Wednesday, January 28, 2009

Why are we facing a serious financial crisis? Real Estate is not the only guilty.

By Sidney Perez

Everybody knows that the economic situation is bad in America. The unemployment rate has been growing and growing since 2007 (7.2% for December 2008) and it will keep increasing.
Furthermore, US consumption decreases a lot and everybody seems afraid of what is going to happen again. Some used to compare this crisis to the 1929 crisis and then the whole capitalistic system is questioned by many specialists.

But, can we really say that all the problems we face are only due to the "poor" real estate crisis?
I think it is not so easy.

We have to take into consideration that our system needs to be regulated a minimum in order to avoid excesses.

Even if speculation cannot technically be forbidden in a free market, I think that the countries (especially the USA) made a big mistake by letting the banks lending money to people who were clearly not able to reimburse their loan. I am from France and I can tell you that our system is totally different. A bank in France will never give a loan of more than 20,000 dollars to someone who has no resources and no job. It is very clear and it can explain that the French banks were not as much affected as the American banks were except the fact that we live in a global economy and then what affects America (unfortunately) also affects the world.
Thus, firstly the legal environment was too weak to prevent this crisis.

Furthermore, the role of the media is also important. They keep showing us disasters, and repeating us that the situation is bad and sometimes worse than ever. They just forgot that during the crisis of 1982, some people told me that when they went to their bank, the office was just closed and there was no way to see your cash back mainly because of the failure of "Penn Square Bank".
People feel even worse when they see this situation showed on TV as insurmountable and then the crisis becomes even deeper.
I think that we do not learn good lessons from the history and even the very recent history like the Internet bubble in 2000. Investors experienced the dangers of speculation but continued the same thing with Real estate without being disturbed by anyone but encouraged.

Indeed, the prices of housing in Miami and Los Angeles increased 175 % from 2000 to 2007. In 2005 and 2006 you could see some advertising campaigns saying : ''Are you missing the real estate boom?'' or "Why the real estate boom will not bust?"
So, let's learn lessons from the history, let's be optimistic about our economy and let's have good ideas which really create value.

The election of Obama may be a new hope for a lot of people but we must act in order to change this bad situation.
Sources :
1)http://digital.library.okstate.edu/encyclopedia/entries/P/PE009.html
2)http://www.bls.gov/
3) http://monimmobilier.blog.capital.fr/ (sorry it is in french...)

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