Posted by: alcrabat | 20 June 2010

THE FINANCIAL CRISIS

By: Amine Mohamed Belghit, Intermediate 1

Definition

A financial crisis can be defined as an economic situation with a declining index, such as the MASI/MADEX index for Morocco, the Cac40 index for France, the Dow Jones index for the U.S.A. or the cost of life index in all economies.  These declining indexes are related to bad economic strategies such as lending money to people without guaranties or increasing the interest rate without precaution. There can be many causes. However, the result is always the same. A financial crisis results in panic amongst consumers as well as investors.

The Birth of the Crisis

After the 9/11 attacks, the United States government needed to find a way to save their economy. This is because the part of economy that I’m talking about is finance.  This sector of economy is directly related to trust amongst investors and companies of investment.  Logically speaking it cannot be a feeling of trust if the country where you live is insecure so the consequence is that people prefer to keep liquid money instead of investing in shares. For that reason the United States government decided to promote them economy with different initiatives such as giving loans to everyone. So the Federal Reserve Bank decided to authorize a banking system to lend money to anyone, even customers who were insolvent. At the time, they only cared about boosting the economy after the attacks and its dramatic consequences. At first, only potential home owners took out loans. However because the interest rate was very low (one percent), hundreds of thousands of Americans took out mortgage loans, even people who weren’t financially qualified  to loan. As every one knows There are some basic precautions that all banks are severe with before according any loan such as a minimum as a vital salary, age of demander, and job with permanent contract etc, having said that, stock sales exploded because commercial banks such as Lehman Brothers & AIG benefited. Later ordinary people wanted to benefit too, so they bought stocks, but nobody knew that after a few years the interest rate would go up. Consequently people with loans paid increasingly more than they imagined. Of course they couldn’t afford the payments, so the banks took the mortgage on proprieties and the next day, they looked to sell them. However, when you have a lot to offer of the same product in the same market, the price declines because they are inversely related; thus the market couldn’t assume to suddenly make a huge profit. This is the law of supply and demand.  It states that the prices must decline, and that is why when houses (proprieties) loose their value, then the bank and the investors loose too.

First when I wrote this article two years ago, I admittedly looked to explain the crisis as a plague in different corners.  But also I wanted  to develop how our country can be threatened once the crisis expands all over the world. Having said that, it may be that there are some mistakes in my next paragraphs to come at a later date, so I want to apologize to the economic community.

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