Free «Oil Embargo and 1980 Farm Crisis» Essay Sample

In 1979 there was a massive protest in Iran which led to an oil crisis in the United States because Mohammad Reza Pahlavi the then Shah of Iran had fled the country bring in a new leader known as Ayalullah Khomeini. This made the oil production to be curtailed and all exports suspended due to the protests. Prices of oil rose up because of the inconsistencies and low production and hence OPEC nations did increase the production to offset the low volume but this did not help because there was a widespread panic that drove the prices higher than the normal circumstances.

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It was believed that many oil companies did create artificial oil shortages to push the prices up, rather than human factors that are beyond their control. During the "malaise" speech on 15 July 1979 where Jimmy Carter the then president made plans to reduce, oil imports and improve the efficiency of the energy sector in the country because he viewed the oil crisis as the moral equivalent of war. Hence, it led to the Carter Doctrine in 1980, which declared that any interference caused by the Persian Gulf in the United States oil interest was to be viewed as an attack. In addition, the Cater proposed the removal of price control imposed before the 1973 crisis by Richard Nixon, which was to be done away with in phases, but Reagan later dismantled them in 1981.

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The mid west crisis began in the early 1970s when there was a sharp increase in the export of agricultural products to the soviet union making farm commodities and income to soar. Land values increased because of the restrictions removed on the Federal Land Bank Lending (Luttrell, 1989). Due to the low interest rates that were being offered, it made many farmers to go into dept thinking that land values and commodities would continue to rise. Hence, by 1980 the speculative bubble did burst because of the high interest rates making the farmland value to drop more that 60%. This made many farmers find it impossible to deter their depts for their asset value had declined. In addition, there was an influx of farm commodities and this made the prizes to go down because of the overproduction.

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President Jimmy Carter did enforce a grain embargo on the Soviet Union that later caused a crucial overseas market for the American farmers (Luttrell, 1989). During this time, there was an economic stagnation and a strong dollar that did harm the agricultural exports. By 1984, the farm indebtedness had risen to $250 billion marking a third of the farmers to be in serious trouble because of the interest payable to the loans did exceeded the income of the farm. This made farm foreclosures to rise dramatically because it had a triple effect in that it made banks in the rural areas to go under receivership (Luttrell, 1989). Thus when new dealers provide credit assistance to farmers at a reduced interest rate they fail to understand that it only offsets acreage reduction because it will enhance the supply by increasing resources.  

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Baking in the 1980s led to the upsurge of failures in a number of banks making most of them insured under Federal Deposit Insurance Corporation to either be closed or receive financial assistance. The national economy in the 1980s was measured by economic aggregates and this made it to grow (Shiskin, 2008). In the 1970's there were a number of factors that created instability in the banking sector and it was during this period that major world currencies became volatile due to external shocks and price increases due to oil embargoes. During this time bank, restrictions were lifted allowing other players in the market thus increasing completion. Due to completion the banking sector share on large business borrowers did decline which made many banks to shift their base to real estate lending where it experienced greater risks. This meant that the performance ratio weakened across all banks making their profits to decline and in the end become volatile. Due to the widespread drop in the public spending that is brought about by the busting of an economic bubble or supply, shock is the main factor that brings about recession. On the other hand, Governments result by adopting the macroeconomic policies that will help in solving the problem of recession by either increasing the money supply or decreasing taxation.

The Federal Deposit Insurance Corporation that backs bank deposits did report the largest number of banks in trouble, which is a 52% increase. This is because most banks highly depend on lending money to construction industry which is likely to come under the most stress. Most of the banks that were affected due to recession include smaller banks because of their involvement in construction loans and the loans are backed by new homes that are now worth a fraction of the estimated value.

Even if the big banks are somehow protected from experiencing problems it does not mean that, their balance sheet is a treat to the economy because they are not raising any additional capital. This is because of remaining solvent well above their minimum capital levels but this will hurt the economy in the sense that providing credit is the life and blood of the economy (Krugman, 2009). The economy does live and die on credit, so when big banks leverage their loans it makes it hard to get new loans and this is bad for everyone.

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