Monday, November 24, 2008

The world financial crisis الأزمة المالية العالمية

The Crisis today

• December16, 2008: Federal Reserve decide the biggest rate cuts
• December17, 2008: Chrysler decides to stop all productions

The Credit Crisis

How did the crisis happen? I need to answer this question to hypothesize this model:
If there is a broad activity in a business sector... if there is an increasing demand in market for it... This increasing demand would lead to an increase in production … This increase in production would lead to an increase in profits which would make an increase in wages... This increase in wages means an increase in the abilities of workers to buy and consume. So, the demand increases much more … and production increases and so on. These increases represent the period of activity.
After this, there would be a time when the market is fully saturated from this sector … No more persons still want or able to afford the prices of these commodities … This means a decline in demands … This decline in the demand would make a decline in production … This decline in production leads to a decline in profits … This decline in profits leads to a decline in wages which means a decline in the abilities of workers to buy and consume. So, the demand decreases more and so on. These declines represent the period of recession.
So, these stages are extremely normal in the capital system and the repeat of activity and recession cycles occurs all the time due to this nature of capitalism.
Ok. This is exactly the cause of the current credit crisis ... Cycles of activity and recession in the field real-estates.
The activity period started after 2000, when the Federal Reserve reduced the rate of interests to solve a previous recession. This reduction of interest rates encouraged people to buy homes using mortgages and borrowing from banks and financial institutions. This increase in the demand lead to an increase in constructions business and all businesses related to it. Then, this activity period ended as the market saturated and there was no more demand on homes … And the recession period started.
But this wasn't the cause of what made the crisis that complicated. What happened is that banks and mortgages institutions had a lending fever. Everyone was given loans with least guarantees just to collect greater interests. The fever increased. The banks and institutions started to take money from other banks and institutions to use it in giving more loans. These other banks and institutions may be borrowing this money from third banks and institutions. And loans map became extremely complicated.
So, when the recession period started … The moment of paying back came. But Americans were not able to pay back(statistics says that 900,000 Americans has lost there jobs in the year 2007 … How could they pay back their loans?!!). So, banks also were not able to pay back to other banks and institutions. Even when banks started to take homes from Americans who are not able to pay debts back to sell it, they found that the prices of these homes in the market are very low and can't make the debts up.
The crisis also extended to the stocks market and affected other industrial branches.
Banks were extremely confused with no way to get money back or pay their debts back. So, collapses started and the credit crisis got worse.

# Semi-timeline of developments:

• June 2007: Collapse of two hedge funds owned by Bear Stearns.

• Safe securities lost investors trust and turned into toxic mortgages.

• Federal Reserve took unprecedented steps to bolster Wall Street.

• March 2008: Federal Reserve staved off Bear Stearns bankruptcy by assuming $30 billion in liabilities and engineering a sale to JP Morgan Chase (for a price less than worth of Bear's Manhattan skyscraper).

• August 2008: Freddie Mac and Fannie Mae stock prices slid sharply.

• Septemper7, 2008: Treasury department announced that it was taking these stocks of Freddie Mac and Fannie Mae over to save the two giants.

• Septemper12, 2008: Top government and financial officials gathered for talks to fend off bankruptcy for Lehman Brothers bank. The talks broke down and the government refused to step in and save Lehman as it had for Bear. So, Lehman Brothers announced bankruptcy.

• Merrill Lynch bank sold itself to Bank of America.

• Septemper16, 2008: American International Group (AIG) bailed out by $85 billion deal.

• Bleeding of stock markets stopped as rumors trickled out about a huge bail-out plan by federal government.

• Septemper18, 2008: Treasury secretary Henry Paulson Jr. announced $700 billion proposal to buy toxic assets from the nation's biggest banks.

• Septemper29, 2008: The House rejected the proposal of the bail-out plan.

• October1, 2008: A revised version of the bail-out plan went back to the house. The new plan includes more tax breaks and other compromises.

• October3, 2008: The House passed the bail-out legislation.

• Crisis extends to Europe: Banks in England and Europe had invested heavily in mortgage-backed securities offered by Wall Street and England had come through a housing boom-and-bust of its own.

• October6, 2008: The German government moved to guarantee all private saving accounts in the country in a step to encourage people to supply banks with money. This is besides a huge bail-out plan.

• With execution of the bail-out plan, the Treasury Department announced that it would spend some of the funds to buy commercial papers (a vital form of short-term borrowing for businesses) in an effort to get credit flowing again.

• October8, 2008: World's leading central banks took a drastic step of a coordinated cut in the interest rates.

• October15, 2008: Ben S. Bernanke – Federal Reserve chairman- said that there would be no quick economic turnaround even with governments' interventions.

• October15, 2008: European and American officials announced coordinated action that includes taking equity stakes in major banks (Talks and decisions lead to stock market activity … Dow increased with 11%, this increase sustained only for 2 days).

• Credit markets were slow to ease up as banks used the injection of government funds to strengthen their balance sheets rather than lend.

• Late October, 2008: Treasury Department decided to use its $200 billion investment plan to steer funds to stronger banks to purchase weaker ones as selling National City bank – an Ohio-based bank- to PNC financial of Pittsburgh.

• October24, 2008: Production cut by OPEC to face prices declines.

• October28, 2008: 11% gain in Dow.

• October29, 2008: The Fed cut its key lending rate again to 1%.

• November1, 2008: European central bank and Bank of England followed US with their own lending rate reduction.

• Giant automakers turned to the government for aid.

• US Department of Labor: 240,000 jobs are lost in October due to the crisis.

• Polls: 61% of American people oppose the bail-out plan.

• Statistics: 533,000 job losses in US in November.

• December4, 2008: State Street Company cut up to 1800 jobs saving $400 million annually.
• General Motors, Chrysler and Ford face bankruptcy risks.

• December12, 2008: Alcatel-Lucent to cut 6000 jobs saving one billion euro ($1.33 billion).

• December12, 2008: Congress rejects automakers bail-out.

• December12, 2008: European General Motors asks the German government for bail-out funds.

• December12, 2008: Bank of America to cut 35,000 jobs over 3 years.

• December13, 2008: International paper to expel 1000 to 1500 workers.

• December13, 2008: General Motors cut production by 30%.

• December14, 2008: Gas prices on the rise again after a long period of declines.

• December15, 2008: Industrial production drops 0.6% in US.

• December15, 2008: Credit loosens on expected rate cut.

• December15, 2008: Oil price falls after touching $50 a barrel.

• December15, 2008: US homes lose $2 trillion in value in 2008.

• December16, 2008: A rise in stock on hope that the Fed would decide new rate cuts.

• December16, 2008: Statistics: Bankruptcy filings rise 30% this year.

• December16, 2008: Lawmakers say that $700 billion bail-out plan lacks appropriate measures to ensure the bail-out is working.

• December16, 2008: Unexpected drops in China's imports and exports.

• December16, 2008: Rio Tinto to cut 14,000 jobs.
• December16, 2008: Federal Reserve decide the biggest rate cuts

• December17, 2008: Chrysler decides to stop all productions

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