The Housing Crash of 2008

Part 1: Similarities and Differences

Similarities

There are key similarities between the economic crisis in the United States, and the crisis in Europe. This is especially due to the fact that the United States 'shipped' a part of the economic crisis to Europe, while the rest originated from Europe itself. The housing bubble was a key cause of the crisis in both Europe and the USA. Only the United Kingdom, Spain, and Ireland had pronounced the real estate trend but it was noticeable in all other regions. The eccentric finance trend that was observed in the United States was experienced also in the UK, Iceland, and Ireland. Additionally, in Europe, investors who were not well informed and were unaware of what would happen greedily went for American mortgage-backed securities thinking that it was a perfect opportunity to receive high returns with low risk (Blinder, 2013). The same was also the case in America during its bubble years. Eventually and just like it had happened in the US, the housing bubble burst which led to a swift recession in Europe. Between 2008 and 2009, Europe’s GDP contracted by 6.8% even higher than 4.7% in the US.  Both the United States and Europe’s government budgets were significantly weakened by the recession. Following the economic contraction in Europe, there was a sharp drop in tax collections in the country. This was followed by an upset in the stability of safety social costs which saw a rapid rise in public pensions, health insurance, and unemployment. In an attempt to fight the recession, most European governments just like in the US, introduced fiscal stimulus packages of different sizes and shapes which did more harm than good as they strained the already struggling budget (Blinder, 2013). Another similarity was the surprising costs of bank bailouts. The European parliaments passed numerous ad hoc bailouts on a country-by-country foundation while similarly, the US had created the TARP. However, the US administration was able to get interests out of it while Europe failed to benefit from the bailouts. Most governments both in Europe and the US acquired staggering amounts of private debts, provided mostly by banks. The federal government in the US purchased, assumed, or guaranteed debts of most companies such as General Electric, General Motors, and AIG just to mention a few. However, after interest and repayment, the United States incurred small costs while European countries suffered extremely large costs (Blinder, 2013). 

Differences

Besides the numerous similarities, there were also several differences between the two crises. First, there was a key difference in the way Federal Reserve and European Central Bank fought the recession. The Federal Reserve was more aggressive than the ECB and its reaction was quicker and stronger. This difference is due to the fact that the Federal's legal mandate gave it instructions to handle low unemployment and low inflation whereas ECB only aimed at dealing with the low inflation (Blinder, 2013). Another difference is that the countries in Europe were not well integrated as the American states were. It should be noted that Europe has seventeen countries that use the same currency just like America's 50 states use a similar currency. The disintegration of Europe was observed when some countries such as Ireland, Portugal, and Greece took a bigger hit compared to countries such as the Netherlands, France, and Germany. Thirdly, Greece suffered most during the economic crisis and Europe had to deal with the country. On the other hand, the States in America were well-integrated and none suffered to a magnitude that could drag the whole continent behind. Greece had troubles such as poor tax collection, budget deficits that got worse after the crisis, and the country was also in default on its public debt roughly 50% of the time. Another reason Greece suffered the most was its dependence on tourism and shipping (Blinder, 2013). These two suffered greatly as there was the world trade collapsed totally paralyzing shipping while on the other hand, vacations became too costly in Greece hence very few people could afford.

Part 2: Imagination – differing perspectives on the crisis

Perspective of a Greek Worker

I would not receive the news that my job or my pension may be cut with a happy mood. Although the European Union hopes that cutting employment and pensions would help in minimizing the government's expenditure, this would lead to more problems. As a Greek citizen, I would blame the Greek creditors and the government for misleading us. I would view it as unfair for pensioners, wage earners, and young Greek citizens who are all blameless to be sacrificed because of the blunders of the irresponsible bankers and political leaders. Also, cutting my pension or pay would not be a smart way of solving the problem at hand. Cutting pensions and pays for citizens would mean that there would be poor living standards. Therefore, I would wonder how that action would enable the Greek government to repay the debt with a suffering economy.

Perspective of a German Worker

As a German worker, I would react in two ways in case of the pressure on my government to bail out the Greek economy. First I would not acknowledge the idea if Greece wants to use the bailout to pay the old debts and also the high pensions. This would still ensure drag the country behind. I would think that austerity measures are vital here. For instance, I would prefer the Greek government to make an improvement on how it manages its public finances. This would call for the modernization of its reporting and financial statistics. I would also want the country's pension system to undergo some key changes before they receive a bailout from my country. Paying pensions scoops out more than a quarter of the country's GDP, which is higher than all other countries in the European Union. Although this would devastate the workers in the country, it would help the government pull out of the increasing debts by decreasing its expenditure. Secondly, I would support the move for my government to bail out the Greek government. This is because failure to bail out the government would lead to problems that would affect all other countries. An exit from the Eurozone by Greece would paralyze many activities hence causing more troubles. 

Losing a Job in a Financial Crisis 

I would acknowledge and appreciate legislation that would work as ARRA or TARP. It would make me happy. This is because such legislation would help in creating jobs hence providing opportunities for the jobless. Also, such legislation would provide relief money to the jobless hence ensuring they do not lack food. To add on that, such legislation would expand healthcare meaning that the jobless can be able to access health services at a low or no cost. Effective legislation would bring all the above benefits that would ease the problems that come with being jobless.

Essay Question Two, Reflection

Part 1: What I have learnt

The study of the United States and the European economic crisis has taught me new things that changed the way I viewed economic crises. One striking lesson I have learned from the Greek government failures is that it is easier to get into a dangerous financial crisis if the administration is not making sound and prudent decisions. Greece had a pension system that was taking much money from its budget than all other European countries and when the crisis hit, it sank into debts quickly than other countries due to its huge expenditure. Also, some of the methods that other countries used were low government expenditures and a moderate pension system that was manageable. I have learned that bailouts may be effective if they are used in an efficient way. For instance, during the economic crisis, both the United States and Europe received bailouts. However, in Europe, the bailouts never generated any interest while the United States was able to make interests.

How my study has changed my perspectives 

My perspective has also changed after learning about the economic crisis. Initially, I blamed the introduction of the Euro as the major cause of troubles in Europe. However, after learning about what happened, I have realized that despite the crises, the introduction of the Euro was the best thing that happened to Europe. First, the common currency ensured that there was no wastage of money in the process of exchanging currencies (Tejvan, 2018). Secondly, the common currency was a good way to ensure that there is no either inflation or deflation (Ellyatt, 2019). The common currency can also be used as a store of wealth because its demand has increased. The Euro has also created a wider market as all the countries trade using a similar currency just like the states in the United States. However, to continue achieving the stability of the euro and avoiding another country to collapse like Greece, the government expenditure should be kept low and manageable. 

Part 2: professional goals and ambitions

I would like to be an entrepreneur who specifically deals with importing and exporting various products to and from other countries. The products would mainly be electrical and made with improved technology. There is always a need for more improved and cheap technology in many countries and I aim at exploiting this opportunity. 

How My Goals Have Been Influenced  

However, from the study about the United States and Europe's economic crises, I have learned that in case of a recession, the first thing that collapses is the world trade. This evident in Greece where after the recession, the world trade ceased and there was no shipping which deteriorated the country's condition during the crisis. This realization has impacted me positively and has stimulated me to do some changes to my goals. This is mainly due to the fact that there is no guarantee that the world's economy is stable and that another crisis is unlikely. In fact, with the current COVID-19 pandemic, several countries and nations are already worried that if the disease continues for long it may destabilize the economy muscle (WTO, 2020). The health pandemic has already dramatically slowed down or completely led to a stop in shipping (Teoh, 2020). This means that imports and exports have been directly hit. Such health and financial pandemics are more likely in the future hence instead of being an importer and exporter, I would like to set my technology industry in a country with most opportunities and sell in that market. From there I can export my products but in case of a crisis and I am unable to export, then my industry will still operate and sell to the local markets. Therefore, this study has broadened my entrepreneurial knowledge and I have learned to make decisions that allow my ambitions to survive an economic crisis.  

References

Blinder, A. S. (2013). After the music stopped: The financial crisis, the response, and the work ahead (No. 79). Penguin Classics. 410-415   Ellyatt, H., (2019). Mad or miraculous: As the euro turns 20, has monetary union been a good thing? CBC News Retrieved from https://www.cnbc.com/2019/01/28/euro-turns-20--has-monetary-union-been-a-good-thing.html      Tejvan, P., (2018). Benefits of Euro. Economics. Retrieved from https://www.economicshelp.org/europe/benefits-euro/  Teoh, P., (2020). The Impact of the Covid-19 Pandemic on Shipping. The Maritime Executive. Retrieved from https://www.maritime-executive.com/editorials/the-impact-of-the-covid-19-pandemic-on-shipping   World Trade Organization, (2020). Trade set to plunge as COVID-19 pandemic upends global economy. WTO News. Retrieved from https://www.wto.org/english/news_e/pres20_e/pr855_e.htm