Sustainable Developments: Priorities for Fixing the Financial Crisis; December 2008; Scientific American Magazine; by Jeffrey D. Sachs; 1 Page(s)

The origin of the U.S. financial crisis is that commercial and investment banks lent trillions of dollars for housing purchases and consumer loans to borrowers ill equipped to repay. The easy lending pushed up housing prices, which then ratcheted still higher when speculators bought houses on the expectation of yet further price increases. When the easy lending slowed and then stopped during 2006 and 2007, the housing prices peaked and began to fall. The housing boom began to unravel and now threatens an economy-wide bust.

The U.S. economy faces four cascading threats. First, the sharp decline in consumer spending on houses, automobiles and other durables, following the sharp decline in lending to households, will cause a recession as construction of new houses and production of consumer durables nose-dive. Second, many homeowners will default on their mortgage payments and consumer loans, especially as house values fall below the mortgage values. Third, the banking sector will cut back severely on its overall lending in line with the fall in its capital following the write-off of bad mortgage and consumer loans. Fourth, the retrenchment of lending now threatens even the shortest-term loans, which banks and other institutions lend to one another for working capital.