Brainstorming on the cause of US financial crisis and its affect on the global economy


I remember back in the days when Dow hit 14000s in late summer of 2007 when I traded stocks as an individual trader.  I thought that times were good.  Whenever I watched CNBC and read Wall Street Journal, I never realized that US stock market faced any threat. However, things got ugly as subprime mortgage crisis unraveled.  Since then I would never realize that I will ever experience what happened to be a largest US financial crisis since the Great Depression.  Now that the Dow is hovering around 8000, 60% down from the all time high in the 2007 late summer, I would like to know how bursting of housing bubble could have such an immense affect on the US stock market and the economy. I cannot grasp and pinpoint the exact cause of the start of the US financial crisis but it seems to be the combination of all the misguided policies and greed. We cannot know or predict when this crisis will turn around.  Krugman offers the dire prediction that US economy will resemble what Japan had experienced in the 1990s, a decade long of growth recession.  According to Krugman the two major causes of US financial crisis resemble what other past financial crisis had been, which are asset bubble and housing bubble crash.  It started to make sense and provided me with a big picture that the US economy was long-ago already on an inevitable path to the current crisis.  The US economy, as the book states, a victim of a ponzi scheme.  Americans were disillusioned by Greenspan and the government. We borrowed so much money from other countries to buy their products and kept inflating housing prices and we believed everything was okay. Why a collapse of housing market in the US can create a global recession?  Despite BRICs and other emerging markets especially ones that experienced the financial crisis before, hoarded enough US and Euro currencies to prevent another financial crisis, these nations are still vulnerable to the US economic slowdown because much of their products and goods are exported to the US.  When times are good, we tend to ignore the pundits who warned and predicted the burst of US economy bubble and the inherent problems but keep enlarging the problem until the problem actually get us.  Maybe this financial crisis is another transition period for the US economy to advance into new financial era like back in the Great Depression.  Still, the US economy is in flunk as of now and it seems it is getting worse, not better.  We have to explore not only the past events that led to current crisis but also study the current development to understand the nature of the financial crisis.     

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