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The Global financial crisis
In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food crop products such as ethanol and biodiesel as an alternative to petroleum) and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world; increased unemployment; and the possibility of a global recession.
The global financial crisis of 2008 is a
major financial crisis, the worst of its kind since
the Great Depression, which is ongoing as of
mid-November 2008. It became prominently visible in September 2008 with the
failure, merger or conservatorship of several large United States-based
financial firms. The underlying causes leading to the crisis had been reported
in business journals for many months before September, with commentary about
the financial stability of leading
Beginning with failures of
large financial institutions in the
I. Beginning and Causes
On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in the Washington Post titled, 'What Went Wrong'. In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crises of 2008.
On October 17, 2008,
attorney Timothy D. Naegele, wrote an article in the American Banker
entitled, 'Greenspan's Fingerprints All Over Enduring Mess,' which
argues that Alan Greenspan's actions and inactions
triggered the economic crises of 2008. The article discusses the economic
tsunami that has been rolling worldwide with devastating effects; and the
author asserts that Greenspan is the architect of the enormous economic
'bubble' that burst globally. The author cites Giulio Tremonti,
While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of 'easy' credit-based money to be injected into the financial system and thus create an unsustainable economic boom), there is also the argument that Greenspan actions in the years 2002-2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of dot-com bubble - although by doing so he did not help avert the crisis, but only postpone it.
Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul and Peter Schiff in his book Crash Proof, predicted the crisis prior to its occurrence. They are critical of theories that the free market caused the crisis and instead argue that the Federal Reserve's printing of money out of thin air and the Community Reinvestment Act are the primary causes of the crisis. However Alan Greenspan himself has conceded he was partially wrong to oppose regulation of the markets, and expressed 'shocked disbelief' as the failure of the self interest of the markets, which according to neo-liberal economic theory should have protected shareholder equity.
It has also been argued that the root cause of the crisis is overproduction of goods caused by globalization. Professor Herman Daly suggests that it is not actually an economic crisis, but a crisis of overgrowth beyond sustainable ecological limits.
The financial crisis of 2007–2008 and perhaps beyond, initially referred to in the media as a 'credit crunch' or 'credit crisis', began in July 2007 when investors, finally realizing that sub-prime was a euphemism for 'not so good', and that lending money to people who probably could not pay it back was a bad idea, finally began to question the value of securitized mortgages. With Wall Street no longer able to convincingly hide problems, mortgage security markets fell into a state of disarray, resulting in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve and the European Central Bank. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets world-wide crashed and entered a period of high volatility, and a considerable number of banking, mortgage and insurance company failures in the following weeks.
One example was credit
derivatives - Credit Default Swaps (CDS), which insure debt
holders against default. They are fashioned privately, traded over the counter
outside the purview of regulators. The
After affecting banking
mainly in the
Financial markets (stock exchanges and derivative markets notably) where it developed into a market crash,
Various equity funds and hedge funds that went short of cash and had to get rid of assets,
Insurance activities and pension funds, facing a receding asset portfolio value to cover their commitments,
With also incidences on public finance due to the bailout actions.
at least for some currencies (Icelandic crown, various Eastern Europe and
The first symptoms of what is called the Economic crisis of 2008 ensued also in various countries and various industries.
The initial liquidity crisis
can in hindsight be seen to have resulted from the incipient subprime mortgage crisis, with the first alarm
bells being rung by the 2006 HSBC
results. The crisis was widely predicted by a number of economic experts and
other observers, but it proved impossible to convince responsible parties such
as the Board of Governors of the Federal Reserve of the need for action. One of
the first victims outside the
Excessive lending under loosened underwriting standards, which was a hallmark of the United States housing bubble, resulted in a very large number of subprime mortgages. These high-risk loans had been perceived to be mitigated by securitization. Rather than mitigating the risk, however, this strategy appears to have had the effect of broadcasting and amplifying it in a domino effect. The damage from these failing securitization schemes eventually cut across a large swath of the housing market and the housing business and led to the subprime mortgage crisis. The accelerating rate of foreclosures caused an ever greater number of homes to be dumped onto the market. This glut of homes decreased the value of other surrounding homes which themselves became subject to foreclosure or abandonment. The resulting spiral underlay a developing financial crisis.
Initially the companies affected
were those directly involved in home construction and mortgage lending such as
Northern Rock and Countrywide Financial. Financial institutions
which had engaged in the securitization of mortgages such as Bear Stearns
then fell prey. Later on, Bear Stearns was acquired by JP Morgan Chase through the
deliberate assistance from the
It then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. At the heart of many of these institution's portfolios were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS. Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs.
Beginning with bankruptcy
of Lehman Brothers on Sunday, September 14, 2008, the financial crisis entered
an acute phase marked by failures of prominent American and European banks and
efforts by the American and European governments to rescue distressed financial
institutions, in the United States by passage of the Emergency Economic Stabilization Act
of 2008 and in European countries by infusion of capital into major
As the financial panic
developed during September and October, 2008 there was a 'flight to quality'
as investors sought safety in
The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization.
In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. By July the price of oil reached as high as $147 a barrel although prices fell soon after. The food and fuel crises were both discussed at the 34th G8 summit in July.
Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 6-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.
In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.
In mid-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.
In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations. 'Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets,' have been named as possible reasons for the inflation.
In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term “unsterilized” referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a country´s monetary policy target. However, inflation was also growing in countries classified by the IMF as 'non-oil-exporting LDCs' (Least Developed Countries) and 'Developing Asia', on account of the rise in oil and food prices.
Inflation was also increasing in the developed countries, but remained low compared to the developing world.
The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in 'construction, real estate, financial services, and the auto sector' - bringing world unemployment above 200 million for the first time.
For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.
In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a locus of economic and financial crisis management.
B) National Trends
In the early months of
2008, many observers believed that a
ex-Chairman of the Federal Reserve, stated in
March 2008 that the 2008 financial crisis in the
The former head of the National Bureau of Economic Research said in March 2008 he believed the country was then in a recession, and it could be a severe one. A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that then the economy would suffer but not enter a prolonged and severe recession. It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes its own ruling.
According to numbers
published by Bureau of Economic Analysis in May 2008,
the GDP growth of the previous two quarters was positive. As one common
definition of a recession is negative economic growth for at least two
consecutive fiscal quarters, some analysts suggest this indicates that the
White House budget
director Jim Nussle said the
In a CNBC interview at the
end of July 2008 Alan Greenspan said he believed the
A study released by
Moody's found two-thirds of the 381 largest metropolitan areas in the
In March 2008, Warren
Buffett stated in a CNBC interview that by a 'common sense
On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years. The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:
The unemployment rate
jumped to 6.1 percent in August, its highest level in five years, as the
erosion of the job market accelerated over the summer. Employers cut 84,000
jobs last month, more than economists had expected, and the Labor Department
said that more jobs were lost in June and July than previously thought. So far,
605,000 jobs have disappeared since January. The unemployment rate, which rose
from 5.7 percent in July, is now at its highest level since September
2003. Jared Bernstein, economist at the Economics Policy Institute in
CNN also reported the news, quoted another economist, and placed the news in context:
'Job losses are still mild by recession standards, but the losses are relentless and they are accumulating,' said Bob Brusca of FAO Economics. 'If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And that's a big number.' But while economists generally study the payroll numbers most closely, it's the unemployment rate that registers with most Americans when they think about the labor market.
In early July, depositors
During the weekend of September 13–14, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure, similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of 1929. Stocks on 'Wall Street' tumbled on September 15.
On September 16, news emerged that the Federal Reserve may give AIG an $85 billion (£48 billion) rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.
The year 2008 as of
September 17 has seen 81 public corporations file for bankruptcy in the
The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation.
On September 17, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Hank Paulson that a large amount of public money would be needed to stabilize the financial system. Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions. The Secretary of the Treasury also indicated that money market funds will create an insurance pool to cover themselves against losses and that the government will buy mortgage-backed securities from banks and investment houses. Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion to $1 trillion U.S. dollars. President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777 point plunge. A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.
As of mid-November, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC. (Some portion of the Fed's emergency loans would already have been repaid.)
showed a contraction of 0.6 percent in the first quarter of 2008 following a
contraction of 0.2 percent in the fourth quarter of 2007. Estonia
similarly saw an economic contraction of 0.9 percent in the second quarter,
following a 0.5 percent contraction in the first quarter.
Chairwoman of the Association of
Estonian Food Industry, Sirje Potisepp, warned the Estonian food
industry would probably face bankruptcies citing two major beverage companies
economy of the
A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history. Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices.
On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth £30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities.
According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.
In September, British
bank Bradford & Bingley's £20billion savings
business was acquired by Spanish bank Grupo Santander.
While its retail deposit business along with its branch network will be sold to
By November, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.
Other Eurozone members saw
a decline in their economy in the second quarter. The French economy declined by 0.3 percent,
On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion from the Benelux countries amounting to €11.2 billion. Fortis' troubles started in the beginning of the year with an announcement that it faced around $1.5 bn of losses in the American sub-prime catastrophe. In June, the company announced a selloff of assets to raise €5 bn to improve the liquidity of the organisation. This, however, proved insufficient. On 6 October 2008, the French bank BNP Paribas took over 75% of Fortis' activities in Belgium, and 66% in Luxembourg, in exchange for the Belgian government becoming the new group's major shareholder.
In May industrial output
fell in the
On November 3, 2008, the EU-commision in Brussels predicted for 2009 only an extremely low increase by 0.1% of the BIP, for the countries of the Euro-zone (France, Germany, Italy, etc.). They also predicted negative numbers for the UK (-1.0% ), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, -0.3%, of the same number, on average over the developed economies (-0.7% for the US, and -0.8% for Germany). Economically, the car industry is especially concerned; as a consequence, several countries have already launched immediate help-packages, each involving several billions of dollars, euros or pounds.
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