

Obama and The Economy

On his website, newly reelected President Barack Obama states that he wants to "grow the economy from the middle out."

So far, he has had some success at accomplishing this goal.

- He has been successful at increasing the amount of goods made in America, in other words, he has brought back some manufacturing jobs to the U.S.

- President Obama has supported tax cuts to small businesses, which are critical to our nation's economy - these cuts have allowed these businesses to enjoy more success.

-The President has made some much-needed changes to Wall Street - ensuring that no more foul play occurs there.

- To create more jobs for Americans, President Obama has opened trade with nations such as South Korea, and has been an advocate for technological progress, the latter of which creates new products which can be distributed abroad.

While such positive changes have been made, the President still faces some problems.

-Education funding, which is controlled by each individual state, must be increased in order to improve the academic performance of American Students.

- After the tumultuous events of the past four years, the President needs to regain the confidence of the American people in their government and its economic decisions.

- While efforts to increase American industry have been moderately successful, our nation still does not dominate all other nations in competition.

Where do you think the U.S economy will be in the future?

                                                    www.flickr.com
Sources:

http://www.usnews.com/news/blogs/rick-newman/2012/11/16/obamas-4-biggest-economic-challenges

http://49thward.nationbuilder.com/what_has_president_obama_done_for_the_economy

http://www.barackobama.com/plans/jobs-economy

My three sources are from the U.S. News website, a website operated by members of the Democratic Party, and Barack Obama's own website, respectively. All three sources are current and reliable.

Synthesis & Plan

At this point in my research, I have discovered the causes of the economic crisis in terms of the housing market (subprime mortgages, investment banks, securities), and I have also found some methods that have been used to help out our economy. I plan on focusing my blogs more on solutions, answering questions such as "What is President Obama's specific economic plan?" and ultimately arriving at my own personal opinion on what should be done. I would also like to answer the question "What else has contributed to our country's economic woes?"

The Tragedy of Lehman Brothers

Lehman Brothers.
You've heard the name, although you may not know exactly what Lehman Brothers is.

Founded in 1850, Lehman brothers, an investment bank, quickly grew into a reputable firm. It survived the economic turmoil of the 20th century (i.e. The Great Depression) and eventually grew to become the fourth largest investment bank in the United States.

Surely nothing could ruin such a large investment bank, right?
Wrong.

The beginning of the demise of Lehman Brothers occurred during the housing boom of the early 2000s. Lehman Brothers, always willing to increase business, made the decision to receive mortgages from a number of new mortgage lenders - some of these lenders were dealing subprime mortgages, which if you'll recall, are quite risky due to the fact they belong to people who may not follow through on their housing payments.

This tactic was successful at first, as the firm generated record revenues for a few years after obtaining its new mortgage lenders, however once the trend of homeowners not following through on their mortgage payments began, things started to look pretty bad for Lehman Brothers, who, being an investment bank, used these tainted mortgages as securities - they gave out more of these securities to companies than any other investment bank.

Oops.

By the time the economic crisis was in full swing, it was too late for Lehman Brothers.
Their debt had reached $619 billion dollars; their bankruptcy was the largest in U.S. history.

How can we learn from the mistakes of Lehman Brothers?

                                 www.flickr.com

Source:
www.investopedia.com  "Case Study: The Collapse of Lehman Brothers"
- This recent article is featured on a reputable database for topics related to investing.

What's Been/Should Be Done to Save Our Economy

A multitude of solutions have been proposed to solve our nation's economic woes, however many have only been temporarily successful. In this post I will discuss these as well as other solutions that can potentially fix our economic situation.

The Bailouts

A bailout occurs when the government gives privately-owned banks money in order to encourage those banks to begin lending people money again. This highly controversial method proved to be of little help, as banks did not begin lending again.

Economic Stimulus

Stimulus packages, initiated by the government, are large amounts of money that are used to fund tax cuts and initiate an increase in spending - this would theoretically allow the economy to flourish once again. The stimulus package passed by the Obama administration in 2009 seems to have only been partially successful, helping some but not others. 

Bring Jobs Back Home

Many U.S. companies have turned to outsourcing jobs in order to increase profits. While this helps put more money in the pockets of those companies, due to the lower salaries of workers in other countries, it has had quite a detrimental effect back home, where unemployment still plagues many. By bringing jobs back home, we can get Americans back to work while manufacturing more products in the U.S. - this would certainly have positive effects on American workers as well as the economy.

What else can the government and businesses do to solve the economic crisis? 

                                          www.nyaltnews.com

Sources:

http://www.isreview.org/issues/64/feat-moseley.shtml

- Highly detailed description of causes and solutions of/to the economic crisis.

http://economyincrisis.org/solutions

- Website dedicated to information about the economic crisis. 

How We Hit Rock Bottom

Irresponsibility caused the U.S. economic crisis. People agreed to pay more than they could afford, while banks invested in companies using the money these people could not afford to pay - which resulted in disaster.

The sources that I have utilized discussed the crisis in terms of the housing market, thus I will do the same in this post. 

A mortgage is the money you owe to a bank in order to purchase a house. 

A security, also known as an investment, is the money a bank gives to a company in order to help it start up. 

Congress passed the Gramm-Leach-Bliley Act in 1999, which allowed banks to handle deposits as well as investments...

This caused banks to use mortgages as securities in order to invest in companies. 

Things were looking pretty good at first - this caused more people to buy houses.

A housing bubble occurs when the prices of houses go up due to increasing demand. This happened after more and more people began buying houses. 

The irresponsibility of some people, who bought houses they could not afford, led to disaster as their mortgages, which banks were using as securities, were not paid off. 

Banks then had to pay companies they invested in with their own money, which led to monetary depletion and thus the closing of banks. 

How can we solve this problem and ensure that this never happens again? 

Sources:
www.fotopedia.com

http://www.investopedia.com/terms/h/housing_bubble.asp
- Well known resource about economic transactions

http://www.youtube.com/watch?v=h4Ns4ltUvfw
-Viewed in class

U.S. Economic Crisis

I decided to research the U.S. economic crisis because of how little I know about it. I feel that I should thoroughly understand this topic due to the fact that I will soon be directly affected by it.
All I know about this topic is that the housing market played a key role in causing it and that it is ongoing due to the fact that efforts to alleviate our economic woes seem to have been unsuccessful.