How People Are Impacted From Financial Crises

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How People Are Impacted From Financial Crises

Introduction

The global financial crisis of 2007 to 2008 was characterized by the collapse of financial institutions and the plummet of stock markets. While economists are still debating on the chief causes of the crises, some attributed the phenomenon to an imbalance of credit ratings, complex financial goods and services, and the insufficient action of the financial regulatory agencies. All these factors were believed to be the cause of one of the most devastating financial crises since the great depression of the 1930’s (National Bureau of Economics). This resulted in a fundamental shift in the economic engine, which involves wealth, consumption rates, business investment, and government spending, among others as the key elements. All these factors also contributed to the deterioration of the financial situation of the American households (Federal Reserve Bank of Dallas).

Discussion

Employment: The financial crisis resulted in high rates of unemployment of people in the country. According to the National Bureau of Economics, the unemployment rates had risen by 5 percent since the crisis. According to a report from the Federal Reserve Bank of Dallas, the total economic output was not only experienced at a national level but also from a household level. With a national loss estimated to be around 6 trillion to 14 trillion dollars, the household total loss of output was estimated to range from 40,000 to 90,000 dollars for the financial year.

Social Effects: Aside from financial derailment, there were several social and psychological effects of the financial crisis. Psychological effects stemmed from the lack of financial resources that people could access to maintain the normal standards of living (Brusov). The level of financial well-being also went down due to a sharp plummet in the levels of consumption. As a result of unemployment, the level of productivity also went down significantly. From the study carried out by the National Bureau of Economics, the level of spending was significantly affected by the economic crisis. About 75 percent of the households surveyed said they had reduced spending due to the recession. 75 percent of the households surveyed reported a reduction in income while 45 percent cited a change in the status of employment. The recession was particularly harder for the young job seekers. In addition, the level of optimism for the future, which is regarded as a crucial motivating factor, was seen to be low in comparison to the preceding years. This was because of the reduced employment opportunities presented at that time.

Borrowing: While some families were able to comfortably reduce on their overall consumptions, other households were unable to stay financially afloat, and were thus forced to borrow more money. With the economic depression, the rate of lending became too low for the banks. The overall credit card debt of the households surveyed over the period of a year was estimated to have risen by 25 percent.

Retirement: The recession affected the future of many of the households. Most of the families under survey reported a likelihood of retiring later than expected as a result of spending their retirement savings in a bid to keep afloat during the recession. For the households that had retirement savings, the estimated average proportion of drop in savings was estimated to be around 30 percent.

Housing: House pricing had increased significantly over the course of the recession. In addition, the constant or rising rate of mortgage payments led to financial strains on households that were already experiencing difficulties in other dynamics.

Commodities: high priced commodities further led to economic instabilities. Some of the commodities severely affected by the economic recession include oil and foodstuffs.

Conclusion

The economic recession was characterized by a collapse in many of the financial institutions, which led to negative effects being experienced within the family structure. The plummet of banks and other financial companies resulted in the loss of jobs, reduced spending, and consumption, the decline in the level of psychological well-being, and a more negative outlook for the future. People were forced to not only spend less but also borrow from other financial institutions, which increased their credit debts. Others tapped into their financial and retirement savings, which would require them to work for longer before they retired. The significant financial loss was also experienced by all the underutilized labor forces that were not employed. As a result of these effects, there was a significant loss of confidence exhibited by people in the government institutions, which were designed to protect them from such unfavorable phenomenon.

 

 

Works cited

Brusov, John. “Hidden Global Causes of the Global Financial Crisis.” Journal of Reviews on Global Economics (2012): N.P. Web.

Federal Reserve Bank of Dallas. “Assessing the Costs and Consequences of the 2007–09 Financial Crisis and Its Aftermath – Dallas Fed.” N.P., 2013. Web. 15 Feb. 2016.

National Bureau of Economics. “The Effect of the Economic Crisis on American Households.” N.P., 2016. Web. 15 Feb. 2016. Web.

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