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Global Economic

Environment Policy

A Perspective Report

Global Financial Crisis USA not responsible

Faculty : Prof. Anit N. Mukherjee

Submitted By: Group II (MBA PT 08-11)

Abhishek Gopal 01 Pijush Kanti Roy 28 Ashok Mathur 08

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Palak Magon 27 Sagar Ashok Hasamnis 36 Sumeet Bansal 43

Vandana Aggarwal Jain 48 Anshul Yadav 52 Saket Malhotra 56

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GLOBAL FINANCIAL CRISIS - USA NOT RESPONSIBLE

GLOBAL FINANCIAL CRISIS

GENESIS

What began as a bursting of the U.S. housing market bubble and a rise in

foreclosures has ballooned into a global financial and economic crisis. Some ofthe largest and most venerable banks, investment houses, and insurancecompanies have either declared bankruptcy or have had to be rescuedfinancially. In October 2008, credit flows froze, lender confidence dropped, andone after another, the economies of countries around the world dipped towardrecession. The crisis exposed fundamental weaknesses in financial systemsworldwide, and despite coordinated easing of monetary policy by governments,trillions of dollars in intervention by central banks and governments, and largefiscal stimulus packages, the crisis seems far from over.

Figure 1. Quarterly (Annualized) Economic Growth Rates for SelectedCountries

Percent Growth in GDP

20Actual Forecast

15 2001 ChinaGlobal

FinancialRecession

Crisis

10

5

0U.S.

Japan

-5Germ any

S. Korea

Mexico

Brazil

-10U.K.

United States Mexico Germany United Kingdom Russia

China Japan South Korea Brazil-152000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Year (4th quarter)

Source: Congressional Research Service. Data and forecasts (August 15) by Global Insight.

This financial crisis which began in industrialized countries quickly spread toemerging market and developing economies. Investors pulled capital fromcountries, even those with small levels of perceived risk, and caused values ofstocks and domestic currencies to plunge. Also, slumping exports and

commodity prices have added to the woes and pushed economies world wideeither into recession or into a period of slower economic growth.

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The global crisis now seems to be played out on two levels. The first isamong the industrialized nations of the world where most of the lossesfrom subprime mortgage debt, excessive leveraging of investments, andinadequate capital backing credit default swaps (insurance against defaults andbankruptcy) have occurred. The second level of the crisis is amongemerging market and other economies who may be innocent bystandersto the crisis but who also may have less resilient economic systems that canoften be whipsawed by actions in global markets. Most industrialized countries(except for Iceland) have been able to finance their own rescue packages byborrowing domestically and in international capital markets, but many emergingmarket and developing economies have insufficient sources of capital and haveturned to help from the International Monetary Fund (IMF), World Bank, or fromcapital surplus nations, such as Japan, and the European Union.

The global financial crisis got accentuated due to widespread adherence tothree big assumptions or articles of faith :-

The first of these was a belief that modern capital markets had become so muchmore advanced than their predecessors that banks would always be able totrade debt securities. This encouraged banks to keep lowering lending standards,since they assumed they could sell the risk on. Abundant market liquidityled some firms to overestimate the markets capacity to absorb risk,says the Institute of International Finance, a Washington-based lobby group, in arecent report. The same buoyant environment resulted in market pressure forhigh returns ... and high levels of competition among financial firms.

Second, many investors assumed that the credit rating agencies offered an easy

and cost-effective compass with which to navigate this ever more complex world.Thus many continued to purchase complex securities through out the first half of2007 even though most investors barely understood these products.

But third, and perhaps most crucially, there was a widespread assumption thatthe process of slicing and dicing debt had made the financial system morestable. Policymakers thought that because the pain of any potential creditdefaults was spread among millions of investors, rather than concentrated inparticular banks, it would be much easier for the system to absorb shocks than inthe past. People had looked at what had happened to the Japanese banks andsaid, this simply cannot happen here, because the banks were no longerholding all the credit risk, one senior European policymaker recalls.

The present financial crisis afflicting the global economy should not be

seen from the narrow focus of the credit crunch and its relationship to the

subprime mortgage crisis in the Western countries, especially the US. The crisis

goes to the very foundations of the global capitalist system and it should be

analysed from that angle. What is at the core of the crisis is the over-extension

of credit on a narrow material production base. This is in a situation in which

money has become increasingly detached from its material base of a money

commodity that can measure its value such as gold.

The expansion of the world economy from 1945 onwards was based on the US

providing some kind of link between money and the gold standard, which the US

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tried to maintain until its collapse in the 1970s. Increasingly the dollar became

the global currency but without a backing to its currency from a money

commodity. The over-expansion of credit that has taken place since then,

especially with the globalisation of the world economy, has meant that a lot of

paper money and monetary instruments in the form of derivatives and future

options have lost any relationship to the fundamentals in the material

production of the world economy.

That is why there has been a growing outcry that the growth of speculative

capital has over-run the growth of productive capital with large amounts of

money and credit circulating without the backing of any production at all. That is

also why the relationship between the fundamentals in the economy and the

new credit instruments created on a daily basis in many cases from speculative

short-selling have become narrower and narrower over time. This is also why

the present financial crisis is also a reflection of the energy and food crisis,

because oil and food products such as wheat, rice and other commodities havebeen subjected to speculative trading to back up paper money many years in the

future

IMMEDIATE CAUSE:- The immediate cause or trigger of the crisis wasthe bursting of the United States housing bubble which peaked in approximately

20052006. High default rates on "subprime" and adjustable rate mortgages

(ARM), began to increase

quickly thereafter. An increase

in loan incentives such as easy

initial terms and a long-termtrend of rising housing prices

had encouraged borrowers to

assume difficult mortgages in

the belief they would be able to

quickly refinance at more

favorable terms. However, once

interest rates began to rise and

housing prices started to drop

moderately in 20062007 in

many parts of the U.S.,

refinancing became more difficult. Defaults and foreclosure activity increased

dramatically as easy initial terms expired, home prices failed to go up as

anticipated, and ARM interest rates reset higher.

An adjustable rate mortgage (ARM) is a mortgage loan where the interest

rate on the note is periodically adjusted based on a variety of indices. Adjustable

rates transfer part of the interest rate risk from the lender to the borrower. They

can be used where unpredictable interest rates make fixed rate loans difficult to

obtain. The borrower benefits if the interest rate falls and loses out if interest

rates rise.

U.S. Subprime lending expanded dramatically 2004-2006

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Collateralized debt obligations(CDOs): A type of structured asset-backed security whose value andpayments are derived from a portfolio offixed-income underlying assets. CDOsbased on sub-prime mortgages have

been at the heart of the global financialcrisis. CDOs are assigned different riskclasses or tranches, with seniortranches considered to be the safest.Since interest and principal paymentsare made in order of seniority, juniortranches offer higher coupon payments(and interest rates) or lower prices tocompensate for additional default risk.

Credit default swap (CDS): a creditderivative contract between twocounterparties in which the buyermakes periodic payments to the sellerand in return receives a sum of money ifa certain credit event occurs (such as adefault in an underlying financialinstrument). Payoffs and collateral calls

on CDSs issued on sub-prime mortgageCDOs have been a primary cause of the

Subprime lending (near-prime, non-prime,

or second-chance lending) in finance means

making loans that are in the riskiest category

of consumer loans. The term subprime refers

to the credit quality of particular borrowers,

who have weakened credit histories and a

greater risk of loan default than prime


The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March

2007. Subprime loans can offer an

opportunity for borrowers with a less-than-

ideal credit record to become a home

owner. The standards for determining riskcategories refer to the size of the loan,

"traditional" or "nontraditional" structure of

the loan, borrower credit rating, ratio of

borrower debt to income or assets, ratio of loan to value or collateral,

documentation provided on those loans which do not meet Fannie Mae or

Freddie Mac underwriting guidelines for prime mortgages (are "non-

conforming"). Although there is no single, standard definition, in the United

States subprime loans are usually classified as those where the borrower has a

FICO score (Credit Rating)below 640. Subprime lending encompasses a variety of

credit types, including mortgages, auto loans, and credit cards.

UNDERLYING CAUSE:- Incorrect pricing of risk

The pricing of risk refers to the incremental compensation required by investorsfor taking on additional risk, which may be measured by interest rates or fees.For a variety of reasons, market participantsdid not accurately measure the riskinherent with financial innovation such asMBS and CDO's or understand its impact onthe overall stability of the financial system. For

example, the pricing model for CDOsclearly did not reflect the level of riskthey introduced into the system. Theaverage recovery rate for "high quality"CDOs has been approximately 32 centson the dollar, while the recovery rate formezzanine CDO's has been approximately fivecents for every dollar. These massive,practically unthinkable, losses have dramatically impacted the balance sheets ofbanks across the globe, leaving them with very little capital to continueoperations.

Another example relates to AIG, which insured obligations of various financialinstitutions through the usage of credit default swaps. The basic CDS transactioninvolved AIG receiving a premium in exchange for a promise to pay money toparty A in the event party B defaulted. However, AIG did not have the financialstrength to support its many CDS commitments as the crisis progressed and wastaken over by the government in September2008. U.S. taxpayers provided over $180billion in government support to AIG during2008 and early 2009, through which themoney flowed to various counterparties toCDS transactions, including many large global

financial institution

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As financial assets became more and more complex, and harder and harder tovalue, investors were reassured by the fact that both the international bondrating agencies and bank regulators, who came to rely on them, accepted asvalid some complex mathematical models which theoretically showed therisks were much smaller than they actually proved to be in practice.

George Soros commented that

"The super-boom got out of hand when the new products became socomplicated that the authorities could no longer calculate the risks andstarted relying on the risk management methods of the banksthemselves. Similarly, the rating agencies relied on the information provided bythe originators of synthetic products. It was a shocking abdication ofresponsibility."

THE PRINCIPAL REASONS FOR THE GLOBAL FINANCIAL

CRISIS

1. GREED

Housing boom coincided with greater popularity of the securitization of assets,particularly mortgage debt (including subprime mortgages), into collateralized debtobligations (CDOs). A problem was that the mortgage originators often were

mortgage finance companies whose main purpose was to write mortgages usingfunds provided by banks and other financial institutions or borrowed. They werepaid, for each mortgage originated, but had no responsibility for loansgone bad. Of course, the incentive for them was to maximize the numberof loans concluded. This coincided with political pressures to enable moreAmericans to buy homes, although it appears that Fannie Mae and Freddie Macwere not directly complicit in the loosening of lending standards and the rise ofsub-prime mortgages.

In order to cover the risk of defaults on mortgages, particularly subprimemortgages, the holders of CDOs purchased credit default swaps(CDSs). Thepurchaser of the CDS does not have to have a financial interest in the referencedentity, so CDSs quickly became more of a speculative asset than aninsurance policy. As long as the credit events never occurred, issuers of CDSscould earn huge amounts in fees relative to their capital base (since these weretechnically not insurance, they did not fall under insurance regulations requiringsufficient capital to pay claims, although credit derivatives requiring collateralbecame more and more common in recent years).

The sellers of the CDSs that protected against defaults often covered their riskby turning around and buying CDSs that paid in case of default. As the risk ofdefaults rose, the cost of the CDS protection rose. Investors, therefore, couldarbitrage between the lower and higher risk CDSs and generate large income

streams with what was perceived to be minimal risk. In 2007, the notional value(face value of underlying assets) of credit default swaps had reached $62 trillion,

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more than the combined gross domestic product of the entire world ($54 trillion),although the actual amount at risk was only a fraction of that amount(approximately 3.5%). By July 2008, the notional value of CDSs had declined to$54.6 trillion and by October 2008 to an estimated $46.95 trillion. The systemof CDSs generated large profits for the companies involved until thedefault rate, particularly on subprime mortgages, and the number ofbankruptcies began to rise. Soon the leverage that generated outsizedprofits began to generate outsized losses, and in October 2008, theexposures became too great for companies such as AIG.

2. Risk

The origins of the financial crisis point toward three developments that increasedrisk in financial markets. The first was the originate-to-distribute model formortgages. The originator of mortgages passed them on to the provider of fundsor to a bundler who then securitized them and sold the collateralized debtobligation to investors. This recycled funds back to the mortgage market andmade mortgages more available. However, the originator was not penalized, for

example, for not ensuring that the borrower was actually qualified for the loan,and the buyer of the securitized debt had little detailed information about theunderlying quality of the loans. Investors depended heavily on ratings by creditagencies. The second development was a rise of perverse incentives andcomplexity for credit rating agencies. Credit rating firms received fees to ratesecurities based on information provided by the issuing firm using their modelsfor determining risk. Credit raters, however, had little experience with creditdefault swaps at the systemic failure tail of the probability distribution. Themodels seemed to work under normal economic conditions but had not beentested in crisis conditions. Credit rating agencies also may have advised clientson how to structure securities in order to receive higher ratings. In addition, the

large fees offered to credit rating firms for providing credit ratings were difficultfor them to refuse in spite of doubts they might have had about the underlyingquality of the securities. The perception existed that if one credit rating agencydid not do it, another would. The third development was the blurring of linesbetween issuers of credit default swaps and traditional insurers. In essence,financial entities were writing a type of insurance contract without regard forinsurance regulations and requirements for capital adequacy (hence, the use ofthe term credit default swaps instead of credit default insurance). Much riskwas hedged rather than backed by sufficient capital to pay claims in caseof default. Under a systemic crisis, hedges also may fail. However, although theCDS market was largely unregulated by government, more than 850institutions in 56 countries that deal in derivatives and swaps belong to the

ISDA (International Swaps and Derivatives Association).

3. BOOM AND COLLAPSE OF THE SHADOW BANKING

SYSTEM

In a June 2008 speech, President and CEO of the NY Federal Reserve Bank

Timothy Geithner, who in 2009 became Secretary of the United States

Treasury, placedsignificant blame for the freezing of credit markets on a

"run" on the entities in the "parallel" banking system, also called the

shadow banking system. These entities became critical to the credit markets

underpinning the financial system, but were not subject to the same

regulatory controls. Further, these entities were vulnerable because they

borrowed short-term in liquid markets to purchase long-term, illiquid

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and risky assets. This meant that disruptions in credit markets would make

them subject to rapid deleveraging, selling their long-term assets at depressed

prices. He described the significance of these entities: "In early 2007, asset-

backed commercial paper conduits, in structured investment vehicles, in auction-

rate preferred securities, tender option bonds and variable rate demand notes,

had a combined asset size of roughly $2.2 trillion. Assets financed overnight in

tri-party repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly

$1.8 trillion. The combined balance sheets of the then five major investment

banks totalled $4 trillion. In comparison, the total assets of the top five bank

holding companies in the United States at that point were just over $6 trillion,

and total assets of the entire banking system were about $10 trillion." He stated

that the "combined effect of these factors was a financial system vulnerable to

self-reinforcing asset price and credit cycles."

Nobel laureate Paul Krugman described the run on the shadow banking

system as the "core of what happened" to cause the crisis.

"As the shadow banking system expanded to rival or even surpass conventional

banking in importance, politicians and government officials should have realized

that they were re-creating the kind of financial vulnerability that made the Great

Depression possibleand they should have responded by extending regulations

and the financial safety net to cover these new institutions. Influential figures

should have proclaimed a simple rule: anything that does what a bank does,

anything that has to be rescued in crises the way banks are, should be regulated

like a bank."

He referred to this lack of controls as "malign neglect." In a dramatic meeting onSeptember 18, 2008 Treasury Secretary Henry Paulson and Fed Chairman Ben

Bernanke met with key legislators to propose a $700 billion emergency bailout.

Bernanke reportedly tells them: "If we don't do this, we may not have an

economy on Monday . The Emergency Economic Stabilization Act also called

theTroubled Asset Relief Program (TARP) is signed into law on October 3, 2008.

Economist Paul Krugman and U.S. Treasury SecretaryTimothy Geithner explain

the credit crisis via the implosion of the shadow banking system, which had

grown to nearly equal the importance of the traditional commercial banking

sector as described above. Without the ability to obtain investor funds inexchange for most types of mortgage-backed securities or asset-backed

commercial paper, investment banks and other entities in the shadow banking

system could not provide funds to mortgage firms and other corporations.

This meant that nearly one-third of the U.S. lending mechanism was frozen and

continued to be frozen into June 2009. According to the Brookings Institution, the

traditional banking system does not have the capital to close this gap as of June

2009: "It would take a number of years of strong profits to generate sufficient

capital to support that additional lending volume." The authors also indicate that

some forms of securitization are "likely to vanish forever, having been an artifact

of excessively loose credit conditions." While traditional banks have raised their

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lending standards, it was the collapse of the shadow banking system that is the

primary cause of the reduction in funds available for borrowing.

Hedge Funds: Hedge funds should be required to register with a national

securities regulator. Systemically-important hedge funds should be subject to

prudential regulation. Hedge funds should provide information on a confidentialbasis to regulators about their strategies and positions

Tax Havens: Minimum international standardsa regulatory floorshould apply

in all countries, including tax havens and offshore banking centers.

4. GLOBAL MONEY FLOWS RESPONSIBLE

In the years leading up to the start of the crisis in 2007, significant amounts of

foreign money flowed into the U.S. from fast-growing economies in Asia and oil-

producing countries. This inflow of funds made it easier for the Federal

Reserve to keep interest rates in the United States too low (by theTaylorrule) from 20022006 which contributed to easy credit conditions, leading to the

United States housing bubble. Loans of various types (e.g., mortgage, credit

card, and auto) were easy to obtain and consumers assumed an unprecedented

debt load. As part of the housing and credit booms, the amount of financial

agreements called mortgage-backed securities (MBS) and collateralized debt

obligations (CDO), which derived their value from mortgage payments and

housing prices, greatly increased. Such financial innovation enabled

institutions and investors around the world to invest in the U.S. housing

market. As housing prices declined, major global financial institutions that had

borrowed and invested heavily in subprime MBS reported significant losses. Falling

prices also resulted in homes worth less than the mortgage loan, providing a

financial incentive to enter foreclosure.

Additional downward pressure on interest rates was created by the USA's high

and rising current account (trade) deficit, which peaked along with the housing

bubble in 2006. Ben Bernanke explained how trade deficits required the U.S. to

borrow money from abroad, which bid up bond prices and lowered interest rates.

Bernanke explained that between 1996 and 2004, the USA current account

deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing

these deficits required the USA to borrow large sums from abroad,

much of it from countries running trade surpluses, mainly the emergingeconomies in Asia and oil-exporting nations. The balance of payments

identity requires that a country (such as the USA) running a current account

deficit also have a capital account (investment) surplus of the same amount.

Hence large and growing amounts of foreign funds (capital) flowed into the USA

to finance its imports. This created demand for various types of financial assets,

raising the prices of those assets while lowering interest rates. Foreign investors

had these funds to lend, either because they had very high personal savings

rates (as high as 40% in China), or because of high oil prices. Bernanke referred

to this as a "saving glut. A "flood" of funds (capital or liquidity) reached

the USA financial markets. Foreign governments supplied funds bypurchasing USATreasury bonds and thus avoided much of the direct impact of

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the crisis. USA households, on the other hand, used funds borrowed from

foreigners to finance consumption or to bid up the prices of housing and financial

assets. Financial institutions invested foreign funds in mortgage-backed

securities.

Certain countries incurred large deficits in international trade and currentaccounts (particularly the United States), while other countries accumulated

large reserves of foreign exchange by running surpluses in those accounts.

Investors deployed hot money in world markets seeking higher rates of return.

These were joined by a huge run up in the price of commodities, rising interest

rates to combat the threat of inflation, a general slowdown in world economic

growth rates, and increased globalization that allowed for rapid communication,

instant transfers of funds, and information networks that fed a herd instinct. This

brought greater uncertainty and changed expectations in a world economy that

for a half decade had been enjoying relative stability

5. WORLDS EXCESSIVE DEPENDENCE ON US AS A

CONSUMER

US consumes and borrows too much but the world wants to keep it that

way as it wants to export to US. As a result US has humungous trade deficit and

therefore borrows from outside world to balance the books keeping the interest

rates low thereby leading to

housing bubble.

The Brookings Institution

reported in June 2009 that U.S.consumption accounted formore than a third of the growthin global consumption between2000 and 2007. "The USeconomy has beenspending too much andborrowing too much foryears and the rest of theworld depended on the U.S.consumer as a source ofglobal demand." With arecession in the U.S. and theincreased savings rate of U.S. consumers, declines in growth elsewhere havebeen dramatic. For the first quarter of 2009, the annualized rate of decline inGDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8%in the Euro area and 21.5% for Mexico.

The fact of the matter is that the U.S. needs a weak dollar to generate export-ledgrowth and to re-orient its economy away from rampant personal consumption.With the U.S. consumer saving more and spending less, dollar weakness hasnever come at a better time to America, boosting exports and the foreignearnings of U.S. multinationals. Washington policy makers know this and are not

about to fiddle with success.

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Hence, the strong dollar mantra of the Obama administration does not carrymuch weight. It has become a phrase with little currency.

The US is running a current account deficit of 5% thru the years. As a

result it borrows from outside to finance it resulting in huge foreign

debt.

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIESFigures in Billion US$

China 798.9 Carib Bnkng Ctrs 171.7

Japan 751.5 Brazil 144.9

United Kingdom 249.3 Hong Kong 132.2

Oil Exporters 185.3 Russia 121.8

US- EXPORTS TO GDP RATIO IS 10.5% WHEREAS CHINA IS 40 %,

Germany 45%, Korea 43%, WORLD WANTS USA AS A CONSUMER, BUT

NOT AS A SUPPLIER. THERE IS OVER DEPENDENCE ON THE AMERICANMARKET.

6. LACK OF ASSET DIVERSIFICATION

INTERNATIONALLY

World official gold holding (November 2009)

Rank Country/OrganizationGold

(tonnes)Gold's share of totalforex reserves (%)

1 United States 8,133.5 77.4%

2 Germany 3,408.3 69.2%

3 International Monetary Fund 3,005.3 -

4 Italy 2,451.8 66.6%

5 France 2,445.1 70.6%

6 China 1,054.0[12] 1.9%

7 Switzerland 1,040.1 29.1%

8 Japan 765.2 2.3%9 Netherlands 612.5 59.6%

10 India 557.7[6] 6%

The economies of the world have failed in their task of Risk Assessment &

mitigation by not diversifying their assets allocation like investing in

alternate asset classes eg Gold which would have de-risked their portfolio

which then would have withstood the financial tsunami like GLOBAL

FINANCIAL CRISIS.

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http://en.wikipedia.org/wiki/United_States_Federal_Reservehttp://en.wikipedia.org/wiki/Deutsche_Bundesbankhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Banque_de_Francehttp://en.wikipedia.org/wiki/People's_Bank_of_Chinahttp://en.wikipedia.org/wiki/Gold_reserve#cite_note-12http://en.wikipedia.org/wiki/Swiss_National_Bankhttp://en.wikipedia.org/wiki/Bank_of_Japanhttp://en.wikipedia.org/wiki/De_Nederlandsche_Bankhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Gold_reserve#cite_note-india-6http://en.wikipedia.org/wiki/Indiahttp://en.wikipedia.org/wiki/Netherlandshttp://en.wikipedia.org/wiki/Japanhttp://en.wikipedia.org/wiki/Switzerlandhttp://en.wikipedia.org/wiki/People's_Republic_of_Chinahttp://en.wikipedia.org/wiki/Francehttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Germanyhttp://en.wikipedia.org/wiki/United_Stateshttp://en.wikipedia.org/wiki/United_States_Federal_Reservehttp://en.wikipedia.org/wiki/Deutsche_Bundesbankhttp://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/Italyhttp://en.wikipedia.org/wiki/Banque_de_Francehttp://en.wikipedia.org/wiki/People's_Bank_of_Chinahttp://en.wikipedia.org/wiki/Gold_reserve#cite_note-12http://en.wikipedia.org/wiki/Swiss_National_Bankhttp://en.wikipedia.org/wiki/Bank_of_Japanhttp://en.wikipedia.org/wiki/De_Nederlandsche_Bankhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Gold_reserve#cite_note-india-6

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United States still has the largest Reserves of GOLD by far, countries like

China have blindly stashed their monies in instruments like US treasury

bonds. Had the Chinese Govt been less than willing to invest in US Bonds

then the US housing bubble would not have grown that big resulting in the

meltdown that followed the crisis.

7.LACK OF INTERNATIONAL MECHANISM TO CONTAIN

FINANCIAL CRISES

U.K Prime Minister Gordon Brown has called for such a conference to have the

specific objective of remaking the international financial architecture. In

the declaration of the G-20 Summit on Financial Markets and the World

Economy, world leaders stated:

We underscored that the Bretton Woods Institutions must be comprehensively

reformed so that they can more adequately reflect changing economic weightsin the world economy and be more responsive to future challenges. Emerging

and developing economies should have greater voice and representation in

these institutions.

G-20:To modernize the global architecture by designating the G-20 as thepremier forum for international economic cooperation, by establishing

the Financial Stability Board (FSB), by having the FSB include major

emerging economies, and by having the FSB coordinate and monitor progress in

strengthening financial regulation. Also, the G-20 agreed to shift the IMF quota

share to dynamic emerging markets and developing countries of at least 5%,

using the current IMF quota formula. The change in quotas is keyed to the IMFs

quota review that is scheduled to be completed by January 2010.

The G-20 countries also agreed to contribute over $500 billion to a

renewed and expanded New Arrangements to Borrow facility in the IMF.

Additional IMF funding will also be available through gold sales and through

additional Special Drawing Rights (SDRs). The G-20also called for reforming the

mission, mandate, and governance of the development banks, including the IMF,

which the G-20 indicated must play a critical role in promoting global financial

stability and rebalancing growth. They also called on the World Bank to play a

leading role in responding to problems whose nature requires globallycoordinated action, such as climate change and green technology, food security,

human development, and private-sector led growth.

All this futuristic thought clearly indicates the fact that the world economic

system and not the USA alone was responsible for the lack of financial stability

leading to collapse.

8. CHINESE RENMIMBI DIRTY FLOAT RESPONSIBLE

The Chinese Govt despite the calls of revaluation of the Renmimbi worldwide has

still not made up its mind on the issue. As a result of the undervalued Yuan, theUS is running huge trade deficits in excess of 500 Billion Dollars.

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Revaluation of the Yuan would be "appropriate": EU(AFP) 29.11.2009

NANJING, China The head of the European Central Bank said that a revaluation

of the Yuan currency would be "appropriate" after talks with China's Premier

Wen Jiabao. "We discussed the exchange rate policy, the de facto peg of the

Yuan," Jean-Claude Trichet told reporters at a briefing after talks between EUofficials and Wen in the eastern city of Nanjing.

He said officials encouraged Beijing to take "a more flexible policy," adding "it

seems it would be appropriate."

The Chinese currency has been effectively pegged to the dollar since the

summer of 2008, and Europe fears the euro's rise against the Yuan will hurt EU

exports to China and eventually slow the continent's economic recovery.

But Beijing, which faces complaints from both the United States and Europe that

it is manipulating its currency to gain an unfair trade edge, says it wants to takeits time and reform its exchange rate system.

Once again the USA appears to be the victim rather than the reason for financial

crisis and its mitigation as China is influencing the World economy.

CONCLUSION

The United States of America cannot be held responsible for the Global

Financial Crisis and that too solely. As the term Global conveys; the

crisis was a global one rather than being only American, albeit the

crisis started from the American shores. The firms that went down like

Lehman brothers, Goldman Sachs, Merrill lynch, Bear Stearns etc might be

US registered but were Multinationals, they employed countless nationals

of all countries, even the shareholding of these corporations was spread

the world over.

Principally, Greed was the major factor behind the crisis whereby

all norms of financial propriety were laid by the way side in

pursuit of insatiable thirst for profit globally.

One thing this crisis has made amply clear is that the balance of

economic power has shifted from the Atlantic Ocean to the Asia-

pacific region.

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Geep Final

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