Cause and consequences of 2008 economic crisis

Cause and consequences of 2008 economic crisis

There are many factors that have caused the 2008 crisis, and many of them have not been created by Europe. And now the small continent cannot do much to fix these mistakes

There is an adage that says:

When the US sneezes, the world catches a cold.

And perfectly describes the American disaster that has had repercussions on the European continent.In the financial interconnected system, US unhappy decisions have led to a similar depression of the which has spread throughout the world.

All began with this

The crisis broke out with the real estate bubble of 2004, After a period of increase in sales and price stability many families started to buy thanks to mortgages they could not afford.

This practice called subprime mortgage, conceded without any mortgage guarantee even to those who did not have demonstrable guarantees. Subprime mortgages in the first five years have low interest rates, then after drastically increase.This risk was not explained to the buyers who were told that they would be able to refinance the mortgage and keep low interest.All economists warned of the danger but no one wanted to listen. Everyone was doing business and earning money, banks, construction companies, factories.Consumers were happy for the first time to be able to afford their home.

Other people’s money…party‚Äôs over

But in 2005-2006, it was time to pay the interests…

Interest rates on subprime mortgages have risen. Many new homeowners were unable to pay or refinance. The crisis had to be limited to US homeowners. Unfortunately, banks and lenders who make these loans have sold their debt to investors. Debt assets were cut in cash and sold to other investors and banks around the world, in complex financial packages that few people seemed to understand completely.In 2007, nearly 1.3 million properties owned by US were foreclosed, up 79% compared to 2006. No one seemed to have ideas that they had these “useless” debts, distributed throughout the world financial system. Suddenly banks were no longer willing to lend themselves to each other, giving rise to a “credit crunch”, a period when there is little liquidity (or money) in the system because no one is lending. The losses began to enter.

By July 2008, the largest banks and financial institutions around the world recorded losses of about $ 435 billion.

Today, banks and other financial institutions cannot get any credit and they are locked with bad assets in their books. Many have had to declare bankruptcy or are close to doing so. Governments have had to save these institutions for fear of what their collapse would mean for the wider economy. These institutions included Freddie Mac and Fannie May in the United States, the insurance giant AIG, Northern Rock in the UK, and Fortis and Dexia in Belgium. Future bankruptcies have prompted the United States government to prepare a $ 700 billion rescue package to save them as it does. The UK could prepare a similar package.

Commodity boom causes bust

The subprime mortgage crisis and the credit crunch are not the only factors of the 2008 economic crisis. Oil prices are quite high, driven by the growing energy needs of China and India emerging economies. This has drastically influenced consumers in North America and Europe in two ways. Consumers have been forced to pay far higher fuel prices to fill their cars and heat their homes, while at the same time rising food costs have drastically driven food prices because it requires fuel to produce and To carry food. Food has become much more expensive in the developing world, in some cases it has caused food disorder.

The current decade has seen a significant boom in commodities after a fall in commodities in the 1980s and 90s which saw the prices at low temperatures.

By 2008 oil had reached a level that people could no longer afford to go over $ 100 a barrel for the first time in history in January 2008.

But this level did not look like that at the time of July, when the oil Has reached $ 147 a barrel. There has been a rapid slowdown in North American and European economies. On September 30, the UK revealed that it had zero growth for the fourth quarter. Together with Germany, it should be officially recession by the end of 2008. The euro area as a whole is seeing some very serious economic indicators going out of the storm, approaching a strategy to save banks failing over time.

Fuel prices are never going to return to levels experienced in the past.

The economic crisis is the result of artificial mistakes in the United States and the natural increase of the eastern economies. Fuel prices will never return to the levels experienced in the past and the world must learn to adapt to this new reality. At the same time, the credit crisis – created in the United States – can only be solved by the United States. There is little Europe that can but stand up and try to ride the storm.

 

 

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