Recent Financial Crisis

Introduction

With the financial meltdown that has rocked the United States (US) and other major economies, anxiety has grown over the fate of the financial system of other nations, as the crisis persist. Both public and private sector operators have had cause to ruminate over the possible effects of the credit crunch on the nations' economies. There are still glaring signs of a gloomy global economic outlook which continue to spin despite frantic moves by the US government and World Bank to reverse the trend. The International Monetary Fund (IMF) noted that the world economy is now entering a major downturn in the face of the most “dangerous shock in mature financial markets since the 19930s.” It is believed that when the United States sneezes, the whole world catches cold. This recent crisis tends to confirm this statement as we see its cataclysmic effects on international business.

Historical Backgroud

The problem began with the collapse of the American Mortgage market when for several reasons, the value of properties went down drastically, leading to inability to refinance individual house mortgage because the banks were reluctant to lend. Banks that had a lot of money tied up in loans to house owners who were no longer able to pay went bankrupt or near bankrupt. With this went the credit crunch because people, who used their houses as collateral to borrow money, were no longer able to access credit (Zalewski, 359-366).

These loans were also sold by the banks to two giant banking institutions Freddie Mac and Fanny Mae, which served as holding financial institutions for mortgage loans. The problem of the sector led to the collapse of these two giants which the American government reluctantly took over. The credit crunch was further exacerbated by the high energy cost which is reflected in the pump price of petroleum, sometimes averaging over four dollars ($4) per litre (Wolfson, pp 393-400).

The end of 158-year-old Lehman Brothers and 94-year-old Merrill Lynch, two of the largest Wall Street investment banks one week after the government takeover of the mortgage finance giants Freddie Mac and Fannie Mae, marked a new stage in the convulsive crisis of American capitalism. This sudden financial quake removed a huge chunk of liquidity from the economy, as paper values built up over decades of speculation, went crashing down. This American malady eventually spread to the rest of the world. Banks began to have problems in Great Britain, the closest economy to the American economy (Kellermann, pp 56-90). The North bank was taken over by the British government, followed by the collapse of the giant Hypo bank in Germany, with rescue plans already being undertaken by the respective governments. Spain, France, Belgium, Netherlands, Luxemburg and Ireland have all come out with packages guaranteeing all depositors in their countries (Benston, pp 67-190). The small country of Iceland is almost bankrupt and gas been negotiating for a loan from Russia. Japan has of recent made available billions of dollars to Japanese banks to ease the credit ...