What is the main cause of the current economic crisis?

What is the main cause of the current economic crisis in the Mexico?

• Answer:

  The mortgage collapse was the final "straw that broke the camel's back", but this is merely a symptom of concentration of wealth. An excellent collection of articles on Federal tax policies and their effects from the Center on Budget and Policy Priorities is given in the links below. One of those papers states: " Not since 1928, just before the Great Depression, has the top 1 percent held such a large share of the nation's income. " from Income Concentration at Highest Level Since 1928, By Chye-Ching Huang and Chad Stone (linked below). Wikipedia has a good article on Distribution of wealth - see the link below for the entire article. The next snip is from this article. In the United States at the end of 2001, 10% of the population owned 71% of the wealth, and the top 1% controlled 38%. On the other hand, the bottom 40% owned less than 1% of the nation's wealth. In describing tax systems, it is important to distinguish between the percent of taxes paid on a given income, and the percent of taxes paid by a person with a given income. For example, if a person earns $1,000,000 and is taxed at a rate of 10%, they will owe $100,000 in taxes. On the other hand, if a person earns $10,000 and is taxed at a rate of 20%, they will owe $2000 in taxes. The person with the greater income is taxed at a lower rate but pays a higher tax. The person with the lesser income is taxed at a higher rate but pays a lower tax. The United States has a tax system which is a mixture of progressive taxation and regressive taxation. The income tax is progressive, capital gains tax, at a lower rate than the income tax, is regressive, as is the sales tax, since the less wealthy spend a greater percentage of their income. In 2003, the one percent with the highest salaries paid more than 34% of the nation's federal income tax; the ten percent with the highest salaries paid more than 66% of the total income tax; the top 25% of paid 84% of the income taxes; and the upper half accounted for virtually the entire U.S. income tax revenue (nearly 97%). This is an inevitable consequence of the concentration of wealth. People who do not have much money cannot pay high taxes, even when they pay a greater percentage of their earnings in taxes. The above clip gives ecomomic reasoning that explains why the Constitution of the United States originally forabade direct taxes (income taxes). This country's growth and success are the result of giving everyday people the right to "life, liberty, and the pursuit of happiness". That growth would have been even greater, and probably built on a more solid base if the Native and enslaved population had been given those same rights. This country will continue to deteriorate economically and socially if those rights are not restored. You have this fairly continuous downward trend from 1929, until just about the mid-1970s. Since then, things have really turned around, and the level of wealth inequality today is almost double what it was in the mid-1970s. Above quoted from linked article below: "The Wealth Divide". The increase in incomes of the top 1 percent of Americans from 2003 to 2005 exceeded the total income of the poorest 20 percent of Americans, data in a new report by the Congressional Budget Office shows. The poorest fifth of households had total income of $383.4 billion in 2005, while just the increase in income for the top 1 percent came to $524.8 billion, a figure 37 percent higher. The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed. See the NY Times article linked below for the rest of the above article. "The last quarter of the twentieth century witnessed some disturbing changes in the standard of living and in equality in the United States. ... Between 1973 and 1993 the real wage declined by 14 per cent, though it has since risen by 7 percent from 1993 to 2000, for a net change of -8 per cent. .... Despite falling real wages, living standards were maintained for a while by the growing labor force participation of wives.... excerpt- Another troubling change... Inequality in the distribution of family income .. virtually unchanged since the end of World War II until the late 1960s, has increased sharply since then.... The poverty rate, which had fallen by half from a postwar peak in 1959 (the first year the poverty rate was computed) to 1973, has since risen. excerpt- The first series is the top marginal tax rate (the marginal tax rate faced by the richest tax filers). Back in 1944, the top marginal tax rate was 94 per cent! After the end of World War II, the top rate was reduced to 86.5 per cent (in 1946) but during the Korean War it was soon back to 92 per cent (in 1953). Even im 1960, it was still at 91 per cent. This generally declined over time, as tax legislation was implemented by Congress. It was first lowered to 70 per cent in 1966, then raised to 77 per cent in 1975, then to 50 per cent in 1983 (Ronald Regan's first major tax act). and then again to 28 per cent in 1986 (through the famous Tax Reform Act of 1986). Since then, it has trended upward, to 31 per cent in 1991 (under President George Bush) and then to 39.6 per cent in 1993 (under President Bill Clinton). Above from Recent Trends in Living Standard in the United States, in Edward N. Wolff see below Obama has proposed a raise in the top marginal tax rate. Some are screaming about it but it correlates to healthier economic times. Senator Obama would raise the top individual tax rate back to 39.6 percent, impose an additional 2 to 4 percent tax on earnings for some over the existing Social Security wage cap, and bring back the phase-out of the personal exemption and certain itemized deductions for higher-income taxpayers. When added up, the top effective marginal tax rate rises...from 37.9 percent to roughly 48 to 50 percent. "High" is in the eye of the beholder, but these are tax rates not seen since before the Tax Reform Act of 1986. (see Manikaw economics blog linked below) Taxation can be utilized by the government to facilitate the redistribution of wealth. See the Wikipedia article and the related question:   Short Answer: Bad Mortgage Lending Practices not mandated by the government If you ask me put your money into a money market mutual fund. Sources. http:/mutualfunds.about.com http:/www.amfi.com/types/money-market-mutual-funds Deregulation of the mortgage lending and investment banking industries. Um - or is it over regulation because the "liberals" bought their votes by helping people afford homes? No, really, wait .... it's because the SEC isn't enforcing the regulations we have. No! No! No! It's because the politicians have trashed the Constitution and we are being held hostage by "THEM", the ones that own the FEDERAL RESERVE. I agree with many of the answers to this question. The "root" cause for this financial melt down is "GREED." Money has never been the problem. It has been the love of money. Because of this greedy love for money organizations that lacked morals began creating lending programs, fraudulently inflating property values and even committing mortgage fraud to get people qualified that could not afford to buy. What causes me more worry for me is that our government thinks that the solution is to give the banks more money to get more people to borrow. Here is a Fact... If the nation is incapable of paying their debt today, what make us think that consumers will be able to re-pay even more debt in the future? The key to resolving this problem is not loaning more money. It is teaching and empowering the nation's consumers to get debt free. People need to learn how to be GOOD STEWARDS of their money. Let us focus on helping one another to make the right decisions and get out of this mess. ----------------------------------------------------------------------------- The Mortgage problem is the result of corporate greed run amuck. And the damage caused in the '90s by changing banking regualtions is small change compared to the fleecing of the middle class with the tax code. That's why they can't pay a mortgage. See: How has the Income Tax contributed to the economic crisis of 2008? and: What is the main cause of the current economic crisis in the US?   Basically what happened is that in the late 1990s the Republican Congress did away with a lot of regulations in the financial industry that had been put in place in the 1930s during the Great Depression. Without these regulations, it became easier for a lot of questionable banking and lending practices to take place. Lenders started making money by giving out mortgages to people they knew or should have known could not actually afford the houses they were buying; the lenders assumed that housing prices would continue to rise, so in the case of foreclosure the lender would still make money. Millions of people ended up in these kinds of mortgages, called subprime mortgages; knowingly or not, these people ended up not being able to repay their mortgages. At the same time, housing prices started to fall. This problem has happened millions of times in the U.S. but also in other countries where the same lax practices were taking place, e.g. Spain, Canada, the U.K., etc.   Lenders that gave out too many mortgages of this type then found themselves having a lot of people not be able to pay back their mortgages. The lender then ends up with the foreclosed house, but it can't sell the house for very much because housing prices are falling. This means that the lender has lost a LOT of money on the one house. If banks loose $200,000 on a million homes, that's already $2 billion in lost money. This is all simplified, of course.   The other problem is that these mortgages were being bundled into investment opportunities that companies like Lehman Brothers and other companies then sold shares in to investors. All these people are now also loosing their money. The results are that bank in trouble don't have enough assets to stay in business; the problem is so massive that only government bail-outs can keep the banks in business. Because so many banks have so many bad mortgages, which are a kind of loan, so they have bad loans, it's hard for any bank to offer credit/loans for any reason right now--they just don't have enough cash to cover everything. The problem then turns to businesses: small businesses rely on credit to expand, make payroll, etc., and without credit business starts to shrink, jobs are lost, and the economy overall tanks because no one can get any credit at all, so the economy is being forced to switch to a cash economy: if you don't have the money already, you can't buy anything.   The fundamental reason: Financial Leverage was misused to manipulate markets for decades. Organizations were never regulated and compelled to hire more ethical traders and managers rather than B-School MBA Grads who have just learned to make money at any cost. US officials while rescuing the global giants claim it is just a real estate correction due to bad debts in banking system. Whatever the case, the market sentiment have changed forever, and valuations will come under immense pressure from now on...be it real estate, equity, debt, bond, products, services, or...anything A man jumping from top floor out of a 100 storey building can feel flying with joy until his reaches the ground floor with a big bang. This is the case with most inflated companies and their greedy management, we only know when they actually burst. We should watch and regulate them starting from their intention to climb that building from ground zero! Some Food for Thought: The golden rule is "do not expect the market to behave and act for your profit". They are playing for their own profit. Win-Win is only a term used to convince or induce not-so-smart investors. There will still be a bunch of guys who have profited from these crashes. After all, nobody is throwing money into the Atlantic Ocean, if you lose someone else gains. Unfortunately, incentives for playing smart (mostly doing bad) are huge and accepted by legal systems, regulators, government and modern society at large. American Debt They have been spending money that doest exist. they have now spent so much that the collateral they put up wont cover the debt. and in order to keep spending, even modestly, they have to loan more money, the lender knowing they are unable to repay are nervous about lending the money. as a result the organizations that provide work cant get the finance they need to continue and end up having to put people of. This has a snowballing effect. For instance America has been buying cheep goods from China for years with American money. and china has been lending it back to them and making interest on the deal. If the US dollar losses value then the Chinese will have to ask for higher interest in order to recoup for Chinese imports into the US. The tentacles go every where. For every dollar the US owns They are about 200 dollars in debt.The price of self regulation, human greed and corruption. nothing other than SUB PRIME lOSS.....it is nothing,US bank issused Home loans to all the people without enquiring their credit background......which lead to non-repayment of many loans......this is one of the reason for US crisis The USA was spending money it borrowed from China, China lent money to America so they would buy their goods. Something had to give. The economy of the world is based on toasters and ever improving mobile phones.   The current crisis is both economic and financial. It may be better to have an understanding of what causes these crises in general, rather than getting tied down in endless details regarding the current crises. The causes of the Great Depression are still being debated over seventy years later. It is unlikely a consensus will be reached regarding the specific chain of events leading to the current crises. --- The underlying cause of all financial crises is due to a drop in the rates of return on investments, falling equity prices and/or a rise in defaults on loans. Such changes can put a chill on the investment markets, thus driving down the current prices paid for units of investment instruments. As investors see 'paper' losses mount ('paper' value is the stated value of the investment at a given time, usually based on the most recent price paid for a unit of that investment by the last buyer), a feedback process may ensue in which falling 'paper' values lead to more risk aversion, which in turn leads to a further drop in 'paper' values. For this reason, understanding the difference between 'paper' losses and real losses is important, though it appears many investors do not understand the difference. Real losses are only experienced when an asset is sold for less than what was paid for it (assuming the interest or dividends paid on the investment kept up with inflation). Many investors do not know whether or not they are experiencing real losses because they generally do not keep track of what they paid for the assets to begin with. Rather, they believe they have lost money simply because last price paid for a unit of the investment by a buyer is less than the previous price paid for a similar unit by an earlier buyer. This is much like believing you've lost half the value of your house because your neighbor sold his extremely similar house for half of what his neighbor sold his extremely similar house for. When 'paper' losses occur, sophisticated investors and their agents realize that assets had been overvalued in the first place and that promised rates of return were unsustainable. In a severe crisis and armed with this truth, many begin looking for answers as to why prices and expected rates of return had been so high in the first place. In some cases, the answers are used to punish those who 'caused' the meltdown. In other cases, the answers are used to justify legislative and regulatory changes meant to prevent a recurrence of such errant valuations. As stability returns to the financial economy, prices and rates of return on investments will be based, as they should be, on more realistic estimates of the expected profitability of enterprises that produce goods and services for the economy. A sizable financial crisis will generally lead to a decline in funding for riskier investments. The deeper the crisis, the more severe the decline in funding. Real economic growth - especially that which comes from new or improved goods, services and technologies - depends on funding provided by risk-taking investors. If investors are hiding from risk en mass, such economic growth will decline or cease (and the economy may be even shrink) until funding for riskier investments in real economic activity increases. An economic crisis occurs when there is a substantial drop in resource utilization. Resources fall into three categories: labor, capital and raw materials. A substantial drop in resource utilization might be caused by loss of or reduced access to one or more resources. For example, an economic crisis can be triggered by a sudden lack of access to oil. Declining resource utilization may also be caused by declining demand for some goods and services. As demand for some goods and services decline, so does demand for the resources that produce those goods and services. Generally, a decline in resource utilization is considered a crisis when the resource in question is labor and the decline is sudden and substantial. Of course, unused resources are available to be utilized to produce other goods and services, assuming that demand for them either exists or is projected to exist, and assuming that investment monies are available to fund the creation of new enterprises or the expansion of existing enterprises. Because the financial economy consists of numeric valuations of economic realities, it is viable only to the degree it renders an accurate numeric portrayal of the real economy. Therefore, a real economic decline should be reflected by declines in the financial economy - unless government and other actors seek to mask the economic crisis with actions that result in bogus valuations in the financial economy. Therefore, a financial crisis might be the numeric representation of a crisis in the real economy, or it might be the result of the financial system 'correcting' previous overvaluations of real assets (i.e. - removing overly-speculative influences from those valuations). In some cases, an economic crisis may trigger financial 'over-correction', thus magnifying the overall effect of the economic crisis and perhaps prolonging it. --- An economic crisis will inevitably lead to a financial crisis - unless governments and other agents manipulate financial valuations in an attempt to avoid devaluations based on real declines in economic potential. Attempts of this sort usually lead to even greater financial crises later that are manifest as damaging levels of inflation or deflation. This occurs as the financial economy, in order to remain viable, inevitably seeks to establish accurate valuations of the real economy. All financial valuations are stated in terms of numbers and those numbers represent money. As such, a financial crisis can be triggered by too much or too little growth (or decline) in the money supply. Such disruptions can, and often do, lead to disruptions in the real economy as well. However, these 'disruptions' may be quite frequent, though little noticed because they are so small. Major monetary mismanagement will lead to major financial disruptions, which can then lead to disruptions in the real economy. The worst scenario is when an economic or financial crisis is large enough to set up a feedback cycle between the two aspects of the economy, thus pushing each toward further decline. A financial crisis can thus lead to an economic decline which further perpetuates the financial decline, which in turn perpetuates the economic crisis. In such a situation, risk aversion may become more important than making money on investments, leading to abandonment of risk-taking investments. Assuming an adequate supply of funds available for investment and continued access to real resources, economic crises are prolonged solely by continued widespread aversion to risk on the part of those with funds available for investment. Any crisis emerges from changes in the real economy and/or from the need for the financial economy to 'correct' itself in order to render more accurate valuations of the real economy. The beginnings of the crisis are due to real disruptions in the real economy, the financial economy and/or the money supply, but the longevity of that crisis is increasingly based, as time goes by, on the unwillingness of holders of wealth to invest in real economic activity. This question should be merged with What is the main cause of the current economic crisis in the US