National Debt

Introduction

Financial crisis initiated from the US, where the lending institution invested huge capital in subprime market in the form of loan and mortgage, by projecting profitable returns. The fall down of the United State sub-prime credit industry in the middle of the year 2007 stimulated an extensive defect in global credit industries, with consequences experienced throughout a broad variety of banks and capitalists with vulnerability to what turned out to be extremely unclear and high-risk securities debt. Estimates of the total losses resulting from sub-prime mortgage problems vary but $400 billion has been cited.

However the borrowers were unable to repay due to various factors which caused the downfall of capital returns resulting in "Credit Crunch". Because of this US economy suffered a great set back.

Discussion

The global financial crisis of 2008-2009 was not a normal cyclical economic downturn. It resulted from the implosion of a huge asset bubble in the U.S. housing market. The reasons for the lack of a meaningful economic recovery can be traced to serious structural problems in American economic, fiscal and tax policy, which helped cause the crisis, and to the U.S. government's response to the crisis. At the root of the global financial crisis was bad public policy on the part of the U.S. Government, and some other countries. These bad policies took the form of aggressive government borrowing, massive over-subsidization of private housing and an extended period of cheap money. These policies led to an enormous, debt-financed over-investment by Americans in residential real estate, which represented a misallocation of economic resources in the economy on a grand scale.

Financial institutions and investors in the U.S. and around the world were heavily exposed to the U.S. and other housing markets through the residential mortgage market, not only as mortgage originators, but also through widespread securitization of mortgage debt and the use of credit default swaps. In this way, the housing crash in the U.S. quickly became a worldwide financial crisis as institutions and investors saw the value of their assets fall or were called on their own financial commitments. This widespread loss of value froze credit markets and many of these institutions then failed or had to be bailed out by governments. One contemporary estimate put the total financial system losses at $4 trillion.

Current versus historical Levels of Debt

The U.S. and some European countries, in reacting to the global financial crisis, greatly increased their already large public debt loads by borrowing more money to fund financial losses, bailouts and fiscal stimulus.

U.S. borrowing, in particular, has occurred on a huge scale. The U.S. government continues to run an annual deficit of about $1.4 trillion (about 9.5 percent of GDP). Even at current extremely low interest rates, Secretary of the Treasury Timothy Geithner recently noted that this results in the government having to borrow close to 40 cents for every $1 it spends? These massive annual deficits have, in only a few years, swollen U.S. federal gross debt to about $14.3 trillion-the current legal borrowing ...