Global Financial Crisis (GFC)
The "Global Financial Crisis" or "GFC" seem to have become the default terms for what has been variously described as: Global Economic Crisis, World Financial Crisis, World Economic Crisis, Financial Meltdown, Economic Meltdown, recession, or depression.
For many the changed circumstances are startling when so recently the fears were about growing inflation, not having sufficient workers as unemployment levels dropped to new lows and the younger generations of workers were thought to be happy to skip between jobs to their own advantage.
So what happened?
Arguments will probably rage for many years to come, about what the exact cause was and who was responsible. The reality is that a whole chain of events and circumstances have come together to create this fall.
Following is a version proposed by some writers, which give us an indication of some of the key probabilities.
The dot-com bubble had built with astounding rapidity from 1995 to a peak in early 2000 with the NASDAQ reaching over 5000 points as speculators bet on the potential of internet companies, often with little regard for their actual profitability. By 2001 the bubble had popped and the stock price crashes were threatening the buoyancy of the wider economy.
Under the Bush administration and US Federal Reserve chairman Alan Greenspan, tax cuts and other efforts were made to put more spending power back into the economy.
(See
http://www.theage.com.au/news/world/greenspans-shock-oil-behind-iraq-invasion/2007/09/16/1189881340375.html
and
http://www.smh.com.au/news/World/Greenspan-admits-he-got-it-wrong-over-Bushs-tax-cuts/2005/03/16/1110913672670.html
for two newspaper views).
After the budget surpluses of the Clinton era, the USA budget went into deficit reaching over US$400 billion in 2004.
So where did all this more freely available money supply go? Many propose that it headed for the "subprime" market in the USA. These were "low or no document" mortgages for people with lower credit ratings, often on very favourable interest rates for limited "honeymoon" periods. The lending institutions considered themselves comparatively safe as housing has generally increased consistently in value over time.
So what went wrong? As owners came to the end of their honeymoon period, the rise in their payments was often dramatic, whilst house prices were static or beginning to fall. In Australia and most other countries, if an owner wishes to sell or defaults they would still be liable for the shortfall that the bank or lending institution was able to recover. However, it appears that in the majority of cases in the USA purchasers were able to just "hand the keys back" if their property value had fallen below the market value. This then become a vicious circle as more properties were dumped on the market and there was greater downward pressure on property prices.
So what are the "derivatives" that we hear about? Derivatives are financial instruments that are used to protect against risk. An example of how they may be used is that if an airline wishes to purchase new aircraft, derivatives may be formed to effectively "insure" against the risk of it defaulting. In a similar way derivatives were used to insure against defaults in the subprime market. So if the mortgagee walked away then responsibility fell back to the holder of the derivative.
So how did the crisis first become international? These derivatives were often onsold and in some cases bundled up into bigger and bigger packages. The financial institutions that were investing in them felt that they were low risk as they were based on the underlying asset of real estate. A market grew in trading these packages of derivatives with a wider range of organisations taking part. Unfortunately as claims were made against them the liability was often passed along a chain of organisations and delays would cause distrust and a resistance to extend credit between organisations and often national boundaries.
So what are the results? As credit has dried up and financial strain put on the institutions it has effected the availability of credit for other commercial ventures, effecting the global economy. Also the solvency of many banks and other institutions has been threatened with many previously trusted names either going bankrupt, or needing takeovers or government baleouts to stay afloat.
So what's being done about it? Governments around the world are taking dramatic stimulus measures to boost sagging economies. Actions have included large interest rate cuts, taking over "toxic debts", spending on infrastructure projects, tax cuts, cash bonuses and directly investing in businesses and financial institutions.
Are there still dangers? If this current crisis was triggered by injecting billions of dollars into the economy after the dotcom crash, then the question must be asked "what are the long term effects of throwing trillions of dollars at the economy now"? Will it be like a tsunami where there isn't just one wave but several with the second and third being bigger? Will governments taking such dramatic action to reinflate make people even more nervous and therefore cautious, which could further depress spending?
Governments will not just have to provide financial stimulus, but also provide appropriate controls for financial institutions and speculators, and help boost confidence if the mistakes are not to be repeated.
What should be done? Like the other major challenges we have listed of Climate Change, Peak Oil and Scarce Resources, first we need to recognise them and understand them and then we need to apply human ingenuity to coming up with solutions at all levels. For those that can adapt there are opportunities to mitigate or even thrive under adverse conditions. The more people are pulling in the same (correct) direction the easier it will be for everyone.
In our navigation bar on the left we have listed many of the areas of opportunity and, like everyone else, we are learning and adapting as we go. It will be an amazing adventure for all the inhabitants of our one planet...
Finding out more:
For three recent books on the Global Financial Crisis see:
The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It
Contagion: The Financial Epidemic That is Sweeping the Global Economy... and How to Protect Yourself from It
The Return of Depression Economics and the Crisis of 2008
Also included are Alan Greenspan's book The Age of Turbulence: Adventures in a New World
Ron Nielsen's The Little Green Handbook: Seven Trends Shaping the Future of Our Planet
Henry Ford's books My Life and Work - An Autobiography of Henry Ford
Search for other Global Financial Crisis products
For businesses that wish to fast track their knowledge on these subjects,
please see our Executive Briefings section.
