Economic crisis

The current financial crisis is the worst the world has seen since the Great Depression
of the 1930s. For younger generations, accustomed to mild recessions of the new phase of
globalization, the misery of the Great Depression is hitherto nothing more than a distant
legend. However, the collapse of two Bear Stearns Hedge funds in summer of 2007 exposed
what came to be known as the subprime mortgage crisis, reintroducing the world to an era of
bank failures, a credit crunch, private defaults and massive layoffs. In the new, globalized
world of closely interdependent economies, the crisis affected almost every part of the world,
receiving extensive coverage in the international media. In an Interconnected World,
American Homeowner Woes Can Be Felt from Beijing to Rio de Janeiro, observed the
International Herald Tribune at the onset of the crisis. Chinese Steelmakers Shiver, Indian
Miners Catch Flu, noted the Hindustan Times. US and China Must Tame Imbalances
Together

Causes:
While few predicted the financial catastrophe, almost everyone has an explanation as
to why it happened. To economists, it all seems painfully simple. Too much foreign money
was flowing into the US from the Asian countries especially China. The availability of easy
credit meant that too many people borrowed to buy properties that they could not afford.
The bankers bundled up these loans and sold them to investors that could not understand
the complexity of these bundles and the risks inherent in them. Once US borrowers started
defaulting on their mortgages, they lost their houses and investors all around the world,
including banks and hedge funds, lost their investments. For the critics of Bush
adminsitration, the government failed to regulate the activities of the banking behemoths.
For the Fed critics, the crisis resulted from Alan Greenspans policy of keeping the interest
rates low for an extended period of time. Given the ongoing nature of the crisis, many
complicated explanations will surface in the years to come. Yet the root of the economic
depression might very well lie in one fundamental human instinct: greed.

Effects
Since the summer of 2008 the world has experienced the greatest destruction of
wealth paper losses measured in the trillions of dollars in its history. No industry in the
world has been left untouched. The financial powerhouses of Bear Stearns and Lehman
Brothers have gone bankrupt and mortgage giants Fannie Mae and Freddie Mac had to be
bailed out. Attempts by the US government to save industries led to an increased budget
deficit, making some experts predict that the global power epicenter might shift away from
the US before the crisis ends. On the other hand, it has become clear that Asian countries
need to restructure their domestic economies to encourage consumption. They cannot
continue to rely on credit-fueled American consumption to promote growth. Consumer
confidence remains low with fears of a double-dip or an anemic recovery being voiced daily.
Some poor countries, insulated from foreign finance, suffered from reductions in tourism,
remittances and foreign aid. What began as a local problem of excess credit in the United
States is likely has affected every member of the global community. All crises in the twentieth
century have had world-wide consequences but the crisis of 2008 will go down in history as
the first full-blown global crisis.

Solutions
Over the past decade, Chinese trade revenues, savings and purchases of US debt
increased. Low interest rates encouraged US consumers to spend and housing prices soared.
But such imbalances could not be sustained and financial instruments containing mortgages
for homes that have lost their value, have proven toxic for the world. Economists and central
bankers are still struggling to find a way out of the subprime mortgage crisis. If Japans lost
decade offers lessons, then deflation must be averted at all costs if there is to be hope for a
recovery.. But for the long-run, one magical phrase emerges from experts and that's stricter
regulations for the banking industry. Once governments succeed in restoring consumer and
investor confidence, they should focus on designing regulations that encourage responsibility
and a long-term outlook. Furthermore, policymakers have to recognize the need for global
oversight of the banking industry, either by strengthening existing institutions or by creating
new international authorities. The timing of the rescue is uncertain, and the certainty of its
efficacy remains in question. To put the matter in historical perspective, there is still no
consensus on whether government spending policies of Franklin D. Roosevelt or increased
demand for goods created by Second World War pulled the United States out of the Great
Depression. One certainty for this crisis: there are no localized solutions for a problem that
extends throughout the world.