How Economic Decline Attributes to Crime

How Economic Decline Attributes to Crime

Economic decline is a period of an economic downturn. Economic recession comes along with high unemployment rates, decrease in the stock and housing market, manufacturing and the Gross Domestic Product (GDP). A region is concluded to have an economic decline when they have negative growth in GDP for more than two consecutive years. All Countries in the world have experienced economic recession though in different capacities. In the period between 2000 and 2010 most states experienced the economic decline that is the great recession. The global financial crisis of 2007 was characterized by a decrease in the real estate market and unemployment. Most parts of the world accuse the leaders and policymakers of economic failure. Several factors contribute to commercial failure depending on different countries. Some of the elements are:

High-Interest rates- Interest rates play a significant role in economic growth; an increase in the rates makes borrowing difficult and investing stagnates because of lack of funds.

A good example is the 1980 economic decline where the interest rates rose to safeguard the value of the dollar. The high-interest rates lead to inflation, so even with the highly charged amount of money people cannot buy goods or services effectively. Besides, high rates decrease borrowing, therefore, a decline in investment.

Increased fuel prices also contribute to the economic recess because the fuel in a significant aspect of production; therefore with increased prices production cost rises product prices rise. The product sells less, and this falls back to the decrease in economic growth. Besides, when people lack confidence in the economy, they prefer saving more to spending and this results in a reduction of economic growth.

Crime is another factor that leads to economic decline — there are many forms of crimes including corruption. Corruption is rated as one of the primary constraints on economic growth. According to Murphy et al. 1997, Corruption causes high transaction cost and misallocation of resources. Most countries suffer drops in economic growth because of corrupt leaders and citizens. The government is not able to tax money made through corruption. Because the money has no exact source of origin, it cannot add to the GDP. In other developing countries the money is wired to other countries where it is kept therefore not in circulation in the state of origin. The money transfer also reduces the amount of money circulating in the economy, thus, decreases investment and impact negatively on the economy. The fact that corrupt deals reduce tax revenue, the government loses a lot of money that would help in running the economy. In the past corruption was given less attention because it was done in secrecy and the results were not very outstanding. But in the current period, people are aware of crime and the implication of economic growth.  According to Kaufmann, 1998, bribery hicks transaction costs, therefore, creating economic insecurity, he also argues that bribery leads to severe economic results that prevent investment. Though other crimes contribute to commercial failure, the most significant offense that brings down an economy is a financial crime. Financial fraud is acute in many countries because of the effects it has on the economy. Some of the financial crimes include fake documents, Ponzi money schemes and selling government property.

The US government has dealt with many money-related crime cases since decades ago where some of the perpetrators are jailed. For example, Kenneth Lay case in 2001 where the CEO of energy giant Enron was found hiding the company’s financial status and shareholders lost money. Samuel Israel was convicted to a 20years in prison after being found guilty of defrauding investors of $450 million. However, the government does not fully explore the financial crime cases. For example in Scott Rothstein case involving $1Billion, the lawyer is still under arrest and case yet to be determined. The major hindrance to financial crime cases is adequate evidence because there is no specific model as to how the crime works. Proving the financial crime cases is difficult because of the way they are conducted that is most are done using the internet. Therefore, the identity of the victim is not specific. The evidence found in these cases does not link to the victim directly; thus the offender ends up free.

In the US the economic decline was evident in 2006 when the housing market went low.  At this time the number of homeowners increased because banks issued loans for 100% of the house value. The expanded home ownership was later blamed on the Community Reinvestment Act that encouraged the bank to loan the low and middle-income people. Real estate investors bought houses with the speculation that the price will rise later. As they purchased many homes, the prices went up because of the demand, and this encouraged more buyers to invest in the business. At some point, the rate increased reached the maximum where it was unstable because many owners were not able to pay for the bank mortgages as the interest was rising. Many investors started pulling out the business, and housing prices began falling reducing the demand leading to the housing bubble burst.

The house burst leads to people failing to pay the loans. The only way banks could get their investments back was by kicking people out of the houses. Homeless people impact directly to the economy because they lower economic growth.

After the burst of the housing bubble the US government increased the interest rates on mortgages and bank loans and also kept the housing demand on the check. The real estate professor Susan Wacher states that the primary cause of the housing bubble was the banks’ lending money without evaluating the ability of the client to pay back.  Between 2004 and 2006, $3 trillion was going into mortgages that were there before and these were given to low-income earners.

The bubble bust hat financial repercussions on the economy. The federal government had to keep low short term interest rates for a more extended period. At this time developing countries had a big money reserve, investing the money lead to a decline in global interest rates. For the following years, the financial market entered a period of great moderation because of the low returns investors had. Apart from the adverse effects, the investors went through; positive lessons were taken from the crisis. For example, having an independent analysis instead of following the crowd and the significance of being diverse in business.

In the US the AFG gangs are commonly known as “Fraud for Profit” this also includes “house flipping.” According to the report by the FBI in 2004, there is an increase in mortgage fraud. The banks were giving loans that did not need any documentation to show the income; this made it easy for others to get more than one houses.  With this arrangement, 10% of the mortgage were a fraud while 25% of had wrong applications. The primary culprit of the game is the lender because they lend money to people without assessing their ability to pay. The central bank only had to lower the interest rates because of too much capital liquidity. Also, investors had the will to take more risks. Home buyers also are to be blamed for the crisis because they were buying properties they could not afford going into significant debts; unfortunately, the property value depreciated instead of the anticipated appreciation.