Beginning of the end:
Markets all over the world fell into turmoil; a little more than £ 50 billion were wiped off of FTSE 100; S & P fell more than 20% when Lehman brothers filed for bankruptcy, throwing the future of banks in jeopardy and sending shock waves all over the globe. Plummet of this ‘too big to fail’ institution marked the beginning of financial instability gripping the world.
It all started with Fed lowering the Federal Reserve fund 11 times in Dec 2011, in order to keep the recession blues away from US economy. Liquidity increased tremendously giving rise to easy credit availability and no ...view middle of the document...
According to the figures, in the US,8.8 million homeowners had either zero or negative home equity i.e. the mortgages were much more than the worth of their homes. This resulted into defaulting NINJAs and balance sheets of banks saw tremendous increment in Non Performing Assets (NPAs). There is a misconception that banks fell by subprime lenders but this problem was multifaceted and which eventually grew multifold. The CDOs purchased by investment giants lost their value. In addition to ever increasing NPAs, this upheaval dented banks eroding their capital and carving a way to insolvency. Lehman Brothers, with its legacy of 158 years, filed for bankruptcy and this ‘black swan’ moment resulted into panic by market participants. Banks were connected with Lehman through derivatives transactions. Money Market Mutual Funds (MMMFs) fled the market drying up the liquidity. Though Fed and other central banks pumped billions into the banks, the market looked risk averse. US spent $700 billion in an effort to save the financial sector from the systemic risk.
Wrong banking practices, Blinding greed resulted into an imminent recession for US economy , but worse, transcended the effects to the rest of the world. The liquidity crisis finally converted to a solvency crisis resulted into crisis of confidence. The recovery from the crisis doesn’t seem to be a robust one. With 9% unemployment and a projected GDP of 2% US economy can’t paint an optimistic picture. Financial instability has social implications as well. Current agitation against bankers is an indication of loss of credibility and will have future political implications too. Crony capitalism and excessive greed has given the world one of the worst crises in centuries.
Euro zone crisis:
First Ireland and now Greece; Euro zone’s trouble have no end. Developed economies running as welfare states in dearth of young population along with rapid credit growths and stretched leverage positions have given rise to another crisis on the other side of Atlantic. Greece is insolvent and Italy and Portugal can be next...