Official economic projectionsOn November 3, 2008, the EU-commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0.1 percent, for the countries of the Euro zone (France, Germany, Italy, etc.) and even negative number for the UK (-1.0 percent), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by -0.3 percent for 2009, averaged over the developed economies. On the same day, the Bank of England and the Central Bank for the Euro zone, respectively, reduced their interest rates from 4.5 percent down to three percent, and from 3.75 percent down to 3.25 percent. Economically, mainly the car industry seems to be involved. As a consequence, starting from November 2008, several countries launched large "help packages" for their economies.The U.S. Federal Reserve Open Market Committee release in June 2009 stated: "...the pace of economic contraction is slowing. Conditions in financial markets have generally improved in recent months. Household spending has shown further signs of stabilizing but remains constrained by ongoing job losses, lower housing wealth, and tight credit. Businesses are cutting back on fixed investment and staffing but appear to be making progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee continues to anticipate that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a gradual resumption of sustainable economic growth in a context of price stability."[136] Economic projections from the Federal Reserve and Reserve Bank Presidents include a return to typical growth levels (GDP) of 2-3% in 2010; an unemployment plateau in 2009 and 2010 around 10% with moderation in 2011; and inflation that remains at typical levels around 1-2%.[137][edit]Responses to financial crisis[edit]Emergency and short-term responsesMain article: Subprime mortgage crisis#ResponsesThe U.S. Federal Reserve and central banks around the world have taken steps to expand money supplies to avoid the risk of a deflationary spiral, in which lower wages and higher unemployment lead to a self-reinforcing decline in global consumption. In addition, governments have enacted large fiscal stimulus packages, by borrowing and spending to offset the reduction in private sector demand caused by the crisis. The U.S. executed two stimulus packages, totaling nearly $1 trillion during 2008 and 2009.[138]This credit freeze brought the global financial system to the brink of collapse. The response of the USA Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks. This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks.[100]Governments have also bailed-out a variety of firms as discussed above, incurring large financial obligations. To date, various U.S. government agencies have committed or spent trillions of dollars in loans, asset purchases, guarantees, and direct spending. For a summary of U.S. government financial commitments and investments related to the crisis, see CNN - Bailout Scorecard.[edit]Regulatory proposals and long-term responsesFurther information: Regulatory responses to the subprime crisis and Subprime mortgage crisis solutions debateAmerican President Barack Obama and key advisers introduced a series of regulatory proposals in June 2009. The proposals address consumer protection, executive pay, bank financial cushions or capital requirements, expanded regulation of the shadow banking system andderivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.[139][140][141]A variety of regulatory changes have been proposed by economists, politicians, journalists, and business leaders to minimize the impact of the current crisis and prevent recurrence. However, as of April 2009, many of the proposed solutions have not yet been implemented. These include: Ben Bernanke: Establish resolution procedures for closing troubled financial institutions in the shadow banking system, such as investment banks and hedge funds.[142] Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance.[143] Re-instate the separation of commercial (depository) and investment banking established by the Glass-Steagall Act in 1933 and repealed in 1999 by the Gramm-Leach-Bliley Act.[144] Simon Johnson: Break-up institutions that are "too big to fail" to limit systemic risk.[145] Paul Krugman: Regulate institutions that "act like banks " similarly to banks.[58] Alan Greenspan: Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to "discourage them from becoming too big and to offset their competitive advantage."[146] Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification.[147] Eric Dinallo: Ensure any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-capitalized exchanges to limit counterparty risk.[148] Raghuram Rajan: Require financial institutions to maintain sufficient "contingent capital" (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.)[149] A. Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk.[150] Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts. In other words, bondholders with a claim of $100 would have their claim reduced to $80, creating $20 in equity. This is also called a debt for equity swap. This is frequently done in bankruptcies, where the current shareholders are wiped out and the bondholders become the new stockholders, agreeing to reduce the company's debt burden in the process. This is being done with General Motors, for example.[151][152] Nouriel Roubini: Nationalize insolvent banks.[153] Reduce mortgage balances to assist homeowners, giving the lender a share in any future home appreciation.[154][edit]See also Subprime mortgage crisis Subprime crisis impact timeline Economic Stimulus Act of 2008 2008 Chinese economic stimulus plan John Maynard Keynes - Keynesian resurgence of 2008 2008–2009 Keynesian resurgence List of acquired or bankrupt banks in the late 2000s financial crisis List of acquired or bankrupt United States banks in the late 2000s financial crisis List of economic crises List of entities involved in 2007–2008 financial crises 2009 G-20 London summit protests 2008 Greek riots 2009 Icelandic financial crisis protests 2009 May Day protests 2009 Moldova civil unrest 2009 Riga riot Bank failure List of largest U.S. bank failures 2008-2009 bank failures in the United States Allen Stanford Bernie Madoff Deflation Dotcom bubble FRED (Federal Reserve Economic Data) The Great Depression Low-Income Countries Under Stress (LICUS) (World Bank program) Mark-to-market accounting Deposit insurance Private equity in the 21st century The Second Great Depression (book) United States v. Winstar Corp. United States housing bubble A Failure of Capitalism (book)
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"short by historical standards"125. ^ [5]126. ^ UBS AG.The IMF in March, 2009 forecast that it would be the first occasion since the great depression that the world economy as a whole would contract. Be afraid. Be very afraid. Daily roundup for 2008-10-31. Retrieved 2008-11-02. "NEGATIVE growth in 2009 for the US, UK, Euro area and Canada. Japan is the fastest growing G7 economy at 0.1% growth. Global growth in 2009 forecast at 1.3%."127. ^ Brookings-Baily and Elliot-The U.S. Financial and Economic Crisis-June 2009128. ^ Following crisis, Arab world loses $3 trillion129. ^ Unemployment in Arab world is a 'time bomb'130. ^ UN reports drop in foreign investment in Mideast-2008131. ^ World Bank predicts tough year for Arab states132. ^ Recession costs Arab banks $4B133. ^ BEA Press Releases134. ^ BLS-Historical Unemployment Rate Table135. ^ Business Week-Unemployed lose with hour and wage cuts136. ^ FOMC Statement June 24 2009137. ^ Minutes of the FOMC April 2009138. ^ "BBC - Stimulus Package 2009". BBC News. 2009-02-14. Retrieved 2009-02-27.139. ^ [6]140. ^ Washington Post - Geithner & Summers - A New Financial Foundation141. ^ Treasury Department Report - Financial Regulatory Reform142. ^ "Bernanke Remarks". Federalreserve.gov. 2008-12-01. Retrieved 2009-02-27.143. ^ "Stigliz Recommendations".144. ^ Stiglitz - Vanity Fair - Capitalist Fools145. ^ WSJ-Economists Seek Breakup of Big Banks146. ^ Greenspan-We need a better cushion against risk147. ^ Warren Buffet-2008 Shareholder's Letter Summary148. ^ Dinallo-We Modernized Ourselves Into This Ice Age149. ^ The Economist-Rajan-Cycle Proof Regulation150. ^ "PIMCO-Lessons from the Crisis". Pimco.com. 2008-11-26. Retrieved 2009-02-27.151. ^ Jeffrey Sachs-Our Wall Street Besotted Public Policy152. ^ FT-Ferguson-Beyond the Age of Leverage153. ^ Roubini-Charlie Rose Interview154. ^ Risks to Global GrowthThe initial articles and some subsequent material were adapted from the Wikinfo article "Financial crisis of 2007-2008"http://www.wikinfo.org/index.php?title=Financial_crisis_of_2007-2008 released under the GNU Free Documentation License Version 1.2[edit]External links and further reading Reuters: Times of Crisis - multimedia interactive charting the year of global change Stewart, James B., "Eight Days: the battle to save the American financial system", The New Yorker magazine, September 21, 2009. Testing the Efficiency of the Commercial Real Estate Market: Evidence from the 2007-2009 Financial Crisis - Paper by Otto Van Hemert, NYU Stern & AQR Capital Management Princeton Economist Alan Blinder Lecture - Origins of the Financial Mess PBS Frontline - Inside the Meltdown Economic Crisis and Stimulus from UCB Libraries GovPubs Credit Crisis — The Essentials topic page from The New York Times Credit Crisis Indicators (Updated daily) - Five ways to measure recent market disruption, from the New York Times Gjerstad, Steven; and Vernon L. Smith (2009-04-06). "From Bubble to Depression? Why the Housing Bubble Crashed the Financial System but the Dot-com Bubble Did Not". Wall Street Journal. p. A15. John C. Hull, The Credit Crunch of 2007: What Went Wrong? Why? What Lessons Can Be Learned?, Rothman School Research Paper, available here The Global Financial Crisis and Responses by the Churches (Arnold Neufeldt-Fast, PhD, Tyndale Seminary, Toronto) Impact of the Financial Crisis Towers Perrin Thought Leadership NYU Stern on Finance - Understanding the Financial Crisis Davis Polk Financial Crisis Manual How nations around the world are responding to the global financial crisis from