The Affect of the United States Bailout Nationally and Internationally

Many people are wondering what caused the recent mortgage crisis in the United States.  Was it the failure of Fannie Mae and Freddie Mac?  Was it the fact that they were lending to people that had an inadequate means to repay their notes? Or was it a combination of events? More importantly what is the United States doing to stop the panic, and how will it affect international markets?

The record $700 Billion dollar bailout is largely the result of the failure of two of the largest financial lenders in the secondary mortgage industry.  The lenders I speak of, Country Wide and Fannie Mae, failed as a result of a sub-prime mortgage crisis in the United States over the past few months.  Many thought Fannie Mae would have nothing to worry about because it was created by the federal government. However the lack of oversight and their governance by Washington insiders left them almost above reproach.   This proves to be a clear cut failure of the leadership that these two huge mortgage lenders have.  The risky behavior that these companies implemented proved to be a huge mistake.  And due to the fact that two of the largest mortgage lenders failed, the lending industry itself has slowed to a crawl. One of the reasons was a result of all the foreclosures and bankruptcies occurring in the United States.  The other being that the financial institutions no longer trusted the solvency of their business partners. This would eventually lead  to the drying up much of the liquidity in the market.

In general, United States mortgage crisis has definitely caused the aggregate financial  markets to fluctuate radically. Banking had become a global industry with its web reaching into many countries.  Foreign investors are frustrated by the unpredictability of the U.S. economy.  Mostly, due to the fact that the United States government has no clear cut remedy for this mortgage crisis. A second thought is should the government intercede in a free market system, or let them fail? The United States Federal Government in order to impede the panic agreed to infuse $700 billion dollars in an effort to bailout the troubled industry.  However this bailout will not only affect U.S. markets but will also drastically affect global markets and additionally the results of the bailout are not guaranteed.  This has also prompted many other industries to seek governmental intervention in an effort to starve off their losses  in a recessionary economy. Who could be next?

Internationally, when news of a potential bailout was heard, international markets fell sharply.  The confidence in U.S. markets was shattered, and as a result the Yen and Euro hit all-time highs against the U.S. dollar.  The only upside to this was an increased  appeal of  American exported goods to foreign markets. Some of the major implications of this bailout plan were seen on September 30, 2008.  Many markets affected included Japan’s Nikkei Index, China’s Hong Kong Exchange, the London FTSE, and Russian Trading System were down notably at word of the rejected Wall Street bailout. In fact the RTS, dropped so sharply that it suspended trading until further notice, sadly this is not terribly uncommon in Russia.  The international markets continued there extreme volatility until a final decision was reached by Congress to approve the bailout.  Finally on October 1, 2008 the American Housing Rescue and Foreclosure Prevention Act of 2008 took effect to try and ease the nerves of international investors. 

The Canadian and European markets slowly began to rise again after the bailout was secured in writing.  The Russian Trading System rose 2.4% to 1,504.20 when the bailout was confirmed.  The United States Stock Market of late has also begun to stabilize as well.  Foreign investors still remain cautious because the American credit crisis is far from over.  Signs of stability were starting to appear, but news of other bankruptcies in the United States may cause another slide in global markets. For example, some major banks in the U.S. have even started to fail like Washington Mutual and not close behind is Citibank. This also leads to an increase in bank mergers and consolidations. And with any merger there always seems to be job losses, thus leading to a rise in unemployment. The cycle of recession has a distinctive pattern.  With unemployment rates hitting a 14 year high of approximately 6.5%, the U.S. economy is obviously in shambles and has the potential of heading toward a rough recession.  This then leads many to still wonder if the financial bailouts are over or if the U.S. economy can recover successfully.