what are the effected of economics crisis on world?
Last two years the world is facing on of biggest problem....that is economics crisis.
most richest economic countries and developing countries strongly effected by economics crisis such as U.S.A, Dubai and Korea and Japan and Russia and also some other countries. Many economist has been finding the solution of economics crisis.
Below you can read about details of World economic crisis....
Now i am asking you.....what did you think about economics crisis and what
are effected of economics crisis and also the important question How to solve
the economics crisis’s?
Financial
markets impact
Impacts
on financial institutions
One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature
of its business led the bank to request security from the Bank of England. This in turn led to investor
panic and a bank run in mid-September 2007. Calls by Liberal
Democrat Shadow Chancellor
Vince Cable to nationalise the institution were initially
ignored; in February 2008, however, the British government
(having failed to find a private sector buyer) relented, and the bank was taken
into public hands. Northern
Rock's problems proved to be an early indication of the troubles
that would soon befall other banks and financial institutions.
Initially the companies affected
were those directly involved in home construction and mortgage lending such as
Northern Rock and Countrywide Financial,
as they could no longer obtain financing through the credit markets. Over 100
mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment
bank Bear Stearns would collapse in March 2008
resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak in September
and October 2008. Several major institutions either failed, were acquired under
duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, and AIG.
TED spread and components during
2008
During September 2008, the crisis
hits its most critical stage. There was the equivalent of a bank run on the money market mutual funds, which
frequently invest in commercial paper
issued by corporations to fund their operations and payrolls. Withdrawal from
money markets were $144.5 billion during one week, versus $7.1 billion the week
prior. This interrupted the ability of corporations to rollover (replace) their
short-term debt. The U.S. government responded by extending insurance for money
market accounts analogous to bank deposit insurance via a temporary guarantee[ and with Federal Reserve programs to
purchase commercial paper. The TED spread, an indicator
of perceived credit risk in the general economy, spiked up in July 2007,
remained volatile for a year, then spiked even higher in September 2008,
reaching a record 4.65% on October 10, 2008.
In a dramatic meeting on September
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 the Troubled Asset
Relief Program (TARP) is signed into law on October 3, 2008.
Economist Paul Krugman and U.S. Treasury Secretary Timothy 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
in exchange 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 lending standards,
it was the collapse of the shadow banking system that is the primary cause of
the reduction in funds available for borrowing.
Wealth effects
There is a direct relationship
between declines in wealth, and declines in consumption and business
investment, which along with government spending represent the economic engine.
Between June 2007 and November 2008, Americans lost an estimated average of
more than a quarter of their collective net worth. By early November 2008, a
broad U.S. stock index the S&P 500, was down 45 percent from its 2007 high.
Housing prices had dropped 20% from their 2006 peak, with futures markets
signaling a 30-35% potential drop. Total home equity in the United States,
which was valued at $13 trillion at its peak in 2006, had dropped to $8.8
trillion by mid-2008 and was still falling in late 2008. Total retirement
assets, Americans' second-largest household asset, dropped by 22 percent, from
$10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period,
savings and investment assets (apart from retirement savings) lost $1.2
trillion and pension assets lost $1.3 trillion. Taken together, these losses
total a staggering $8.3 trillion. Since
peaking in the second quarter of 2007, household wealth is down $14 trillion.
Further, U.S. homeowners had extracted
significant equity in their homes in the years leading up to the crisis, which
they could no longer do once housing prices collapsed. Free cash used by
consumers from home equity extraction doubled from $627 billion in 2001 to
$1,428 billion in 2005 as the housing bubble built, a total of nearly $5
trillion over the period. U.S. home mortgage debt relative to GDP increased
from an average of 46% during the 1990s to 73% during 2008, reaching $10.5
trillion.
Economist Dean Baker explained the reduction in the
availability of credit this way:
"Yes, consumers and businesses
can't get credit as easily as they could a year ago. There is a really good
reason for tighter credit. Tens of millions of homeowners who had substantial
equity in their homes two years ago have little or nothing today. Businesses
are facing the worst downturn since the Great Depression. This matters for credit
decisions. A homeowner with equity in her home is very unlikely to default on a
car loan or credit card debt. They will draw on this equity rather than lose
their car and/or have a default placed on their credit record. On the other
hand, a homeowner who has no equity is a serious default risk. In the case of
businesses, their creditworthiness depends on their future profits. Profit
prospects look much worse in November 2008 than they did in November 2007 (of
course, to clear-eyed analysts, they didn't look too good a year ago either).
While many banks are obviously at the brink, consumers and businesses would be
facing a much harder time getting credit right now even if the financial system
were rock solid. The problem with the economy is the loss of close to $6
trillion in housing wealth and an even larger amount of stock wealth.
Economists, economic policy makers and economic reporters virtually all missed
the housing bubble on the way up. If they still can't notice its impact as the
collapse of the bubble throws into the worst recession in the post-war era,
then they are in the wrong profession."
At the heart of the portfolios of
many of these institutions were investments whose assets had been derived from
bundled home mortgages. Exposure to these mortgage-backed securities, or to the
credit derivatives
used to insure them against failure, caused the collapse or takeover of several
key firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS.
Global contagion
The crisis rapidly developed and
spread into a global economic shock, resulting in a number of European bank
failures, declines in various stock indexes, and large reductions in the market
value of equities and commodities.
Both MBS and CDO were purchased by
corporate and institutional investors globally. Derivatives such as credit
default swaps also increased the linkage between large financial institutions.
Moreover, the de-leveraging of
financial institutions, as assets were sold to pay back obligations that could
not be refinanced in frozen credit markets, further accelerated the liquidity
crisis and caused a decrease in international trade.
World political leaders, national
ministers of finance and central bank directors coordinated their effort to
reduce fears, but the crisis continued. At the end of October 2008 a currency
crisis developed, with investors transferring vast capital resources into
stronger currencies such as the yen, the dollar and the Swiss franc, leading
many emergent economies to seek aid from the International
Monetary Fund.
Effects on the global economy
Global
effects
A number of commentators have
suggested that if the liquidity crisis continues, there could be an extended recession or worse. The continuing development of
the crisis prompted fears of a global economic collapse. The financial crisis is likely
to yield the biggest banking shakeout since the savings-and-loan meltdown
Investment bank UBS stated on October 6 that 2008 would see a
clear global recession, with recovery unlikely for at least two years. Three
days later UBS economists announced that the "beginning of the end"
of the crisis had begun, with the world starting to make the necessary actions
to fix the crisis: capital injection
by governments; injection made systemically; interest rate
cuts to help borrowers. The United Kingdom had started systemic injection, and
the world's central banks were now cutting interest rates. UBS emphasized the
United States needed to implement systemic injection. UBS further emphasized
that this fixes only the financial crisis, but that in economic terms "the
worst is still to come". UBS quantified their expected recession durations
on October 16: the Eurozone's would last two quarters, the United States' would
last three quarters, and the United Kingdom's would last four quarters.[124] The economic crisis in Iceland involved all three of the country's major
banks. Relative to the size of its economy, Iceland’s banking collapse is the
largest suffered by any country in economic history.
At the end of October UBS revised
its outlook downwards: the forthcoming recession would be the worst since the Reagan recession of 1981
and 1982 with negative 2009 growth for the U.S., Eurozone, UK and
Canada; very limited recovery in 2010; but not as bad as the Great Depression.
The Brookings Institution
reported in June 2009 that U.S. consumption accounted for more than a third of
the growth in global consumption between 2000 and 2007. "The US economy has
been spending too much and borrowing too much for years and the rest of the
world depended on the U.S. consumer as a source of global demand." With a
recession in the U.S. and the increased savings rate of U.S. consumers,
declines in growth elsewhere have been dramatic. For the first quarter of 2009,
the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan,
7.4% in the UK, 9.8% in the Euro area and 21.5% for Mexico.
By March 2009, the Arab world had
lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world
is said to be a 'time bomb'. In May 2009, the United Nations reported a drop in
foreign investment in Middle-Eastern economies due to a slower rise in demand
for oil. In June 2009, the World Bank predicted a tough year for Arab states.
In September 2009, Arab banks reported losts nearly to $4 billion since the
global financial crisis onset.
U.S. economic effects
Real
gross domestic product — the output of goods and services produced
by labor and property located in the United States — decreased at an annual
rate of approximately 6 percent in the fourth quarter of 2008 and first quarter
of 2009, versus activity in the year-ago periods. The U.S. unemployment rate
increased to 9.5% by June 2009, the highest rate since 1983 and roughly twice
the pre-crisis rate. The average hours per work week declined to 33, the lowest
level since the government began collecting the data in 1964.
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