Day 3 - Economix

I am no economics major and my current article is a layman's point of view.

The current financial crisis at the Wall St. underscores all the other problems of the world. Why? Simply because it may be the harbinger of a global economic recession. It is still the financial world where other countries catch cold when the US sneezes. US economy is already reeling, marred by the spending in the war in Iraq and an external debt of 13.8 trillion dollars. The US Congress recently stopped a bailout plan. The voting is to take place again on a revised plan.  

What led to the current scenario? Is this the end of Capitalism? Will it ever be the same again? How does it affect us? Numerous questions come to our mind.

Let's start with the basics. The current financial problems rose from heavy subprime lending between 2003-2006, bad sales decisions, declining lending practices, and increasing housing prices. Subprime can be defined as the category of people who have high perceived risk of default, people with not-so-good credit history. Soon the banks started feeling the heat as the interest rates began to rise. The prices of the houses went down, foreclosures increased and the banks started to go bankrupt. New Century Financial was the first major institution to go down in April 2007. This started the "domino effect" and led to the current scenario.

Now the banks don't trust themselves. It has become difficult to secure a loan. The rates have gone up. If the bailout plan doesn't go through, it could lead to recession and unprecedented job losses. How? Soon, the problem would progress beyond the realm of financial institutions and start affecting other businesses. As that happens, a lot of companies could shut down all over the world.

Is this the end of Capitalism? In my opinion, no. The current problem is not due to a fundamental lacuna in Capitalism, its due to bad corporate practices/decisions. I am sure people concerned would have learned with this experience and it would serve as a lesson for future decision makers in the financial industry. 

Speculating the future, I feel that the situation will only get better in case the bailout plan is passed by the US Congress. If not, it may get worse before it gets better. There is always a silver lining in dark cloud. I may come across as an optimist to some and why not? As Sir Winston Churchill said, "For myself I am an optimist-it does not seem to be much use being anything else."

I invite all of you for your comments/arguments/insights/questions over this issue.