2011 U.S. Debt Ceiling Crisis Details

America's economy is one of the strongest economies in the world. As expected, America's economy is massive and complex. Indeed, an economy as big and powerful as America can take a few jabs, right? Well, to an extent. America's economy has been taking so many jabs, uppercuts, and sucker punches over the past decades. 2011 was the year they folded over in pain.

The 2008 Financial Crisis

Enter the biggest economic sucker punch in America's history; The 2008 Financial Crisis. The main culprit? America's housing market.

When individuals buy a house, they usually pay in the form of mortgages to banks. These banks don't want to handle the risks of individuals defaulting (not paying mortgages), so they sell the mortgages to third-party financial institutions.

At the same time, investors worldwide flocked to America's rising housing market because they saw a potential profit from its interest rates. Big third-party financial institutions saw this opportunity. They bought all the mortgages from various banks, bundled them together, and then sold the bundled mortgages to interested investors.

The investors were happy because they could quickly buy multiple mortgages (through mortgage bundling), thinking they would receive large profits. Third-party financial institutions were happy to sell mortgages because they could remove the risk of citizens defaulting while also gaining profits.

This drove the house prices to high levels, to the point where citizens could not pay their mortgages and chose to default. This might seem okay since the banks and financial institutions now own the houses. They could sell them and break even, right? Wrong.

You have to remember that this event is happening all over America. When you have too many goods to sell, the price drops. Houses suddenly lost a tremendous amount of value, and investors lost money and left the market. Banks and financial institutions were forced into bankruptcy as well.

Pre 2011 Financial Crisis

The effects of the 2008 financial crisis are of Titanic proportions. No one can blame anyone since it's everyone's fault. Banks selling mortgages to get their hands clean of risks. Financial institutions were greedily selling bundled mortgages to investors for profits. Investors buying bundled mortgages because untrustworthy financial agency reviewers say so.

The government had to step in. However, it was too late; the damage was done. The government enacted the TARP (Troubled Assets Relief Program). It gave emergency loans to foreign banks, then put that money into trusted domestic banks so that they wouldn't collapse.

The government extended this program to other businesses such as automobiles, insurance companies, and homeowners. It successfully stopped the cascade of panic and stopped the economy from spiraling down into the abyss.

In 2010, America passed a new law called Dodd-Frank Law. It exposes banks and financial institutions' transactions to the public, causing them to think twice before taking enormous financial risks.

Real-World Example of The 2011 U.S. Debt Ceiling Crisis

Effects of the 2008 financial crisis persisted in the following years. In this recovery era, America spent more and more money trying to heal the wounded economy. But they didn't have enough income to spend.

Thye took out loans, a lot of loans. America asked investors and foreign banks to lend them money, offering a 3-5% interest rate. They agreed, and America grew again. However, Americans soon found themselves piling massive debts. Perhaps more than they could ever pay.

Now in 2011, and U.S. debt has reached its debt limits. $14 trillion of debt. Unfortunately, the economy was still half-dead, and America needed even more money to inject. A great debate among members of Congress ensued:

  • Pro-Debt: The pro-debt side wanted America to raise the debt limit. That way, America can borrow more money and invest it in the economy. Once the economy gets up and running, the growth rate will rise, and America can enjoy the profits. Then, America would pay back the debts with that profit. A bold but risky move.
  • Contra-Debt: The contra-debt wanted America not to raise the debt limit. Instead of borrowing more money, they suggested they should look inwards and evaluate the budgeting system. They insisted that America should cut spending on areas that don't contribute to economic growth, such as the military budget. Furthermore, increased debt would breed another problem. There is also a chance that investors will stop lending money to America, undoubtedly cause another massive economic crisis. A safe and very reasonable move.

The Final Outcome

Under the Budget Control Act of 2011, Congressmen raised the debt ceiling by $2.4 trillion. It became official law on 2 August 2011. It effectively increases the debt ceiling from $14.3 trillion to $16.4 trillion. With the (borrowed) funds secured, America continues its spending to rebuild the economy.