Anonymous asked in Social ScienceEconomics · 1 decade ago

in easy terms can you explain the economic crises to me, mainly the causes of it?

im doing a project on the economic crisis,

i need the causes of it, effects of it, effects on nations and possible solutions.

Please help me with whatever you can this is important to me.

i wont copy what you say, i just cant find any information that isnt opinions or something i can understand

3 Answers

  • 1 decade ago
    Best Answer

    You will have an idea on what is happening by understanding the Business Cycle Theory of the Austrian School of Economics. It explains that business cycles exist because of government intervention and not because of the free market.

    One way for government to intervene in the market aside from coercive legislation is through a central bank (Federal Reserve) by keeping interest rates artificially low, price-fixing, inflating the money supply, etc.

    The market should determine what prices, wages, interest rates are. The free market is the amalgamation of a lot of individual supply and demand transactions. This is the most powerful determinant of what rates should be as opposed to a few people who think they know better than the market.

    Entrepreneurs are the experts in predicting the market, thus they can venture into capital investment and business decisions. Some of them fail because they are not as good as those who are successful. But if the market is tampered with by the government (through artificially low interest rates, price fixing, wage fixing, inflation, etc), it sends bad signals to these entrepreneurs which causes them to make bad investments (malinvestments) - and a temporary/fake prosperity ensues (this is the boom cycle - where more buildings, companies, houses, etc. are made/created even though they are not needed or actually have no market for such investments). Once the market tries to get back to real rates or equilibrium, it will start liquidating the malinvestments created by the boom cycle (this is the bust cycle - where the market finally says "enough is enough" - where the houses should be foreclosed because they can't be paid, where factories should be closed because they actually have no market for what they produce, where irresponsible banks go bankrupt, etc.)

    A perfect analogy would be the following:

    Imagine a small landowner who rents out a space for lodging in a small town. One day, the circus came to town bringing with it its numerous staff and the tourists they attract. Because of this, more demand came up for his business. He then started buying the lots beside his land and created more lodging for the people that the circus attracts. Once the circus leaves town though, not only did it bring its staff with it, its departure also stopped the big number of tourists coming into town. Now the business owner is paying extra expenses for very few customers. He is then forced to sell/liquidate the bad investments he made because of the "false market signals" brought by the circus.

    With this in mind, you can now fill in the blanks as far as the present economic crisis is concerned. Moral hazards created by legislation which promoted buying houses and other things without being able to afford it, artificially low interest rates, price fixing, etc. Also, by preventing the recession in the 90's to run its full course, the central planners postponed the inevitable correction needed by the market. It has now come back as the current crises which is bigger and more painful. The market should be allowed to do its work. Prior to the 30's, depressions/recessions lasted only a year or 2. But during the Hoover and FDR administrations, they intervened in the market with the goal of "saving" the economy with its New Deals, not knowing that it was counterproductive. Because of this, the Great Depression lasted more than a decade. With this, a precedent has now been established and depressions got more and more painful because of all these government interventions.

    To show you the credibility of the Austrian School of Economics - they were able to predict the Great Depression, the crisis of the 70s, Enron, the Nasdaq bubble/burst, the mortgage crisis and a lot more.

    *** Don't listen to that D00thcy guy who just follows what the establishment want him to believe. He must watch too much of the mainstream media and not rely on actual research and personal reading to understand the situation.

    He is right about the role of inflation. What I am not sure if he knows is that all these so called measures to "free up" the credit market and the "helping out of consumers" through bail outs and encouraging them to spend more money by giving them more or creating more incentive to spend money they don't have IS one of the causes of inflation. I suspect he might even be one of those people who define inflation as "increase in prices of goods". What he doesn't know is that inflation is actually the "increase in money supply" WHICH leads to higher prices because of the debasement of the currency (through inflation).

    Seems like the "other guy" didn't really read what I wrote as he believes I did not answer your question. D00tchy only presented the symptoms and not the underlying cause of these symptoms. I agree that the consumers are important, but I should also add that corporations are also important as they provide what the consumers want to consume. What is bad is when corporations are in bed with government. And that is what is happening right now.

    Another proof that he did not understand my case is, he said "nothing is being done to help the consumer". That is exactly the point. The consumers aren't benefiting from government intervention. They never benefit every time government intervenes. So basically, part of what D00thcy said just proves my case. I say we should just get the government out of the way and let the free market work.

    Also, what is wrong with listening to Ron Paul? He predicted all this mess right? What about D00thcy? Does he read anyone who actually predicted this mess? I doubt it...

    Source(s): America's Great Depression by Murray Rothbard Human Action: A Treatise on Economics by Ludwig Von Mises Man, Economy and State by Murray Rothbard The Revolution: A Manifesto by Ron Paul Economics in One Lesson by Henry Hazlitt Crash Proof: How to Profit in the Coming Economic Collapse by Peter Schiff - you can do a lot of research on economics for your paper in this site. - also in this site, specifically the "Depression Reader" found in this link:
  • 1 decade ago

    I wouldn't listen too much on that guy talking about the Austrian School of Economics. That guy just watched too much Ron Paul. Besides, it doesn't even answer your question...

    The pivotal factor behind the global economic crises are the frozen credit markets. The other guy mentioned it right, that home-buyers and banks were lending and borrowing money without proper controls to ensure that the money would be paid back. But what he is also forgetting is that inflation (esp food and natural resources) were going unrealistically higher. That puts a strain on the consumer, who has to think about paying his mortgage while also putting food on the table. In short, things became more expensive and the consumer ran out of money.

    So the issue of frozen credit markets is very simple, a company has a limited amount of money and they are in the business of extending loans. Once people default on their loans (not paying back), there isn't any new money to extend more loans to other people. No money to people means less money they spend. Less money that consumers spend, means less business profit, means less business productivity. Hence, stockmarket crashes.

    So now corporations turned to the gov't asking for bail out rescue packages. Basically this means to ask mom and dad for money. Problem is, now that alot of money has been appropriated to banks, they are not eager to lend it out again, instead choosing to boost up their balance sheets and divest that money into profit-recovering investment ventures. So no money is going to the consumer.

    That's the root of it. The consumer is such an important part of the success of our economy, and yet, nothing is being done to help the consumer. Sure, the price of oil has gone down (not by supply/demand as they want you to think) but still not enough is done to alleviate the burdens on the consumer.

    I think we can debate lively about possible solutions and there are many, but I think the most essential solution would be to help the consumer rather than the corporations. Tax-reducing policies would be a step in the right direction. Basically, the more money people have left in their pockets the more they have available to save and spend.

    So there was my 2 cents, rootcause/issue, effects, and solution.

  • Anonymous
    1 decade ago

    stupid people bought houses they couldn't afford. stupid banks lent people money knowing full well they probably couldn't repay them. people default, banks fail which leads to stocks going down which leads to more banks and companies failing etc. Results: credit is hard to come by because of frivolous lending the previous few years, banks are consolidating and the big three car companies in the us (and practically everyone else) is looking for the government to press more money to fix things. Government prints more money, dollar goes down in value, people ask for more money, cycle repeats until the US is no more. The rest of the world rejoices.

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