The global economic crisis started in 2008 in United States.
The main factors that led to this crisis were the following: The excessive rise in prices of raw materials, an overvaluation of the product, a global food crisis, an energy crisis, global inflation and the threat of worldwide recession, the credit and mortgage crisis, loss in market confidence.
But the most important of all is the fictitious expansion of credit created by the central banks that have motivated entrepreneurs to invest where they should not invest.
The consequence was the arrival of a crisis for the world’s richest countries.
“Late-2000s recession”. Wikipedia. Web. 3rd October 2011. Late-2000s recession-Wikipedia, the free encyclopedia.
The excessive rise in prices of raw materials.
In 2000 started the rising price of raw materials, especially in the oil and food (which were discussed at the G-8). But was in 2008 when this increase began to cause real economic damage, especially in developing countries. Moreover, this fact also created a stagflation and a global stagnation. In January of 2008 was published that the cause of rising prices was due to speculation. But later, there was the fall in prices. This also happened with industrial materials such as copper.
“Late-2000s recession”. Wikipedia. Web. 3rd October 2011. Late-2000s recession-Wikipedia, the free encyclopedia
Global food crisis.
The world food prices were increased dramatically in the years 2007 and 2008, creating a global crisis, causing a political and economic instability, and creating a social recession in both the developed and underdeveloped countries. Possible causes for this increase in food prices are still in debate.
After the incredible flooding in the indices of food prices in late 2008, prices began to fall dramatically during the recession. Although there have been steady increases during the years 2009 and 2010. So, in 2011, prices of basic food reached their peak, not seen for a long time.
The root causes of the on-going increases in food prices were the growth of oil prices. The latter caused an escalation growth is the cost of fertilizers, transport of food and agriculture industry. But, really, the root causes of worldwide rise in food prices are as follows:
The fall in stocks of food around the world, structural changes in trade and agricultural production, diversions of food commodities to high input foods and fuel, commodity market speculation, and climate change.
“2007–2008 world food price crisis”. Wikipedia. Web. 8th October 2011. 2007–2008 world food price crisis- Wikipedia, the free encyclopedia
The credit and mortgage crisis.
The U.S. subprime mortgage crisis was one of the first indicators of the late-2000s financial crisis, Characterized by an increase in mortgage delinquencies and the resulting decrease of securities backed by said mortgages. Banks began to provide subprime mortgages and lower quality, with much higher rates.
A high percentage of these subprime mortgages, more than 90% in 2006 for example, were adjustable rate mortgages. These two changes were part of a broader trend of lowered lending standards and higher-risk mortgage products.
In addition, households had acquired more and more debt and that debt fell on the owner’s personal incomes mortgage loan. For this reason, the debt ratio increased in 2007. In mid-2006, home sales peaked in prices. But a year later, promptly began the decline in prices.
As it is, adjustable rate mortgages, interest rates started rising, which meant, a higher monthly payments. For this reason, mortgage delinquencies soared. As the financial market, real estate titles lost some of its value.
Global investors also drastically reduced purchases of mortgage-backed debt and other securities as part of a decline in the capacity and willingness of the private financial system to support lending. Concerns about the soundness of U.S. credit and financial markets led to tightening credit around the world and slowing economic growth in the U.S. and Europe.
The causes of the mortgage crisis are:
Boom and bust in the housing market, the homeowner speculation, high-risk mortgage loans and lending/borrowing practices, mortgage fraud, securitization practices, inaccurate credit ratings, government policies, policies of central banks, financial institution debt levels and incentives, credit default swaps, Globalization, technology and the trade deficit.
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Global inflation
In February 2008, inflation rose to record levels not seen, all over the world. IMF data argue that inflation was at its peak in oil exporting countries due to foreign exchange reserves.
Inflation also came to underdeveloped countries and even to developed countries, the latter less so. But, in 2009, the problem was reversed. The economic outlook pointed to deflation.
For example, the General Reserve System (banking system of the United States) chose to situate the interest rate to 0%. For so, encourage the demand for loans to purchase goods to the population. In 17, July of 2008, was published, in the site of International Monetary Found an article about the inflation, where say that the inflation is an increasingly problem.
There said, that Inflation is rising, both in advanced and emerging economies, despite the global slowdown. In many countries, the driving force of inflation is higher food and fuel. Oil prices have risen substantially above previous record levels in real terms, drive by supply concerns in the context of limited spare capacity and inelastic demand, while food prices have been driven by bad weather on top of strong growth in demand (including biofuels).
“Global slowdown and rising inflation”. International Monetary Fund. Web. 8th October 2011. IMF World Economic Outlook (WEO) Update– Global slowdown and rising inflation, July 2008
Currency wars and trade wars.
In October 2010, appeared the first signs of a possible currency war between the dollar, Euro, yen and Yuan.
The objective of the countries was to lower the price of their models, in search of competitive advantages, to facilitate the export of products, which help overcome the crisis. But if there is a currency war and a circle of rebates, commercial confrontation be accentuated, leading to a trade war that would delay economic recovery.
“Currency war”. Wikipedia. Web. 10th October 2011. Currency war-Wikipedia, the free encyclopedia.
Loss in market confidence
The stock market crash of January 2008, just before the global stock market crash of October 2008, it went through by a series of sharp falls in global stock markets that began in late 2007.
The main cause was the fear that the U.S. economy entered a recession after the start of the subprime mortgage crisis. In turn this, crisis spread to the rest of the world as a liquidity crisis among banks at the same time caused the credit crisis and lack of confidence that continued during 2008. Generally, considered part of the economic crisis of 2008 and, has continued in an economically-financial U.S. and international crisis of greater significance. This stock market crisis was the forerunner of the global stock market crash of October 2008, much more serious and profound.
«Stock market crash of January 2008». Wikipedia. Web. 12th October 2011. Stock market crash of January 2008-Wikipedia, the free encyclopedia
Period of recession.
United States is the world’s largest economy. In the 2008, they saw that crossed a credit and mortgage crisis, which affected the housing bubble greatly. Officially, this situation began when the U.S. central bank had to intervene to provide liquidity to the banking system.
Some economists also often refer to this period of crisis as: late-2000s recession.
The recession of the late 2000s, sometimes called the Great Recession began in December 2007 and took a turn down particularly pronounced in September 2008. The Great Recession is a serious on-going problem in the global economy. The Great Recession has hit the world economy, with greater intensity in some countries than others. This is a great global recession which is characterized by various systemic imbalances. The cause of this economic crisis was the outbreak bursting of the financial crisis in late 2000.
Most often, the economist used the word “recession” with a scientific sense and they, referring specifically to the contraction phase of a business cycle, with two or more consecutive quarters of negative GDP growth. By the economic-science definition of the word «recession», the Great Recession ended in the U.S. in June or July 2009. However, for others, the word «recession» means: through a situation with many difficulties.
Although, some economists had put an end to recession in June 2009, the situation in the United States was not great. in the U.S., the consequences of the crisis was still present:, persistent high unemployment remains, along with low consumer confidence, the continuing decline in home values and increase in foreclosures and personal bankruptcies, an escalating federal debt crisis, inflation, and rising gas and food prices. For this reason, although the data, analysed by economists in 2011, say the United States had surpassed the recession, the economic situation both as social and labour indicated the opposite.
According to the National Bureau of Economic Research USA (the official arbiter of U.S. recessions) the recession began in December 2007. The outbreak of the financial sector in 2008 in the U.S. would be closely related to the subprime lending practices by financial institutions and the growing trend of securitization of real estate mortgages in the United States. The sale of this type of subprime mortgages, it will begin to extend for the whole country. Such investments were, at first sight, the most suitable. But the risks of these mortgages are very high and were difficult to assess.
A more broad based credit boom fed a global speculative bubble in real estate and equities, which served to reinforce the risky lending practices. This precarious financial situation was exacerbated due to the constant increases in the price indices of oil and food prices.
The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices. Due to the mounting loan losses and the downfall of America Corporation, Lehman Brothers, the September 15, 2008, a general panic spread around the market for bank loans.
Because of the dramatic decline in stock prices and housing, many commercial and investment banks, large size and reputation in the United States and Europe suffered huge losses and even some of them came to a situation bankruptcy.
To cope with the situation and to try to save some banks had to set in huge public financial assistance.
A global recession has caused, in general, serious problems for all countries of the world, from a sharp drop in international trade to rising unemployment and falling prices of raw materials. In December 2008, the National Bureau of Economic Research (NBER) declared that the onset of recession in the United States going back to December 2007. Some economists have predicted that the crisis began to show signs of recovery in 2011 and will be the worst recession since the Great Depression of the 1930s.
The factors that led to the crisis are very different. First, the exorbitant increase in prices of assets and the economic boom in demand. Secondly, we look the easy accessibility to obtain a credit, and finally, inadequate regulation and supervision, resulting in an increase in inequality.
Governments have found a solution to the recession in the Keynesian ideas. Fiscal and monetary policies have been significantly eased to stem the recession and financial risks. Although some economists think that these Keynesian measures they want to pursue, should be withdrawn in the time when the economies be restored.
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Pre-recession economic imbalances.
The government was unable to react in time, and for this reason, the crisis as a surprise to many citizens. Between 2000 and 2006, when the United States were in full swing, a set of twelve economists had already made a forecast of the recession, based on the fall of the housing market, among themselves, Dean Baker, Wynne Godley, and Michael Hudson.
U.S. monetary policy suffered an imbalance due to excessive money creation, leading to negative household savings and a huge U.S. trade deficit, dollar volatility and public deficits.
The consequences of this imbalance were as follows:
Commodity boom
In the decade of 2000, there was a significant rise in prices, especially in the prices of commodities and housing. So, to the commodities recession of 1980 was ended. In 2008, rising oil prices and basic food was so serious; leading to a situation of threat of global retreat, stagflation, and real economic damage. The rising price of oil in 2008 was the highest since the previous decade. Same thing happened with the important chemical commodity, such as Sulphuric acid. In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.
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Housing bubble
By 2007, real estate bubbles were still under way in many parts of the world, especially in countries like United States, United Kingdom, United Arab Emirates, Italy, Australia, New Zealand, Ireland, Spain, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Norway, Singapore, South Korea, Sweden, Finland, Argentina, Baltic States, India, Romania, Russia, Ukraine and China.
U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that «at a minimum, there’s a little ‘froth’ (in the U.S. housing market) … it’s hard not to see that there are a lot of local bubbles».
Wise, the housing bubble, The Economist magazine, writing at the same time, went further, saying «the worldwide rise in house prices are the biggest bubble in history». Real estate bubbles lead to a decrease in the price of housing. For this reason, many homeowners end up with a mortgage debt higher than the actual value of the property.
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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. Possible reasons for inflation are: Excess money supply around the world, monetary easing by the Fed to control the financial crisis, speculation in commodities, agricultural failure, rising cost of importation from China and the growing demand for food and commodities in emerging markets.
In 2007, data from the International Monetary Fund (IMF), marked, that inflation had been higher in oil-exporting countries, largely due to, the growth of foreign exchange reserves of foreign countries. However, inflation was growing in other countries, too. For example, inflation rose in countries classified by the IMF as «non-oil exporting less», in developed countries and in development of Asia. The reason that this country to enter inflation was, rising oil prices and food commodities. Inflation was also increasing in developed countries, but remains low in comparison to the developing world.
“Late-2000s recession”. Wikipedia. Web. 3rd October 2011. Late-2000s recession – Wikipedia, the free encyclopedia
“World oil demand ‘to rise by 37%”. BBC News. Web. 8th October 2011. BBC NEWS| Business| World oil demand ‘to rise by 37%
Analysis of the origins.
Many economists suggest that the origin of the crisis is the wrong practice, both monetary policy public, and the practice of private financial institutions the United States, in particular, had a mortgage financing too decentralized, and non-crystalline.
Moreover, this financing was too competitive.
Many experts believe that the trend for high risk loans is due to this extreme competition among lenders of income and market share.
On the other hand, the economist, Robert Reich, believes that the cause of, economic debt in the U.S. economy may be economic inequality among the population, where middle-class wages are often low and in times of crisis, remain stagnant, and most of the wealth is concentrated in the top of society.
Some economists say that the ultimate point of origin of the great financial crisis of 2007-2010 goes back to U.S. economy heavily indebted. The end point of origin of the crisis was the collapse of the housing market in 2006. The failure rates of subprime mortgages were the first sign of a credit boom and a shock of real estate. But large default rates on subprime mortgages demonstrate the seriousness of the crisis. On the contrary, now the low- quality mortgage, act as an accelerator of the financial system.
Finally, we will name the factors that characterize this crisis, particularly: the transfer of assets from bank balance sheets in the market, the creation of complex and opaque assets, the failure of rating agencies to adequately assess the risk of such assets, and the application of fair value accounting.
But possibly the most decisive factor in this crisis is the poor quality of regulators and supervisors in the detection and correction of the weaknesses that could arise.
No one has thought about the consequences that could have a bad management of the economy.
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The Effects.
International trade suffered a decline in the volumes of exchanges that can be seen as of the second half of 2008.
Another effect was, the late-2000s economic recession, which is regarded as the worst recession since World War II.
Real gross domestic product (GDP) suffered a fall, at an annualized pace not seen since the 1950s. In terms of capital investment, the decline began in 2006. The fall of the capital investment equals the 1957–58 post war record in the first quarter of 2009. The collapse in the residence investment accelerated in 2009, falling more intense every year..
Another effect that, more damages the economy, was the decline in US domestic demand. In 2009, a report, made public, the loss of value of shares in global companies.
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Political instability related to the economic crisis.
On the other hand, there are politics. Politics and economy of a country are always closely related. Therefore, if any of the parties fails, the other could also fail. Or, which is the same, that, that the predicament of economic crisis could result in a political imbalance.
The Associated Press reported in March 2009 that: United States «Director of National Intelligence Dennis Blair has said the economic weakness could lead to political instability in many developing nations.” Even some developed countries are seeing political instability.
NPR reports that David Gordon, a former intelligence officer who now leads research at the Eurasia Group, said: «Many, if not most, of the big countries out there have room to accommodate economic downturns without having large-scale political instability if we’re in a recession of normal length. If you’re in a much longer-run downturn, then all bets are off.»
Globally, mass protest movements have arisen in many countries as a response to the economic crisis. This political instability may trigger social protest movements. Even many of these protests are aimed at the government to find a solution to the crisis.
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Policy responses
The financial phase of the crisis led to emergency interventions in many national financial systems. As the crisis developed into genuine recession in many major economies, economic stimulus meant to revive economic growth became the most common policy tool. After having implemented rescue plans for the banking system, major developed and emerging countries announced plans to relieve their economies. In particular, economic stimulus plans were announced in China, the United States, and the European Union. Bailouts of failing or threatened businesses were carried out or discussed in the USA, the EU, and India. In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a focus of economic and financial crisis management.
The consequences were devastating: weakness, loss of jobs, and also caused the bankruptcy of fifty banks and financial institutions. This collapse dragged the stocks and the ability of consumption and savings of the population. In September 2008, problems were exacerbated by the bankruptcy of several financial institutions related to real estate mortgage market, as investment bank Lehman Brothers or insurance company AIG. Due to this situation, the government of the United States decided to act and provided hundreds of billions of dollars to save some entities. in 2011, came the crisis in the debt ceiling.
“Late-2000s recession”. Wikipedia. Web. 3rd October 2011. Late-2000s recession – Wikipedia, the free encyclopedia.