The current U.S. economic crisis and potential fixes Essay

The current U.S. economic crisis and potential fixes - Essay Example Citigroup, UBS, and JPMorgan have all announced negative earnings in their last financial reports as well as plans to lay off a significant number of workers. This paper carries out an analysis of how and why the crisis occurs and it evaluates the effectiveness of current measures used by the government to solve this crisis. The rest of the paper is organized as follows: Section 2 looks at how the crisis occurred, section three looks at the causes of the crisis that is why the crisis occurred; Section 3 looks at the regulatory environment and current solutions; and the last section provides some conclusions and recommendations. Sub-prime loans are loans offered to borrowers with no prior track record of good credit history3. Due to the risk inherent in the loans, they are often issued at very high interest rates so as to compensate for the extra risk that they carry4. A sub-prime crises or credit crunch is said to exist when a significant number of sub-prime loans have been issued to unscrupulous borrowers5. These crises pose difficulties to both financial institutions and the borrowers. The outbreak of the recent sub-prime crises came after warning signals of write-downs in the value of mortgages late last year6. House prices in the U.S witnessed an unusual growth between 1997 and 2005. For example, prices increased by approximately 85% during this period. The period 2001 and 2005 witnessed the highest rates of appreciation7. Sub-prime delinquencies and foreclosures were therefore mitigated by house price appreciations during these years. This is so because borrowers facing difficulties to make regular mo rtgage payments could depend on the appreciation of the value of their property to solve their financial problems by refinancing the mortgage and withdrawing cash from the increased equity in the house thereby sustaining the new mortgage for a while. Borrowers could repay the principal by selling off the property8. Appreciation in property prices