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GLOBAL ECONOMIC COLLAPSE 2008 AND 2013

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The Financial Crisis of 2008 is an ongoing global financial crisis that is the worst the world has seen since 1933 with the Great Depression.

DEFINITION of 'Financial Crisis'A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. MEANING OF GLOBAL FINANCIAL COLLAPSEA worldwide period of economic difficulty experienced by markets and consumers. A global financial crisis is a difficult business environment to succeed in since potential consumers tend to reduce their purchases of goods and services until the economic situation improves.

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Why the financial crisis of 2008 happened?

The answer is simple: the housing bubble burst (U.S. subprime mortgage crisis)

What is subprime lending is all about?Subprime lending means giving loan to people who may have difficulty in maintaining the repayment schedule. These loans are characterized by higher interest rates, poor quality collateral, and less favorable terms in order to compensate for higher credit risk.Example: Student loans in India are considered to be subprime.

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Borrowing decisions by individuals

Housing Bubble Formation

Lending decisions by Financial Institution

The “housing bubble burst” in 2006-07, as prices plunged (fall) downward in the Sunbelt (U.S). Many speculators and homeowners could not meet their payments, especially those who had "sub-prime" mortgages because their income was too low to support the eventual monthly payments, or who had adjustable rate mortgages where the monthly payments started small then escalated.

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Cause of the Global Economic Collapse:

The U.S. economy was being driven by a housing bubble. When it burst, private residential investment (i.e., housing construction) fell by nearly 4% GDP and consumption enabled by bubble-generated housing wealth also slowed. This created a gap in annual demand (GDP) of nearly $1 trillion. The U.S. government was unwilling to make up for this private sector shortfall.

Record levels of household debt accumulated in the decades preceding the crisis resulted in a balance sheet recession (similar to debt deflation) once housing prices began falling in 2006. Consumers began paying down debt, which reduces their consumption, slowing down the economy for an extended period while debt levels are reduced.

U.S. government policies encouraged home ownership even for those who could not afford it, contributing to lax lending standards, unsustainable housing price increases, and indebtedness.

The financial crisis happened because banks were able to create too much money, too quickly, and used it to push up house prices and speculate on financial markets

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IMPACT OF SUBPRIME CRISIS:

Major banks suffered from huge losses. Countrywide Financial Corporation, the biggest U.S. mortgage lender, eventually gets taken over by Bank of America.

DIRECT IMPACTS OF THE CRISIS:

Financial Institutions – Bankruptcy New Century Financial (USA) – April 2, 2007 American Home Mortgage (USA) – August 6, 2007 Sentinel Management Group (USA) – August 17, 2007 Ameriquest (USA) – August 31, 2007 NetBank (USA) – September 30, 2007 Terra Securities (Norway) – November 28, 2007 American Freedom Mortgage Inc. (USA) – January 30, 2007

FINANCIAL INSTITUTIONS – WRITE DOWNS:

Citigroup (USA) - $24.1b Merrill Lynch (USA) - $ 22.5b USB AG (Switzerland) - $ 16.7b Morgan Stanley (USA) - $10.3b Credit Agricole (France) - $ 4.8b HSBC (UK) - $3.4b Bank of America (USA) - $5.28b CIBC (Canada) – 3.2b Deutsche Bank (Germany) - $3.1b

Total Write downs and losses were around $300 - $350 billion US dollars

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EMPLOYMENT RATE REAL GDP VARIATION (QUARTER PERIODS)

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SOLUTIONS OF CRISES

The emergence of incorporation companies (fusion) and sales of a number of big companies to save it from bankruptcy.

Many of large Central Banks provide large number of countries around the world with billions to ease the liquidity crisis, such as the U.S. Federal Bank and Japan’s Central Bank and the German Central Bank.

The U.S. government’s rescue plan presented to the House of Representatives $ 700 billion and, after deliberations between rejection and acceptance was approved by the Council of Representatives and the Senate.

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