1. It all started in September, 2008. Investment Banker Lehman Brothers in United States failed to meet its payment obligations. More and more Investment Bankers like Merrill Lynch and Goldman Sachs collapsed. Since then, the world is facing an economic recession. The result was:
Industrial production in the United States, Europe and other continents has been coming down.
The problem of unemployment is increasing.
While some countries like India have been able to absorb this shock, most others have been reeling under severe economic crisis.
2. When the world was hoping that the crisis will blow over, the news came on 5th August, 2011, that Standard and Poor, an International Rating Agency, downgraded the US economy. This came as a shocker. Present scenario is:
US Dollar has been getting week vis-à-vis other currencies.
Share Markets of various countries have been witnessing weak trends.
Now, the Global Economic Crisis is more severe than ever.
Origin:
To beat its economic recession, after the Gulf War, in 2002, USA resorted to measures for massive housing ventures. To encourage house construction activity, USA started exclusive Housing Finance Companies called Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae). These companies granted Housing Loan to all applicants.
Housing Loan portfolios were aggregated and divided into units called Derivatives. Investment Bankers like Lehman Brothers bought and marketed the Derivatives like shares for trading. Large Investors, throughout the world, purchased these Derivatives and intense Trading Activity was going on in these Derivatives. Market Prices shot up in the faith that Real Estate prices in USA would always go up. It was believed that with increase in the value of the House Assets, Values of Derivatives would also go up. Basic faith was on the strength of the economy of USA.
Insurance of this Housing Finance by Insurance Companies like American Insurance Group (AIG) was bundled and marketed as Derivatives. Prices of these Derivatives also were going up.
In short, there was intense speculation in the market over these derivatives and their prices were unrealistic.
All these would have gone on smoothly. But, the basic problem was that the Housing Finance companies granted Loans without assessing the borrowers’ repaying capacity. Individuals with No Income No Assets (NINA) and No Income No Job No Assets (NINJA) were given housing finance. When these borrowers could not meet their periodical repayment obligations, defaults started. When large number of houses came for sale, prices started crashing to unbelievable levels. With such low price level, the Loans could not be recovered and the Financing Agencies incurred huge losses. This resulted in crash in the prices of the Derivatives. All the large corporate investors in the world lost their money in one sweep. This led to a liquidity crunch throughout the world. This affected production, which in turn, affected imports and exports. Result was lay offs and lock outs. Unemployment and social tensions were the ultimate result in the whole world.
Present Status:
USA encourages its citizens to spend, borrow, earn and repay. Conservative process of earn, spend, save and invest has never been its norm. The result is that the country imports more and exports less.
Its Debts in US $ to various countries is huge. Its capacity to repay its dues is now considered to be less. So, its Credit Rating has come down sounding an alarm, world over. So far, US $ has been considered to be more valuable than even Gold. All countries have been accumulating $ in currency and debts/ bonds. These countries are in trouble now.
The Economy is in bad shape in most of the countries in Europe, like Portugal, Italy, Ireland, Greece and Spain (Called PIIGS), due to adverse Balance of Payments position.
Due to these adverse economic conditions in USA and most of Europe, countries transacting with them suffer and the result is the world is passing through a long term crisis.
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—About our writer:
D.Doraisamy is a retired bank officer with over three decades of experience in bank credit. He holds a B.Sc. degree in Chemistry, M.A. in English, CAIIB and a certificate in Co-operation and Industrial Finance. He has wide experience in conducting classes in bank credit.
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