This money crisis could last a long time because of the following reasons:
- House prices are still falling in the US, reducing the value of mortgage loans
- Many homeowners will still face rising interest rates, when their introductory periods come to an end
- It can be difficult to regain confidence in the financial markets
- A recession in the US and global downturn could cause a further rise in bad loans
Most economic regions are now facing recession, or are in it. This includes the US, the Euro zone, and many others. At such times governments attempt to stimulate the economy. Standard macroeconomic policy includes policies to increase borrowing, reduce interest rates, reduce taxes and spend on public works such as infrastructure (Economics Help).
Borrowing at a time of recession seems risky, but the idea is that this should be complimented with paying back during times of growth. (Economics Help)
Likewise, reducing interest rates sounds like there would be less incentive for people to save money, when banks need to build up their capital reserves. However, as the real economy starts to feel the pinch, reduced interest rates is an attempt to encourage people to take part in the economy. (Economics Help)
Tax reduction is something that most people favor, and yet during times of economic downturn it would seem that a reduction in tax would result in reduced government revenues just when they need it and then spending on health, education, etc, would be at risk. However, because higher taxes during downturns mean more hardship for more people, increased borrowing is supposed to offset the reduction in taxes, hopefully affording people a better chance to weather the economic storm. (Economics Help)
Finally it is at this time that public infrastructure work, which can potentially employ many, many people, is palatable. Often, under free market ideals, government involvement in such activities is supposed to be minimal. Even the other forms of “interference” is usually frowned upon. However, most states realize that markets are not always able to function on their own (the current financial crisis, starting in the US, being the prime example); pragmatic and sensible adoption of market systems means governments can guide development and progress as required. (Economics Help)
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