Why world is in Economic Crisis?
Causes of the crises
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, Italy's Minister of Economy and Finance, who said: "Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most." 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 allowed huge amounts of "easy" credit-based money to be injected into the financial system), 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. 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.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 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.
High commodity prices The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the Great Commodities Depression 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 globalisation.
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.
Inflation 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.
Unemployment 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.
Rise in unemployment 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 Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading. 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.
Liquidity crisis In early July, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac - the largest mortgage lender in the US - was seized by federal regulators. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008. 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.[citation needed] 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 United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.
On September 29, Citigroup beat out Wells Fargo to acquire the ailing Wachovia's assets will pay $1 a share, or about $2.2 billion. In addition, the FDIC said that the agency would absorb the company's losses above $42 billion; in exchange they would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.
Bailout of U.S. financial system 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 billionto $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.
Europe Denmark was confirmed to be in a recession after quarterly results for 2008 showed a contraction of 0.6 percent in the first quarter 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, putting it in a recession.Latvia officially entered a recession after gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in first quarter GDP.Sweden's economy showed zero growth in the second quarter of 2008. The entire economy of the European Union declined by 0.1 percent in the second quarter.A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.
Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy. Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency
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, Italy's Minister of Economy and Finance, who said: "Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most." 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 allowed huge amounts of "easy" credit-based money to be injected into the financial system), 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. 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.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 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.
High commodity prices The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the Great Commodities Depression 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 globalisation.
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.
Inflation 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.
Unemployment 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.
Rise in unemployment 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 Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. "If anyone is still scratching their head over that one, they can stop," Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading. 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.
Liquidity crisis In early July, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac - the largest mortgage lender in the US - was seized by federal regulators. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008. 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.[citation needed] 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 United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals.The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.
On September 29, Citigroup beat out Wells Fargo to acquire the ailing Wachovia's assets will pay $1 a share, or about $2.2 billion. In addition, the FDIC said that the agency would absorb the company's losses above $42 billion; in exchange they would receive $12 billion in preferred stock and warrants from Citigroup in return for assuming that risk.
Bailout of U.S. financial system 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 billionto $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.
Europe Denmark was confirmed to be in a recession after quarterly results for 2008 showed a contraction of 0.6 percent in the first quarter 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, putting it in a recession.Latvia officially entered a recession after gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in first quarter GDP.Sweden's economy showed zero growth in the second quarter of 2008. The entire economy of the European Union declined by 0.1 percent in the second quarter.A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.
Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy. Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency
Financial markets January 2008 stock market volatility
January 2008 was an especially volatile month in world stock markets, with a surge in implied volatility measurements of the US-based S&P 500 index , and a sharp decrease in non-U.S. stock market prices on Monday, January 21, 2008 (continuing to a lesser extent in some markets on January 22). Some headline writers and a general news columnist called January 21 "Black Monday" and referred to a "global shares crash though the effects were quite different in different markets.
American stock markets were closed on Monday, January 21 for Martin Luther King, Jr. Day. Seemingly in response to the fall in non-U.S. markets the U.S. Federal Reserve announced a surprise rate cut of 0.75% on Tuesday at 8 a.m. This rate cut is believed to have been influential in preventing large declines in the American stock markets, with the Dow Jones Industrial Average down only 1.1% for the day, never closing that week worse than a 1.6% decrease from the previous Friday, and indeed closed up for the week. Later it was announced that Société Générale, one of the largest banks in Europe, accused its employee Jérôme Kerviel of fraudulent trades costing it €4.9 billion, and causing it to sell approximately €50 billion in European equity derivatives from January 21–23.
The effects of these events were also felt on the Shanghai Composite Index in China which lost 5.14 percent, most of this on financial stocks such as Ping An Insurance and China Life which lost 10 and 8.76 percent respectively. Investors worried about the effect of a recession in the US economy would have on the Chinese economy. Citigroup estimates due to the number of exports from China to America a one percent drop in US economic growth would lead to a 1.3 percent drop in China's growth rate.
Market downturn of September and October 2008 As of October 2008, stocks in North America, Europe, and the Asia-Pacific region had all fallen by about 30% since the beginning of the year. The Dow Jones Industrial Average had fallen about 37% since January 2008.
There were several large Monday declines in stock markets world wide during 2008, including one in January, one in August, one in September, and another in early October.
The simultaneous multiple crises affecting the US financial system in mid-September 2008 caused large falls in markets both in the US and elsewhere. Numerous indicators of risk and of investor fear (the TED spread, Treasury yields, the dollar value of gold) set records.
Russian markets, already falling due to declining oil prices and political tensions with the West, fell over 10% in one day, leading to a suspension of trading, while other emerging markets also exhibited losses. On September 18, UK regulators announced a temporary ban on short-selling of financial stock On September 19 the United States' SEC followed by placing a temporary ban of short-selling stocks of 799 specific financial institutions. In addition, the SEC made it easier for institutions to buy back shares of their institutions. The action is based on the view that short selling in a crisis market undermines confidence in financial institutions and erodes their stability. On September 22, the Australian Securities Exchange (ASX) delayed opening by an hour after a decision was made by the Australian Securities and Investments Commission (ASIC) to ban all short selling on the ASX. This was revised slightly a few days later.
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