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 has prompted in some quarters fears of a global economic collapse although there are now many cautiously optimistic forecasters in addition to some prominent sources who remain negative. 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. 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.
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, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico


At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the early 1980s recession with negative 2009 growth for the U.S., Eurozone, UK; very limited recovery in 2010; but not as bad as the Great Depression.

Financial markets impacts

Impacts on financial institutions

The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60% through their losses, but British and eurozone banks only 40% .
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 financial institution 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, Washington Mutual, Wachovia, and AIG.

Credit markets and the shadow banking system
During September 2008, the crisis hit 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.
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.

The origin of financial crisis

As the world is going through the first months of 2010, the memories of last year’s recession are still guiding the financial commotion of the world in a ghost like manner. If we dig deeper into the origin of financial crisis, we see reasons like high corporate debt levels, international trade imbalances, the collapse of the real estate bubble and other such reasons implying that the financial crisis has been a direct result of some grave misdirections of the world money economy, predominantly controlled by the US economy.
However, unfortunately, since the US was the major center of the financial crisis, it is the US economy that had to suffer the most. The US administration announced the Financial Crisis inquiry Commission to categorize the origins of the financial crisis. This committee is expected to submit its report by end 2010.
Before discussing the origins of the financial crisis, it will perhaps not be irrelevant to check the implications of the financial crisis. The economic recession of 2009-10 had profound impact on the world economy and also the world political calculations. In fact, the huge mandate that worked or Barrack Obama had its origins in the promises Obama made about resolving the financial crisis scenario.
The list of companies that failed during the two year period between 2007 and 2009 alone is sufficient to stress the impact that the financial crisis had. The big names of failures include the Lehman brothers, the American freedom Mortgage, American Home mortgage, Sentinel management group and most recently the reputed Goldman sachs.

When we set to decide the origins of financial crisis, it is easy to categorize the reasons of recession into points like the collapse of the real estate bubble, the predatory lending practices of financial institutions to create huge amount of national debt and also the mismanagement of public funds by wall street top honchos. However, if we dig deeper into the origins of the financial crisis, do we see an unscrupulous and thoughtless gathering of money by a group of people and the encouragement to buy the gods manufactured by these handful of corporations? This was the basis of national debt, was it not?
People were being encouraged to take credit cards and buy the goods and financial plans, although the banks and the institutions providing credits that was well beyond their limits. This disbalance in the money system manifested itself in the financial crisis. So, when we are trying to find the origins of financial crisis, we should look into our own wallets and think on what basis did these companies issued the credits if there was no money support behind the credits? The unanimous government support behind the corporations also paved the way to financial crisis.
The real estate bubble and the home foreclosure deserve special mention in this respect.   This can be explained as following. The real estate laws at first allowed the home prices to go up and that directed homeowners to engage in adjustable rate mortgages. With so many going for the adjustable rate mortgages home refinancing, when the real estate prices began to fall, then naturally there are a great many incidents of foreclosures and negative equity. The mortgage frauds and all other types of frauds also played their roles in the origins of financial crisis.
The financial crisis is far from over and if still faulty budget promises like the Schwarzenegger California budget proposals 2010 will continue to be made, there is no scope that the economy will recover again.