Some Steps of the Financial and Economic Crisis of 2008

The subprime mortgage crisis would get much worse
Despite all the talk of subprime being contained, my report “The Subprime Crisis is Just Starting” was published in March of 2008, a full six months before it started hitting the fan.

Major financial firms would fail
In May of 2008 I wrote “A Credit Derivatives Risk Primer”, which detailed how the same fundamental, predictable types of human-behavior-based mistakes that crashed the $1.2 trillion mortgage derivatives market would imperil the $62 trillion credit derivatives market, and lead to losses that the major financial firms could not possible handle.

Failures would continue, in a dominoes-like fashion
As explained in the Subprime Crisis report, these intertwined derivatives crises were the result of years of extraordinarily bad judgments on the part of the major financial firms, and carried the real danger of causing the rapid, domino-like annihilation of the highly leveraged and intertwined Wall Street firms in a flash, not from accounting losses, but from losing their sources of funding once creditors understood the extent of the derivatives losses.

A total meltdown would not happen
Both reports explained that, while investors should consider getting immediately out of financial assets to avoid the rush for the exits, they should not invest for a total market meltdown of the financial system, because it would not be permitted to happen.

A massive Government bailout would happen
Instead, both reports state that what you should anticipate is a massive government intervention to protect the financial system, and that the best strategy was to avoid the financial asset losses while positioning yourself to benefit from the bailouts.

Inflation is coming
The Federal Reserve and Government had already proven they would not hesitate to create a near infinite supply of new money out of thin air, without raising taxes or increasing economic output, and thereby create extraordinary inflationary pressures within the system. While deemed necessary to combat global asset deflation, you should expect this monetary inflation to show up as price inflation on real goods in the not too distant future.

Global Economic Crisis & Financial Crisis

The root cause of the economic and financial crisis was the United States mortgage market selling sub-prime mortgages to large numbers of consumers with inadequate incomes. These mortgages were bundled into securitized paper investments, and sold by Wall Street to major financial institutions across the globe.

When the mortgages became non-performing, these securitized assets were transformed into toxic acid, infecting the entire worldwide financial system. The ensuing global economic and financial crisis has destroyed trust in banks and borrowers in all the major economies of the world. Depositors are withdrawing their money from uninsured and even insured accounts. Coinciding with this massive run on the world’s banks, these financial institutions are no longer lending capital to each other, reflected in the rising LIBOR short term inter-bank loan rates.

Capital is fleeing, and the global credit crunch ensuing has frozen the arteries of a global economy based on easy, cheap credit. As corporations are being denied normal flows of credit, a massive global economic crisis is transforming the financial meltdown on Wall Street into an economic disaster on Main Street. This evolving global and financial crisis and credit crunch will afflict developed and developing economies, leading to massive unemployment, demand destruction and price deflation among many pivotal asset classes

The attempts by the Federal Reserve Bank and Treasury Department in the United States to inject liquidity into the credit market, along with intervention by central banks in many other developed economies, is proving ineffective in responding to the global economic crisis. A growing number of economists are speculating that the global economic crisis will lead to a worldwide recession of such intensity; it may rival the Great Depression of the 1930’s in its calamitous economic devastation.

Latin America face to 'Enormous Stress' for Economic Crisis

Global economic downturn has cast a pall over the new year in Latin America. While the region's leaders initially struck a positive note in the face of bad news from abroad, most are now drafting plans to create jobs, keep financial systems from wobbling and shore up social programs in case of a prolonged recession.

"It's very hard to have an upbeat outlook about the region, where countries are going to be under enormous stress," Michael Shifter, vice president for policy at the Washington-based Inter-American Dialogue and adjunct professor of Latin American politics at Georgetown University, told Catholic News Service.

The worldwide financial crisis has ended a half-decade boom that saw the region's economy expand by an average of 5 percent a year, with some countries growing by more than 7 percent. The rate slowed to 4.6 percent in 2008, and the most optimistic growth forecast for 2009, by the U.N. Economic Commission for Latin America and the Caribbean, is 1.9 percent.

The plunge in world oil prices has hit countries like Brazil, Venezuela, Ecuador and Bolivia, while in Peru decreased demand for metals has led to the layoff of thousands of workers by mining companies and their suppliers.

One concern is that economic woes could have political fallout, especially in countries that have been retooling their political systems in recent years.

Bolivians will go to the polls Jan. 25 to vote on a new constitution that has been a source of controversy and protest. If it is approved, as most observers predict, Congress will have to bring the country's legislation into line with the new text, and presidential and congressional elections will be scheduled for December. Presidential elections also will be held this year in Chile, Uruguay, Honduras, El Salvador and Panama.

In Ecuador, where a new constitution was approved last year and President Rafael Correa will seek re-election April 26, indigenous organizations have staged roadblocks to protest laws encouraging large-scale mining that they say would threaten the environment and their way of life.

While some observers fear that the economic crisis will deflect attention from environmental issues in the region, the Amazon likely is to be a concern in 2009, said Rick Jones, deputy regional director for global solidarity and justice at Catholic Relief Services, the U.S. bishops' international relief and development agency.

The crunch also is forcing Latin Americans living abroad to make hard choices. Many families in Latin America depend on remittances, the money sent home by relatives abroad. In Central American countries, remittances amount to up to 40 percent of foreign earnings.

But those financial flows have slowed. While remittances jumped from $30 billion to $45.5 billion between 2004 and 2006, the figure leveled off to $45.9 billion last year.

Only half of Latin Americans living abroad said they sent money home in 2008, down from 73 percent in 2006. Cutting the remittance lifeline could push more families below the poverty line, spurring a new wave of migration, according to the Inter-American Development Bank.

People in desperate economic straits may take even greater risks to get past tighter U.S. border controls, Jones said, making them more likely to fall prey to traffickers who force them into virtual slavery to pay off their travel debt once they get to the United States.

Drug smuggling, migrant smuggling and human trafficking have converged under the control of the same cartels, making the migration gamble even more dangerous, he said.

Drug-related corruption and violence are on the rise in the region, especially in Central America and Mexico, but also in countries like Peru, at a time when governments are likely to free up fewer funds to fight them. Shifter said that conjunction of factors should pressure the administration of President-elect Barack Obama to review its approach to combating illegal drugs.

Ultimately, though, the best crystal ball turns cloudy when queried about 2009, because it is difficult to predict how long the worldwide recession will last or its precise impact on the various parts of an increasingly diverse region.

Both Jones and Shifter expect countries to scale back social programs as they pump more money into jump-starting their economies.

Some Specific countries affected by Economic Crisis

1. Argentina
o Argentina: A crisis made abroad
o Finger-pointing or focusing on systemic reforms?
o IMF holds off on collecting Argentine loan repayment
o Argentine crisis signaling end of neo-liberal model?

2. Thailand
o Thai economic policies remain unchanged
o Flitting foreign capital angers Thais
o Siamese twins: The currency crisis in Thailand and the Philippines

3. Brazil
o Why Brazil should look at Malaysia's policies
o Shockwaves from Brazil's devaluation
o The Real plan and its crisis
o The Brazilian economic crisis - Oxfam
o Brazil: The Real and global crisis
o Brazil crisis underlines the need for new solutions
o Brazil's IMF-sponsored economic disaster
o The Brazilian financial scam

4. Russia
o IMF book-loan to prevent defaults -to IMF!
o The Russian crisis of 1998

5. Malaysia
o Why Brazil should look at Malaysia's policies

6. Korea
o The IMF-Korea bailout
o Korean crisis caused by financial liberalization and economic deregulation

Economic Crisis Causes and Effects

A. Causes of the crisis
1. Argentina: A crisis made abroad
2. OTC derivatives played important role in Asian crisis
3. "Financial warfare" triggers global economic crisis
4. Trade and Development Report 1998: The causes of the crisis
5. An East Asian financial crisis made in the US
6. The Financial Crisis in East Asia: A Background Note by UNCTAD Secretariat
7. Asia's financial crisis
8. Analysis of BIS Report - Asia: The financial intermediation path to a vicious circle

D. Effects of the crisis
1. Only minor improvements in the near-term
2. Higher bank capital requirements on the way
3. Everyone should look for "exit strategies", says BIS
4. BIS study confirms some perceptions of Basle accord
5. Banks continue retreat from South
6. Asia: Crisis causes massive unemployment
7. Massive retreat by banks from emerging markets
8. Putting Asia in its place
9. Financial turmoil spreads across the world

Today Russia's Economic Crisis

On 30 April the internet site gazeta.ru published an article by Andrei Illarionov, former economic advisor to the President. The title "A leap backwards" speaks for itself. The article shows that industrial production fell to its lowest point in February this year, a fall of 23.4% from the peak in December 2007.

In April the Federal Service of State Statistics' index of industrial production showed a further deterioration, a fall of 16.9% by comparison with the previous April. This was the most significant fall since February 2009 - 16%. It was also the biggest fall since production fell by 18% in 1994. Between January and April industrial production fell by 14.9% by comparison with the same period in the previous year. Although March saw a growth of 11% over February, there was a further fall in April of 8.1%.

Mining production figures remained unchanged between March and April at 11.8%. There was a slight increase in the production and distribution of electricity and gas.
As for manufacturing, there was a 20.8% fall in March by comparison with the previous year, and the April figure was 25.1%. The headlong downward spiral in manufacturing has continued and has spread to the production of gas and steam turbines, which fell in April by 60.1% and 90.1% respectively.

A preliminary report on fluctuations in GDP from the Russian Ministry of Economic Development for the first quarter suggests that there has been a decline of 9.5%. It is clear from this report that Russians have not yet felt the full force of the crisis. Real incomes and salaries have only fallen by 2.3%. Turnover in the retail sector has decreased by even less, and activity in the service sector has fallen by 1.5%.

However, the prospects are far from rosy. In previous years the main engines of growth were wholesale and retail trade, vehicle repairs and motorcycles, household goods and items of personal use. In 2009 the picture will be very different. The Ministry's figures show a decline of 6.1% in value added in the wholesale and retail sectors.

Thus, a review of the wholesale sector leads to the conclusion that the current comparatively comfortable situation in the retail and service sectors will not last long. The situation in retail did not look so bad in the first quarter of 2009 because of the rush to stockpile durables in expectation of worse times to come.

The situation in the labour market is serious. According to the International Labour Organization there were 7.5 million people unemployed in March 2009. This represents 10% of the economically active population. Furthermore, as the Ministry report shows, the number of unemployed is likely to increase if people who are now working part time, on down time or taking unpaid leave proceed to lose their jobs. As of 18 March this year the total number of such employees was 1.2 million.

Any review of the Russian economy and its problems, particularly employment, should bear in mind that the socio-economic situation of the country's many regions is very different. There are also many so-called "mono-industrial cities", where a single major enterprise provides employment to a large section of the population and life in the city depends on it.

Global financial crisis effects on India

The economy now is the backwash effect of the American financial crisis. Central banks in several countries, including India, have moved quickly to improve liquidity, and the finance minister has warned that there could be some impact on credit availability. That implies more expensive credit.
For those looking to raise capital, the alternative of funding through fresh equity is not cheap either, since stock valuations have suffered in the wake of the FII pull-out. In short, capital has suddenly become more expensive than a few months ago and, in many cases, it may not be available at all.
The big risk is a possible repeat of what happened in 1996: Projects that are halfway to completion, or companies that are stuck with cash flow issues on businesses that are yet to reach break even, will run out of cash. If the big casualty then was steel projects, one of the casualties this time could be real estate, where building projects are half-done all over the country and some developers who touted their 'land banks' find now that these may not be bankable.
The only way out of the mess is for builders to drop prices, which had reached unrealistic levels and assumed the characteristics of a property bubble, so as to bring buyers back into the market, but there is not enough evidence of that happening.
The question meanwhile is: Who else is frozen in the sudden glare of the headlights? The answer could be consumers, many of whom are already quite leveraged. More expensive money means that floating rate loans begin to bite even more; even those not caught in such a pincer will decide that purchases of durables and cars are not desperately urgent.
It is not just the impact of those caught on the margin that must be considered. The drop in real estate and stock prices robs a much larger body of consumers of the wealth effect. In short, the second round effects of the financial crisis will be felt straightaway in the credit-driven activities and sectors, but will spread beyond that in a perhaps slow wave that could take a year or more to die down.
At the heart of the problem lie questions of liquidity and confidence. What the RBI needs to do, as events unfold, is to neutralise the outflow of FII money by unwinding the market stabilisation securities that it had used to sterilise the inflows when they happened. This will mean drawing down the dollar reserves, but that is the logical thing to do at such a time. If done sensibly, it would prevent a sudden tightening of liquidity, and also not allow the credit market to overshoot by taking interest rates up too high.
Meanwhile, there is an upside to be considered as well. The falling rupee will mean that exporters who felt squeezed by the earlier rise of the currency can breathe easy again, though buyers overseas may now become more scarce. Overheated markets in general will all have an element of sanity restored. And for importers, the oil price fall will neutralise the impact of the dollar's decline against the rupee.