What went wrong with the US economy?

What went wrong with the US economy?

Recently economic news made the evening headlines and became a major concern for the average person. A crisis is looming and people are understandably interested and anxious.

The main reasons the US economy is in chaos today are a result of several blunders committed by the banks and the government starting well before the Bush era. These blunders resulted in the meltdown of the housing market, followed by billions of dollars of losses to lending banks which in turn tightened lending requirements creating a credit crunch. This uncertainty was followed by lay offs numbering 600,000 jobs so far this year alone. The weakening economy places pressure on the Federal Reserve to cut down interest rates thereby weakening the Dollar, as foreigners become less comfortable with the future of that currency.

The Housing Market. When house prices kept going up during the past decade people started to speculate about future prices, consumer confidence rose, and more people started taking bigger loans.

Bush's Limo

English: This graph shows the development of oil p...

Henry Paulson, Secretary of the Treasury of the Un...

Banks were glad to oblige by lowering the requirements for down payments and lending at ever lower interest rates. The problem with people speculating was that both parties (the borrowers and the lenders) were banking that the prices were only going to go up. The classic bubble was created when house prices were way out of line compared to their relative potential rental income. So the borrower would just sell his house after a few years after its price would appreciate substantially, make the difference and pay what he owed the bank. That same person would then borrow more to buy a bigger more prestigious house which would be way beyond his means and hope what happened last time would happen again. As with all bubbles throughout history which are based on...