The Era of Irresponsibility 2007-2009

Brazil, China, Malaysia, and Singapore are some of the developing nations that have taken the initiative to change their domestic policies to become viable competitors in today's global market-place. The American consumer-based economy revealed a certain flaw that both the United States and other nations of the world would have never considered, "fear". This level of uncertainty brought about after the global financial crisis lasting from the last quarter of 2007 through June 2009 forced the American machine of economic dominance to blink. The main culprit is this "perpetual level of uncertainty" that continues to haunt American consumers at the close of 2010 due to employment instability and slow economic growth. Lending institutions continue to raise loan requirements for less-than-interested consumers that are focused on saving the resources they have concerned about the duration of this period of recovery.

WGBH Boston produced a documentary television program by Frontline called "Ten Trillion and Counting" that revealed some disturbing trends that the United States government has grown accustomed to since the year 2000. The borrowing of vast amounts of money to the tune of US$400 billion each quarter just to have enough operational capital to compensate for the revenue lost due to tax-cuts and the economic failures of businesses and citizens. This trend in borrowing or leveraging the debt on future generations comes shortly after the"Era of Irresponsibility" (the period from 2001 - 2009). During this period the housing market seemed the most viable means for investors to somewhat safely place their capital resources. As in previous trends such as the "Dot.com Era" (the period from 1997 - 2000), we witnessed investors pour capital into this industry until too much liquidity fostered abuse, mismanagement, and losses. The dot.com became a thing of the past within a decade.

After the terrorist attack of September 11, 2001, the markets, banks, and nation tried to recover from a burst economic bubble while enduring a period of uncertainty about harmful adversaries. When the markets began to rebound, the mortgage industry and housing was expected to be the new panacea for stimulating the economy. The same systemic problems that sank the dot.coms poured into the mortgage banking industry. Too much liquidity in the market created a high demand for volume home sales due to the rapid growth of new home development. Lending institutions wanted consumers in them to pay mortgages and some lenders ignored responsible lending practices with undocumented loan approval and other schemes of balloon payments. The problem remained the same as in the decade prior, consumers tried to assume the role of investors by purchasing properties for capital gains. However, this time the camel's back was broken when the perception did not meet the reality of the true value of the over-valued properties.

The immediate relevance is that during the period between 2007 and 2009, the United States experienced an economic free-fall without a safety-net. The United States government and the new Obama Administration had to quickly devise a plan to continue shoring-up the economy. Unfortunately, during the previous years expenditures such as MediCare Part D and tax-cuts that won political favor for the last administration and did little to enhance government revenue. The nation's legacy obligations of social security, MediCare, and fighting wars in both Afghanistan and Iraq placed a heavier burden on the federal government. So as in the previous administration, the Obama Administration had to continue the borrowing in order to assist in meeting operational requirements for the government while ensuring enough resources for a continued stimulus plan.

The primary difficulty for most politicians is to actually go to the people for what they need beyond the vote. There are some estimates that the United States needed about US$3.6 trillion dollars to avoid the slow recovery that the nation is currently experiencing. Many of the aforementioned nations and others borrowed substantial amounts early on during the crisis to keep enough momentum to avoid a slow growth economy after the down-turn. The United States approached the situation in a slower fashion by incrementally borrowing the capital needed to save the banks and automobile industries. The opportunity cost of such a slow reaction due to political grand-standing against the new administration prolonged the recovery process. As nations such as Germany, France, and China rebound from this economic down-turn, embracing some tough reform measures in pensions, policies, and banking reforms, they question the United States commitment to uphold the role of leadership by example.

During the 2010 elections, many Americans were concerned about the cost of the stimulus and therefore voted against those who endorsed or supported it with the rationale of probably paying higher taxes in the future. According to the U.S. government the American individual tax-payer pays about US$1.9 trillion in taxes per year and it has been cut severely since the economic down-turn and therefore more capital has to be borrowed at a rate of US$1.6 trillion per year on top of that to meet the fiscal obligations. The premise is that the government is too big, but the reality is that the revenue-base is too small. Unpopular reforms in healthcare and the up-coming pension plans will become another political football, but in any case the United States will have to raise taxes to pay for the pre-existing debts from the wars, social programs, and the economic down-turn. As for now, the rest of the world waits to see when will the United States implement these reforms.


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