The subprime mortgage crisis is an ongoing real estate crisis and financial crisis triggered by a dramatic rise in mortgage delinquencies and foreclosures in the United States, with major adverse consequences for banks and financial markets around the globe.
Approximately 80% of U.S. mortgages issued in recent years to subprime borrowers were adjustable-rate mortgages. After U.S. house prices peaked in mid-2006 and began their steep decline thereafter, refinancing became more difficult. As adjustable-rate mortgages began to reset at higher rates, mortgage delinquencies soared. Securities backed with subprime mortgages, widely held by financial firms, lost most of their value. The result has been a large decline in the capital of many banks and U.S. government sponsored enterprises, tightening credit around the world.
The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005-2006. High default rates on “subprime” and adjustable rate mortgages (ARM), began to increase quickly thereafter. An increase in loan incentives such as easy initial terms and a long-term trend of rising housing prices had encouraged borrowers to assume difficult mortgages in the belief they would be able to quickly refinance at more favorable terms. However, once interest rates began to rise and housing prices started to drop moderately in 2006-2007 in many parts of the U.S., refinancing became more difficult. Defaults and foreclosure activity increased dramatically as easy initial terms expired, home prices failed to go up as anticipated, and ARM interest rates reset higher. Falling prices also resulted in homes worth less than the mortgage loan, providing a financial incentive for borrowers to enter foreclosure. The ongoing foreclosure epidemic that began in late 2006 in the U.S. continues to be a key factor in the global economic crisis, because it drains wealth from consumers and erodes the financial strength of banking institutions.
In the years leading up to the crisis, significant amounts of foreign money flowed into the U.S. from fast-growing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. interest rates from 2002-2004 contributed to easy credit conditions, which fueled both housing and credit bubbles. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.As part of the housing and credit booms, the amount of financial agreements called mortgage-backed securities (MBS), which derive their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on other loan types also increased significantly as the crisis expanded from the housing market to other parts of the economy. Total losses are estimated in the trillions of U.S. dollars globally.
While the housing and credit bubbles built, a series of factors caused the financial system to become increasingly fragile. Policymakers did not recognize the increasingly important role played by financial institutions such as investment banks and hedge funds, also known as the shadow banking system. Some experts believe these institutions had become as important as commercial (depository) banks in providing credit to the U.S. economy, but they were not subject to the same regulations. These institutions as well as certain regulated banks had also assumed significant debt burdens while providing the loans described above and did not have a financial cushion sufficient to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing economic activity. Concerns regarding the stability of key financial institutions drove central banks to take action to provide funds to encourage lending and to restore faith in the commercial paper markets, which are integral to funding business operations. Governments also bailed out key financial institutions, assuming significant additional financial commitments.
The risks to the broader economy created by the housing market downturn and subsequent financial market crisis were primary factors in several decisions by central banks around the world to cut interest rates and governments to implement economic stimulus packages. Effects on global stock markets due to the crisis have been dramatic. Between 1 January and 11 October 2008, owners of stocks in U.S. corporations had suffered about $8 trillion in losses, as their holdings declined in value from $20 trillion to $12 trillion. Losses in other countries have averaged about 40%. Losses in the stock markets and housing value declines place further downward pressure on consumer spending, a key economic engine. Leaders of the larger developed and emerging nations met in November 2008 and March 2009 to formulate strategies for addressing the crisis. As of April 2009, many of the root causes of the crisis had yet to be addressed. A variety of solutions have been proposed by government officials, central bankers, economists, and business executives.
Number of U.S. residential properties subject to foreclosure actions by quarter (2007-2010).
Subprime borrowers typically have weakened credit histories and reduced repayment capacity. Subprime loans have a higher risk of default than loans to prime borrowers. If a borrower is delinquent in making timely mortgage payments to the loan servicer (a bank or other financial firm), the lender may take possession of the property, in a process called foreclosure.
The value of USA subprime mortgages was estimated at $1.3 trillion as of March 2007,  with over 7.5 million first-lien subprime mortgages outstanding.Between 2004-2006 the share of subprime mortgages relative to total originations ranged from 18%-21%, versus less than 10% in 2001-2003 and during 2007. In the third quarter of 2007, subprime ARMs making up only 6.8% of USA mortgages outstanding also accounted for 43% of the foreclosures which began during that quarter. By October 2007, approximately 16% of subprime adjustable rate mortgages (ARM) were either 90-days delinquent or the lender had begun foreclosure proceedings, roughly triple the rate of 2005. By January 2008, the delinquency rate had risen to 21% and by May 2008 it was 25%.
The value of all outstanding residential mortgages, owed by USA households to purchase residences housing at most four families, was US$9.9 trillion as of year-end 2006, and US$10.6 trillion as of midyear 2008. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007, and again to 2.8 million in 2009, a 21% increase vs. 2008.
By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure. By September 2009, this had risen to 14.4%. Between August 2007 and October 2008, 936,439 USA residences completed foreclosure. Foreclosures are concentrated in particular states both in terms of the number and rate of foreclosure filings. Ten states accounted for 74% of the foreclosure filings during 2008; the top two (California and Florida) represented 41%. Nine states were above the national foreclosure rate average of 1.84% of households.
The crisis can be attributed to a number of factors pervasive in both housing and credit markets, factors which emerged over a number of years. Causes proposed include the inability of homeowners to make their mortgage payments, due primarily to adjustable-rate mortgages resetting, borrowers overextending, predatory lending, speculation and overbuilding during the boom period, risky mortgage products, high personal and corporate debt levels, financial products that distributed and perhaps concealed the risk of mortgage default, bad monetary and housing policies, international trade imbalances, and inappropriate government regulation. Three important catalysts of the subprime crisis were the influx of moneys from the private sector, the banks entering into the mortgage bond market and the predatory lending practices of the mortgage lenders, specifically the adjustable-rate mortgage, 2-28 loan, that Mortgage Lenders sold directly or indirectly via Mortgage Brokers. On Wall Street and in the financial industry, moral hazard lay at the core of many of the causes.
In its “Declaration of the Summit on Financial Markets and the World Economy,” dated 15 November 2008, leaders of the Group of 20 cited the following causes:
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
During May 2010, Warren Buffett and Paul Volcker separately described questionable assumptions or judgments underlying the U.S. financial and economic system that contributed to the crisis. These assumptions included: 1) Housing prices would not fall dramatically; 2) Free and open financial markets supported by sophisticated financial engineering would most effectively support market efficiency and stability, directing funds to the most profitable and productive uses; 3) Concepts embedded in mathematics and physics could be directly adapted to markets, in the form of various financial models used to evaluate credit risk; 4) Economic imbalances, such as large trade deficits and low savings rates indicative of over-consumption, were sustainable; and 5) Stronger regulation of the shadow banking system and derivatives markets was not needed.
Boom and bust in the housing market
Main articles: United States housing bubble and United States housing market correction
Existing homes sales, inventory, and months supply, by quarter.
Vicious Cycles in the Housing & Financial Markets
Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing market boom and encouraging debt-financed consumption. The USA home ownership rate increased from 64% in 1994 (about where it had been since 1980) to an all-time high of 69.2% in 2004. Subprime lending was a major contributor to this increase in home ownership rates and in the overall demand for housing, which drove prices higher.
Between 1997 and 2006, the price of the typical American house increased by 124%. During the two decades ending in 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004, and 4.6 in 2006. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation. USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.
While housing prices were increasing, consumers were saving less and both borrowing and spending more. Household debt grew from $705 billion at yearend 1974, 60% of disposable personal income, to $7.4 trillion at yearend 2000, and finally to $14.5 trillion in midyear 2008, 134% of disposable personal income. During 2008, the typical USA household owned 13 credit cards, with 40% of households carrying a balance, up from 6% in 1970. Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.
This credit and house price explosion led to a building boom and eventually to a surplus of unsold homes, which caused U.S. housing prices to peak and begin declining in mid-2006. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtainadjustable-rate mortgages. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage’s term. Borrowers who could not make the higher payments once the initial grace period ended would try to refinance their mortgages. Refinancing became more difficult, once house prices began to decline in many parts of the USA. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default.
As more borrowers stop paying their mortgage payments (this is an on-going crisis), foreclosures and the supply of homes for sale increases. This places downward pressure on housing prices, which further lowers homeowners’ equity. The decline in mortgage payments also reduces the value of mortgage-backed securities, which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis.
By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. This major and unexpected decline in house prices means that many borrowers have zero or negative equity in their homes, meaning their homes were worth less than their mortgages. As of March 2008, an estimated 8.8 million borrowers – 10.8% of all homeowners – had negative equity in their homes, a number that is believed to have risen to 12 million by November 2008. Borrowers in this situation have an incentive to default on their mortgages as a mortgage is typically nonrecourse debt secured against the property. Economist Stan Leibowitz argued in the Wall Street Journal that although only 12% of homes had negative equity, they comprised 47% of foreclosures during the second half of 2008. He concluded that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay.
Increasing foreclosure rates increases the inventory of houses offered for sale. The number of new homes sold in 2007 was 26.4% less than in the preceding year. By January 2008, the inventory of unsold new homes was 9.8 times the December 2007 sales volume, the highest value of this ratio since 1981. Furthermore, nearly four million existing homes were for sale, of which almost 2.9 million were vacant. This overhang of unsold homes lowered house prices. As prices declined, more homeowners were at risk of default or foreclosure. House prices are expected to continue declining until this inventory of unsold homes (an instance of excess supply) declines to normal levels.
Main article: Speculation
Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchases were not intended as primary residences. David Lereah, NAR’s chief economist at the time, stated that the 2006 decline in investment buying was expected: “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.”
Housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being “flipped” (sold) for a profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.
Nicole Gelinas of the Manhattan Institute described the negative consequences of not adjusting tax and mortgage policies to the shifting treatment of a home from conservative inflation hedge to speculative investment. Economist Robert Shiller argued that speculative bubbles are fueled by “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming.” Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values.
New York State prosecutors are examining whether eight banks hoodwinked credit ratings agencies, to inflate the grades of subprime-linked investments. The Securities and Exchange Commission, the Justice Department, the United States attorney’s office and more are examining how banks created, rated, sold and traded mortgage securities that turned out to be some of the worst investments ever devised. In 2010, virtually all of the investigations, criminal as well as civil, are in their early stages.
Warren Buffett testified to the Financial Crisis Inquiry Commission: “There was the greatest bubble I’ve ever seen in my life…The entire American public eventually was caught up in a belief that housing prices could not fall dramatically.”
High-risk mortgage loans and lending/borrowing practices
In the years before the crisis, the behavior of lenders changed dramatically. Lenders offered more and more loans to higher-risk borrowers, including undocumented immigrants. Subprime mortgages amounted to $35 billion (5% of total originations) in 1994, 9% in 1996, $160 billion (13%) in 1999, and $600 billion (20%) in 2006. A study by the Federal Reserve found that the average difference between subprime and prime mortgage interest rates (the “subprime markup”) declined significantly between 2001 and 2007. The combination of declining risk premia and credit standards is common to boom and bust credit cycles.
In addition to considering higher-risk borrowers, lenders have offered increasingly risky loan options and borrowing incentives. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.
Growth in mortgage loan fraud based upon US Department of the Treasury Suspicious Activity Report Analysis.
The mortgage qualification guidelines began to change. At first, the stated income, verified assets (SIVA) loans came out. Proof of income was no longer needed. Borrowers just needed to “state” it and show that they had money in the bank. Then, the no income, verified assets (NIVA) loans came out. The lender no longer required proof of employment. Borrowers just needed to show proof of money in their bank accounts. The qualification guidelines kept getting looser in order to produce more mortgages and more securities. This led to the creation of NINA. NINA is an abbreviation of No Income No Assets (sometimes referred to as Ninja loans). Basically, NINA loans are official loan products and let you borrow money without having to prove or even state any owned assets. All that was required for a mortgage was a credit score. 
Another example is the interest-only adjustable-rate mortgage (ARM), which allows the homeowner to pay just the interest (not principal) during an initial period. Still another is a “payment option” loan, in which the homeowner can pay a variable amount, but any interest not paid is added to the principal. An estimated one-third of ARMs originated between 2004 and 2006 had “teaser” rates below 4%, which then increased significantly after some initial period, as much as doubling the monthly payment.
The proportion of subprime ARM loans made to people with credit scores high enough to qualify for conventional mortgages with better terms increased from 41% in 2000 to 61% by 2006. However, there are many factors other than credit score that affect lending. In addition, mortgage brokers in some cases received incentives from lenders to offer subprime ARM’s even to those with credit ratings that merited a conforming (i.e., non-subprime) loan.
Mortgage underwriting standards declined precipitously during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay. Mortgage fraud by lenders and borrowers increased enormously. In 2004, the Federal Bureau of Investigation warned of an “epidemic” in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to “a problem that could have as much impact as the S&L crisis”.
So why did lending standards decline? In a Peabody Award winning program, NPR correspondents argued that a “Giant Pool of Money” (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with financial innovation such as the mortgage-backed security (MBS) andcollateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable. NPR described it this way:
The problem was that even though housing prices were going through the roof, people weren’t making any more money. From 2000 to 2007, the median household income stayed flat. And so the more prices rose, the more tenuous the whole thing became. No matter how lax lending standards got, no matter how many exotic mortgage products were created to shoehorn people into homes they couldn’t possibly afford, no matter what the mortgage machine tried, the people just couldn’t swing it. By late 2006, the average home cost nearly four times what the average family made. Historically it was between two and three times. And mortgage lenders noticed something that they’d almost never seen before. People would close on a house, sign all the mortgage papers, and then default on their very first payment. No loss of a job, no medical emergency, they were underwater before they even started. And although no one could really hear it, that was probably the moment when one of the biggest speculative bubbles in American history popped.
Borrowing under a securitization structure.
Further information: Securitization and Mortgage-backed security
The traditional mortgage model involved a bank originating a loan to the borrower/homeowner and retaining the credit (default) risk. With the advent ofsecuritization, the traditional model has given way to the “originate to distribute” model, in which banks essentially sell the mortgages and distribute credit risk to investors through mortgage-backed securities. Securitization meant that those issuing mortgages were no longer required to hold them to maturity. By selling the mortgages to investors, the originating banks replenished their funds, enabling them to issue more loans and generating transaction fees. This created a moral hazard in which an increased focus on processing mortgage transactions was incentivized but ensuring their credit quality was not.
Securitization accelerated in the mid-1990s. The total amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3 trillion. The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006. American homeowners, consumers, and corporations owed roughly $25 trillion during 2008. American banks retained about $8 trillion of that total directly as traditional mortgage loans. Bondholders and other traditional lenders provided another $7 trillion. The remaining $10 trillion came from the securitization markets. The securitization markets started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with the exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac.
A more direct connection between securitization and the subprime crisis relates to a fundamental fault in the way that underwriters, rating agencies and investors modeled the correlation of risks among loans in securitization pools. Correlation modeling-determining how the default risk of one loan in a pool is statistically related to the default risk for other loans-was based on a “Gaussian copula” technique developed by statistician David X. Li. This technique, widely adopted as a means of evaluating the risk associated with securitization transactions, used what turned out to be an overly simplistic approach to correlation. Unfortunately, the flaws in this technique did not become apparent to market participants until after many hundreds of billions of dollars of ABS and CDOs backed by subprime loans had been rated and sold. By the time investors stopped buying subprime-backed securities-which halted the ability of mortgage originators to extend subprime loans-the effects of the crisis were already beginning to emerge.
Nobel laureate Dr. A. Michael Spence wrote: “Financial innovation, intended to redistribute and reduce risk, appears mainly to have hidden it from view. An important challenge going forward is to better understand these dynamics as the analytical underpinning of an early warning system with respect to financial instability.” 
Inaccurate credit ratings
Main article: Credit rating agencies and the subprime crisis
MBS credit rating downgrades, by quarter.
Credit rating agencies are now under scrutiny for having given investment-grade ratings to MBSs based on risky subprime mortgage loans. These high ratings enabled these MBS to be sold to investors, thereby financing the housing boom. These ratings were believed justified because of risk reducing practices, such as credit default insurance and equity investors willing to bear the first losses. However, there are also indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty.
Critics allege that the rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors. On 11 June 2008, the SEC proposed rules designed to mitigate perceived conflicts of interest between rating agencies and issuers of structured securities. On 3 December 2008, the SEC approved measures to strengthen oversight of credit rating agencies, following a ten-month investigation that found “significant weaknesses in ratings practices,” including conflicts of interest.
Between Q3 2007 and Q2 2008, rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities. Financial institutions felt they had to lower the value of their MBS and acquire additional capital so as to maintain capital ratios. If this involved the sale of new shares of stock, the value of the existing shares was reduced. Thus ratings downgrades lowered the stock prices of many financial firms.
Main article: Government policies and the subprime mortgage crisis
U.S. Subprime lending expanded dramatically 2004-2006
Both government failed regulation and deregulation contributed to the crisis. In testimony before Congress both the Securities and Exchange Commission(SEC) and Alan Greenspan conceded failure in allowing the self-regulation of investment banks.
Increasing home ownership has been the goal of several presidents including Roosevelt, Reagan, Clinton and G.W.Bush. In 1982, Congress passed the Alternative Mortgage Transactions Parity Act (AMTPA), which allowed non-federally chartered housing creditors to write adjustable-rate mortgages. Among the new mortgage loan types created and gaining in popularity in the early 1980s were adjustable-rate, option adjustable-rate, balloon-payment and interest-only mortgages. These new loan types are credited with replacing the long standing practice of banks making conventional fixed-rate, amortizing mortgages. Among the criticisms of banking industry deregulation that contributed to the savings and loan crisis was that Congress failed to enact regulations that would have prevented exploitations by these loan types. Subsequent widespread abuses of predatory lending occurred with the use of adjustable-rate mortgages. Approximately 80% of subprime mortgages are adjustable-rate mortgages.
In 1995, the GSEs like Fannie Mae began receiving government tax incentives for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the Fannie Mae and Freddie Mac with the subprime market. In 1996, HUD set a goal for Fannie Mae and Freddie Mac that at least 42% of the mortgages they purchase be issued to borrowers whose household income was below the median in their area. This target was increased to 50% in 2000 and 52% in 2005. From 2002 to 2006, as the U.S. subprime market grew 292% over previous years, Fannie Mae and Freddie Mac combined purchases of subprime securities rose from $38 billion to around $175 billion per year before dropping to $90 billion per year, which included $350 billion of Alt-A securities. Fannie Mae had stopped buying Alt-A products in the early 1990s because of the high risk of default. By 2008, the Fannie Mae and Freddie Mac owned, either directly or through mortgage pools they sponsored, $5.1 trillion in residential mortgages, about half the total U.S. mortgage market. The GSE have always been highly leveraged, their net worth as of 30 June 2008 being a mere US$114 billion. When concerns arose in September 2008 regarding the ability of the GSE to make good on their guarantees, the Federal government was forced to place the companies into a conservatorship, effectively nationalizing them at the taxpayers’ expense.
The Glass-Steagall Act was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential conflicts of interest between the lending activities of the former and rating activities of the latter. Economist Joseph Stiglitz criticized the repeal of the Act. He called its repeal the “culmination of a $300 million lobbying effort by the banking and financial services industries…spearheaded in Congress by Senator Phil Gramm.” He believes it contributed to this crisis because the risk-taking culture of investment banking dominated the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period. The Federal government bailout of thrifts during the savings and loan crisis of the late 1980s may have encouraged other lenders to make risky loans, and thus given rise to moral hazard.
Conservatives and Libertarians have also debated the possible effects of the Community Reinvestment Act (CRA), with detractors claiming that the Act encouraged lending to uncreditworthy borrowers, and defenders claiming a thirty year history of lending without increased risk. Detractors also claim that amendments to the CRA in the mid-1990s, raised the amount of mortgages issued to otherwise unqualified low-income borrowers, and allowed the securitization of CRA-regulated mortgages, even though a fair number of them were subprime.
Both Federal Reserve Governor Randall Kroszner and FDIC Chairman Sheila Bair have stated their belief that the CRA was not to blame for the crisis.
Economist Paul Krugman argued in January 2010 that the simultaneous growth of the residential and commercial real estate pricing bubbles undermines the case made by those who argue that Fannie Mae, Freddie Mac, CRA or predatory lending were primary causes of the crisis. In other words, bubbles in both markets developed even though only the residential market was affected by these potential causes.
Policies of central banks
Federal Funds Rate and Various Mortgage Rates
Central banks manage monetary policy and may target the rate of inflation. They have some authority over commercial banks and possibly other financial institutions. They are less concerned with avoiding asset price bubbles, such as the housing bubble and dot-com bubble. Central banks have generally chosen to react after such bubbles burst so as to minimize collateral damage to the economy, rather than trying to prevent or stop the bubble itself. This is because identifying an asset bubble and determining the proper monetary policy to deflate it are matters of debate among economists.
Some market observers have been concerned that Federal Reserve actions could give rise to moral hazard. A Government Accountability Office critic said that the Federal Reserve Bank of New York’s rescue of Long-Term Capital Management in 1998 would encourage large financial institutions to believe that the Federal Reserve would intervene on their behalf if risky loans went sour because they were “too big to fail.”
A contributing factor to the rise in house prices was the Federal Reserve’s lowering of interest rates early in the decade. From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and of theSeptember 2001 terrorist attacks, and to combat the perceived risk of deflation. The Fed believed that interest rates could be lowered safely primarily because the rate of inflation was low; it disregarded other important factors. Richard W. Fisher, President and CEO of the Federal Reserve Bank of Dallas, said that the Fed’s interest rate policy during the early 2000s was misguided, because measured inflation in those years was below true inflation, which led to a monetary policy that contributed to the housing bubble. According to Ben Bernanke, now chairman of the Federal Reserve, it was capital or savings pushing into the United States, due to a world wide “saving glut”, which kept long term interest rates low independently of Central Bank action.
The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year ARM rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates and it became riskier to speculate in housing.
Financial institution debt levels and incentives
Leverage Ratios of Investment Banks Increased Significantly 2003-2007
Many financial institutions, investment banks in particular, issued large amounts of debt during 2004-2007, and invested the proceeds in mortgage-backed securities (MBS), essentially betting that house prices would continue to rise, and that households would continue to make their mortgage payments. Borrowing at a lower interest rate and investing the proceeds at a higher interest rate is a form of financial leverage. This is analogous to an individual taking out a second mortgage on his residence to invest in the stock market. This strategy proved profitable during the housing boom, but resulted in large losses when house prices began to decline and mortgages began to default. Beginning in 2007, financial institutions and individual investors holding MBS also suffered significant losses from mortgage payment defaults and the resulting decline in the value of MBS.
A 2004 U.S. Securities and Exchange Commission (SEC) decision related to the net capital rule allowed USA investment banks to issue substantially more debt, which was then used to purchase MBS. Over 2004-07, the top five US investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to the declining value of MBSs. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Further, the percentage of subprime mortgages originated to total originations increased from below 10% in 2001-2003 to between 18-20% from 2004-2006, due in-part to financing from investment banks.
During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearnsand Merrill Lynch). These failures augmented the instability in the global financial system. The remaining two investment banks, Morgan Stanley and Goldman Sachs, opted to become commercial banks, thereby subjecting themselves to more stringent regulation.
In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities off-balance sheet into special purpose vehicles or other entities in theshadow banking system. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis. New accounting guidance will require them to put some of these assets back onto their books during 2009, which will significantly reduce their capital ratios. One news agency estimated this amount to be between $500 billion and $1 trillion. This effect was considered as part of the stress tests performed by the government during 2009.
Martin Wolf wrote in June 2009: “…an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the ‘shadow banking system’ itself – was to find a way round regulation.”
The New York State Comptroller’s Office has said that in 2006, Wall Street executives took home bonuses totaling $23.9 billion. “Wall Street traders were thinking of the bonus at the end of the year, not the long-term health of their firm. The whole system-from mortgage brokers to Wall Street risk managers-seemed tilted toward taking short-term risks while ignoring long-term obligations. The most damning evidence is that most of the people at the top of the banks didn’t really understand how those [investments] worked.”
Investment banker incentive compensation was focused on fees generated from assembling financial products, rather than the performance of those products and profits generated over time. Their bonuses were heavily skewed towards cash rather than stock and not subject to “claw-back” (recovery of the bonus from the employee by the firm) in the event the MBS or CDO created did not perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment banks was not adequately factored into the compensation of senior executives.
Credit default swaps
Credit default swaps (CDS) are financial instruments used as a hedge and protection for debtholders, in particular MBS investors, from the risk of default. As the net worth of banks and other financial institutions deteriorated because of losses related to subprime mortgages, the likelihood increased that those providing the insurance would have to pay their counterparties. This created uncertainty across the system, as investors wondered which companies would be required to pay to cover mortgage defaults.
Like all swaps and other financial derivatives, CDS may either be used to hedge risks (specifically, to insure creditors against default) or to profit from speculation. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. CDS are lightly regulated. As of 2008, there was no central clearing house to honor CDS in the event a party to a CDS proved unable to perform his obligations under the CDS contract. Required disclosure of CDS-related obligations has been criticized as inadequate. Insurance companies such as American International Group (AIG), MBIA, and Ambac faced ratings downgrades because widespread mortgage defaults increased their potential exposure to CDS losses. These firms had to obtain additional funds (capital) to offset this exposure. AIG’s having CDSs insuring $440 billion of MBS resulted in its seeking and obtaining a Federal government bailout.
When investment bank Lehman Brothers went bankrupt in September 2008, there was much uncertainty as to which financial firms would be required to honor the CDS contracts on its $600 billion of bonds outstanding. Merrill Lynch’s large losses in 2008 were attributed in part to the drop in value of its unhedged portfolio of collateralized debt obligations (CDOs) after AIG ceased offering CDS on Merrill’s CDOs. The loss of confidence of trading partners in Merrill Lynch’s solvency and its ability to refinance its short-term debt led to its acquisition by the Bank of America.
Economist Joseph Stiglitz summarized how credit default swaps contributed to the systemic meltdown: “With this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one’s own position. Not surprisingly, the credit markets froze.”
Author Michael Lewis wrote that CDS enabled speculators to stack bets on the same mortgage bonds and CDO’s. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS insurance were betting that significant defaults would occur, while the sellers (such as AIG) bet they would not. A theoretically infinite amount could be wagered on the same housing-related securities, provided buyers and sellers of the CDS could be found. In addition, Chicago Public Radio, Huffington Post, and ProPublica reported in April 2010 that market participants, including a hedge fund called Magnetar Capital, encouraged the creation of CDO’s containing low quality mortgages, so they could bet against them using CDS. NPR reported that Magnetar encouraged investors to purchase CDO’s while simultaneously betting against them, without disclosing the latter bet. Instruments called synthetic CDO, which are portfolios of credit default swaps, were also involved in allegations by the SEC against Goldman-Sachs in April 2010.
US Balance of Payments
U.S. Current Account or Trade Deficit
In 2005, Ben Bernanke addressed the implications of the USA’s high and rising current account deficit, resulting from USA investment exceeding its savings, or imports exceeding exports. Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. The US attracted a great deal of foreign investment, mainly from the emerging economies in Asia and oil-exporting nations. The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices. Bernanke referred to this as a “saving glut” that may have pushed capital into the USA, a view differing from that of some other economists, who view such capital as having been pulled into the USA by its high consumption levels. In other words, a nation cannot consume more than its income unless it sells assets to foreigners, or foreigners are willing to lend to it. Alternatively, if a nation wishes to increase domestic investment in plant and equipment, it will also increase its level of imports to maintain balance if it has a floating exchange rate.
Regardless of the push or pull view, a “flood” of funds (capital or liquidity) reached the USA financial markets. Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the direct impact of the crisis. USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. USA housing and financial assets dramatically declined in value after the housing bubble burst.
Boom and collapse of the shadow banking system
In a June 2008 speech, President of the NY Federal Reserve Bank Timothy Geithner, who later became Secretary of the Treasury, placed significant blame for the freezing of credit markets on a “run” on the entities in the “parallel” banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls as depository banks. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: “In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion.” He stated that the “combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.”
Nobel laureate Paul Krugman described the run on the shadow banking system as the “core of what happened” to cause the crisis. “As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible-and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.” He referred to this lack of controls as “malign neglect.”
The securitization markets supported by the shadow banking system started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: “It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume.” The authors also indicate that some forms of securitization are “likely to vanish forever, having been an artifact of excessively loose credit conditions.”
The Economist reported in March 2010: “Bear Stearns and Lehman Brothers were non-banks that were crippled by a silent run among panicky overnight “repo” lenders, many of them money market funds uncertain about the quality of securitized collateral they were holding. Mass redemptions from these funds after Lehman’s failure froze short-term funding for big firms.”
Main article: Financial crisis of 2007-2010
Impact in the U.S.
Impacts from the Crisis on Key Wealth Measures
Between June 2007 and November 2008, Americans lost more than a quarter of their net worth. By early November 2008, a broad U.S. stock index, the S&P 500, was down 45 percent from its 2007 high. Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop. Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008. Total retirement assets, Americans’ second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008. During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion. Taken together, these losses total a staggering $8.3 trillion. Members of USA minority groups received a disproportionate number of subprime mortgages, and so have experienced a disproportionate level of the resulting foreclosures.
Financial market impacts, 2007
Further information: List of writedowns due to subprime crisis
FDIC Graph – U.S. Bank & Thrift Profitability By Quarter
The crisis began to affect the financial sector in February 2007, when HSBC, the world’s largest (2008) bank, wrote down its holdings of subprime-related MBS by $10.5 billion, the first major subprime related loss to be reported. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. Top management has not escaped unscathed, as the CEOs of Merrill Lynch and Citigroup resigned within a week of each other in late 2007. As the crisis deepened, more and more financial firms either merged, or announced that they were negotiating seeking merger partners.
During 2007, the crisis caused panic in financial markets and encouraged investors to take their money out of risky mortgage bonds and shaky equities and put it into commodities as “stores of value”. Financial speculation in commodity futures following the collapse of the financial derivatives markets has contributed to the world food price crisis and oil price increases due to a “commodities super-cycle.” Financial speculators seeking quick returns have removed trillions of dollars from equities and mortgage bonds, some of which has been invested into food and raw materials.
Mortgage defaults and provisions for future defaults caused profits at the 8533 USA depository institutions insured by the FDIC to decline from $35.2 billion in 2006 Q4 to $646 million in the same quarter a year later, a decline of 98%. 2007 Q4 saw the worst bank and thrift quarterly performance since 1990. In all of 2007, insured depository institutions earned approximately $100 billion, down 31% from a record profit of $145 billion in 2006. Profits declined from $35.6 billion in 2007 Q1 to $19.3 billion in 2008 Q1, a decline of 46%.
Financial market impacts, 2008
The TED spread – an indicator of credit risk – increased dramatically during September 2008.
Further information: Indirect economic effects of the subprime mortgage crisis
As of August 2008, financial firms around the globe have written down their holdings of subprime related securities by US$501 billion. The IMF estimates that financial institutions around the globe will eventually have to write off $1.5 trillion of their holdings of subprime MBSs. About $750 billion in such losses had been recognized as of November 2008. These losses have wiped out much of the capital of the world banking system. Banks headquartered in nations that have signed the Basel Accords must have so many cents of capital for every dollar of credit extended to consumers and businesses. Thus the massive reduction in bank capital just described has reduced the credit available to businesses and households.
When Lehman Brothers and other important financial institutions failed in September 2008, the crisis hit a key point. During a two day period in September 2008, $150 billion were withdrawn from USA money funds. The average two day outflow had been $5 billion. In effect, the money market was subject to a bank run. The money market had been a key source of credit for banks (CDs) and nonfinancial firms (commercial paper). The TED spread (see graph above), a measure of the risk of interbank lending, quadrupled shortly after the Lehman failure. 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. 
However, some economists state that Third-World economies, such as the Brazilian and Chinese ones, will not suffer as much as those from more developed countries.
The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and eurozone banks only 40 percent.
Further information: Subprime mortgage crisis solutions debate
Various actions have been taken since the crisis became apparent in August 2007. In September 2008, major instability in world financial markets increased awareness and attention to the crisis. Various agencies and regulators, as well as political officials, began to take additional, more comprehensive steps to handle the crisis.
To date, various 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.
Federal Reserve and central banks
Main article: Federal Reserve responses to the subprime crisis
The central bank of the USA, the Federal Reserve, in partnership with central banks around the world, has taken several steps to address the crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: “Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy.”
Irish response to the crisis: a van in Dublin
The Fed has:
* Lowered the target for the Federal funds rate from 5.25% to 2%, and the discount rate from 5.75% to 2.25%. This took place in six steps occurring between 18 September 2007 and 30 April 2008; In December 2008, the Fed further lowered the federal funds rate target to a range of 0-0.25% (25 basis points).
* Undertaken, along with other central banks, open market operations to ensure member banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities. Central banks have also lowered the interest rates (called the discount ratein the USA) they charge member banks for short-term loans;
* Created a variety of lending facilities to enable the Fed to lend directly to banks and non-bank institutions, against specific types of collateral of varying credit quality. These include the Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF).
* In November 2008, the Fed announced a $600 billion program to purchase the MBS of the GSE, to help lower mortgage rates.
* In March 2009, the FOMC decided to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency (GSE) mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities during 2009.
According to Ben Bernanke, expansion of the Fed balance sheet means the Fed is electronically creating money, necessary “…because our economy is very weak and inflation is very low. When the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.”
Main articles: Economic Stimulus Act of 2008 and American Recovery and Reinvestment Act of 2009
On 13 February 2008, President Bush signed into law a $168 billion economic stimulus package, mainly taking the form of income tax rebate checks mailed directly to taxpayers. Checks were mailed starting the week of 28 April 2008. However, this rebate coincided with an unexpected jump in gasoline and food prices. This coincidence led some to wonder whether the stimulus package would have the intended effect, or whether consumers would simply spend their rebates to cover higher food and fuel prices.
On 17 February 2009, U.S. President Barack Obama signed the American Recovery and Reinvestment Act of 2009, an $787 billion stimulus package with a broad spectrum of spending and tax cuts. Over $75 billion of which was specifically allocated to programs which help struggling homeowners. This program is referred to as the Homeowner Affordability and Stability Plan.
Bank solvency and capital replenishment
Main article: Emergency Economic Stabilization Act of 2008
Common Equity to Total Assets Ratios for Major USA Banks
Losses on mortgage-backed securities and other assets purchased with borrowed money have dramatically reduced the capital base of financial institutions, rendering many either insolvent or less capable of lending. Governments have provided funds to banks. Some banks have taken significant steps to acquire additional capital from private sources.
The U.S. government passed the Emergency Economic Stabilization Act of 2008 (EESA or TARP) during October 2008. This law included $700 billion in funding for the “Troubled Assets Relief Program” (TARP), which was used to lend funds to banks in exchange for dividend-paying preferred stock.
Another method of recapitalizing banks is for government and private investors to provide cash in exchange for mortgage-related assets (i.e., “toxic” or “legacy” assets), improving the quality of bank capital while reducing uncertainty regarding the financial position of banks. U.S. Treasury Secretary Timothy Geithner announced a plan during March 2009 to purchase “legacy” or “toxic” assets from banks. The Public-Private Partnership Investment Program involves government loans and guarantees to encourage private investors to provide funds to purchase toxic assets from banks.
For a summary of U.S. government financial commitments and investments related to the crisis, see CNN – Bailout Scorecard.
For a summary of TARP funds provided to U.S. banks as of December 2008, see Reuters-TARP Funds.
Bailouts and failures of financial firms
Further information: List of bankrupt or acquired banks during the financial crisis of 2007-2008, Federal takeover of Fannie Mae and Freddie Mac, Government intervention during the subprime mortgage crisis, and Bailout
People queuing outside a Northern Rockbank branch in Birmingham, United Kingdomon September 15, 2007, to withdraw their savings because of the subprime crisis.
Several major financial institutions either failed, were bailed-out by governments, or merged (voluntarily or otherwise) during the crisis. While the specific circumstances varied, in general the decline in the value of mortgage-backed securities held by these companies resulted in either their insolvency, the equivalent of bank runs as investors pulled funds from them, or inability to secure new funding in the credit markets. These firms had typically borrowed and invested large sums of money relative to their cash or equity capital, meaning they were highly leveraged and vulnerable to unanticipated credit market disruptions.
The five largest U.S. investment banks, with combined liabilities or debts of $4 trillion, either went bankrupt (Lehman Brothers), were taken over by other companies (Bear Stearns and Merrill Lynch), or were bailed-out by the U.S. government (Goldman Sachs and Morgan Stanley) during 2008. Government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac either directly owed or guaranteed nearly $5 trillion in mortgage obligations, with a similarly weak capital base, when they were placed into receivership in September 2008. For scale, this $9 trillion in obligations concentrated in seven highly leveraged institutions can be compared to the $14 trillion size of the U.S. economy (GDP) or to the total national debt of $10 trillion in September 2008.
Major depository banks around the world had also used financial innovations such as structured investment vehicles to circumvent capital ratio regulations. Notable global failures included Northern Rock, which was nationalized at an estimated cost of £87 billion ($150 billion). In the U.S.,Washington Mutual (WaMu) was seized in September 2008 by the USA Office of Thrift Supervision (OTS). Dozens of U.S. banks received funds as part of the TARP or $700 billion bailout.
As a result of the financial crisis in 2008, twenty five U.S. banks became insolvent and were taken over by the FDIC.. As of August 14, 2009, an additional 77 banks became insolvent. This seven month tally surpasses the 50 banks that were seized in all of 1993, but is still much smaller than the number of failed banking institutions in 1992, 1991, and 1990. The United States has lost over 6 million jobs since the recession began in December 2007.
The FDIC deposit insurance fund, supported by fees on insured banks, fell to $13 billion in the first quarter of 2009. That is the lowest total since September, 1993.
According to some, the bailouts could be traced directly to Alan Greenspan’s efforts to reflate the stock market and the economy after the tech stock bust, and specifically to a February 23, 2004 speech Mr. Greenspan made to the Mortgage Bankers Association where he suggested that the time had come to push average American borrowers into more exotic loans with variable rates, or deferred interest. This argument suggests that Mr. Greenspan sought to enlist banks to expand lending and debt to stimulate asset prices and that the Federal Reserve and US Treasury Department would back any losses that might result. As early as March 2007 some commentators predicted that a bailout of the banks would exceed $1 trillion, at a time when Ben Bernanke, Alan Greenspan and Henry Paulson all claimed that mortgage problems were “contained” to the subprime market and no bailout of the financial sector would be necessary.
Both lenders and borrowers may benefit from avoiding foreclosure, which is a costly and lengthy process. Some lenders have offered troubled borrowers more favorable mortgage terms (i.e., refinancing, loan modification or loss mitigation). Borrowers have also been encouraged to contact their lenders to discuss alternatives.
The Economist described the issue this way: “No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmes have been ineffectual, and private efforts not much better.” Up to 9 million homes may enter foreclosure over the 2009-2011 period, versus one million in a typical year. At roughly U.S. $50,000 per foreclosure according to a 2006 study by the Chicago Federal Reserve Bank, 9 million foreclosures represents $450 billion in losses.
A variety of voluntary private and government-administered or supported programs were implemented during 2007-2009 to assist homeowners with case-by-case mortgage assistance, to mitigate the foreclosure crisis engulfing the U.S. One example is the Hope Now Alliance, an ongoing collaborative effort between the US Government and private industry to help certain subprime borrowers. In February 2008, the Alliance reported that during the second half of 2007, it had helped 545,000 subprime borrowers with shaky credit, or 7.7% of 7.1 million subprime loans outstanding as of September 2007. A spokesperson for the Alliance acknowledged that much more must be done.
During late 2008, major banks and both Fannie Mae and Freddie Mac established moratoriums (delays) on foreclosures, to give homeowners time to work towards refinancing.
Critics have argued that the case-by-case loan modification method is ineffective, with too few homeowners assisted relative to the number of foreclosures and with nearly 40% of those assisted homeowners again becoming delinquent within 8 months. In December 2008, the U.S. FDIC reported that more than half of mortgages modified during the first half of 2008 were delinquent again, in many cases because payments were not reduced or mortgage debt was not forgiven. This is further evidence that case-by-case loan modification is not effective as a policy tool.
In February 2009, economists Nouriel Roubini and Mark Zandi recommended an “across the board” (systemic) reduction of mortgage principal balances by as much as 20-30%. Lowering the mortgage balance would help lower monthly payments and also address an estimated 20 million homeowners that may have a financial incentive to enter voluntary foreclosure because they are “underwater” (i.e., the mortgage balance is larger than the home value).
A study by the Federal Reserve Bank of Boston indicated that banks were reluctant to modify loans. Only 3% of seriously delinquent homeowners had their mortgage payments reduced during 2008. In addition, investors who hold MBS and have a say in mortgage modifications have not been a significant impediment; the study found no difference in the rate of assistance whether the loans were controlled by the bank or by investors. Commenting on the study, economists Dean Baker and Paul Willen both advocated providing funds directly to homeowners instead of banks.
The L.A. Times reported the results of a study that found homeowners with high credit scores at the time of entering the mortgage are 50% more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage-compared with lower-scoring borrowers. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimated 588,000 strategic defaults occurred nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in the fourth quarter of 2008.
Homeowners Affordability and Stability Plan
Main article: Homeowners Affordability and Stability Plan
On 18 February 2009, U.S. President Barack Obama announced a $73 billion program to help up to nine million homeowners avoid foreclosure, which was supplemented by $200 billion in additional funding for Fannie Mae and Freddie Mac to purchase and more easily refinance mortgages. The plan is funded mostly from the EESA’s $700 billion financial bailout fund. It uses cost sharing and incentives to encourage lenders to reduce homeowner’s monthly payments to 31 percent of their monthly income. Under the program, a lender would be responsible for reducing monthly payments to no more than 38 percent of a borrower’s income, with government sharing the cost to further cut the rate to 31 percent. The plan also involves forgiving a portion of the borrower’s mortgage balance. Companies that service mortgages will get incentives to modify loans and to help the homeowner stay current.
Regulatory proposals and long-term solutions
Further information: Subprime mortgage crisis solutions debate and Regulatory responses to the subprime crisis
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 and derivatives, and enhanced authority for the Federal Reserve to safely wind-down systemically important institutions, among others.
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 June 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.
* Joseph Stiglitz: Restrict the leverage that financial institutions can assume. Require executive compensation to be more related to long-term performance. 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.
* Simon Johnson: Break-up institutions that are “too big to fail” to limit systemic risk.
* Paul Krugman: Regulate institutions that “act like banks ” similarly to banks.
* 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.”
* Warren Buffett: Require minimum down payments for home mortgages of at least 10% and income verification.
* 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.
* 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.)
* A. Michael Spence and Gordon Brown: Establish an early-warning system to help detect systemic risk.
* Niall Ferguson and Jeffrey Sachs: Impose haircuts on bondholders and counterparties prior to using taxpayer money in bailouts.
* Nouriel Roubini: Nationalize insolvent banks. Reduce debt levels across the financial system through debt for equity swaps. Reduce mortgage balances to assist homeowners, giving the lender a share in any future home appreciation.
* Paul McCulley advocated “counter-cyclical regulatory policy to help modulate human nature.” He cited the work of economist Hyman Minsky, who believed that human behavior is pro-cyclical, meaning it amplifies the extent of booms and busts. In other words, humans are momentum investors rather than value investors. Counter-cyclical policies would include increasing capital requirements during boom periods and reducing them during busts.
U.S. Treasury Secretary Timothy Geithner testified before Congress on October 29, 2009. His testimony included five elements he stated as critical to effective reform: 1) Expand the FDIC bank resolution mechanism to include non-bank financial institutions; 2) Ensure that a firm is allowed to fail in an orderly way and not be “rescued”; 3) Ensure taxpayers are not on the hook for any losses, by applying losses to the firm’s investors and creating a monetary pool funded by the largest financial institutions; 4) Apply appropriate checks and balances to the FDIC and Federal Reserve in this resolution process; 5) Require stronger capital and liquidity positions for financial firms and related regulatory authority.
The U.S. Senate passed a regulatory reform bill in May 2010, following the House which passed a bill in December 2009. These bills must now be reconciled. The New York Times has provided a comparative summary of the features of the two bills, which address to varying extent the principles enumerated by Secretary Geithner.
Law investigations, judicial and other responses
Significant law enforcement action and litigation is resulting from the crisis. The U.S. Federal Bureau of Investigation was looking into the possibility of fraud by mortgage financing companies Fannie Mae and Freddie Mac, Lehman Brothers, and insurer American International Group, among others. New York Attorney General Andrew Cuomo is suing Long Island based Amerimod, one of the nation’s largest loan modification corporations for fraud, and has issued 14 subpoenas to other similar companies. The FBI also assigned more agents to mortgage-related crimes and its caseload has dramatically increased. The FBI began a probe of Countrywide in March 2008 for possible fraudulent lending practices and securities fraud.
Over 300 civil lawsuits were filed in federal courts during 2007 related to the subprime crisis. The number of filings in state courts was not quantified but is also believed to be significant.
This section requires expansion. Implications
Estimates of impact have continued to climb. During April 2008, International Monetary Fund (IMF) estimated that global losses for financial institutions would approach $1 trillion. One year later, the IMF estimated cumulative losses of banks and other financial institutions globally would exceed $4 trillion. This is equal to U.S. $20,000 for each of 200,000,000 people.
Francis Fukuyama has argued that the crisis represents the end of Reaganism in the financial sector, which was characterized by lighter regulation, pared-back government, and lower taxes. Significant financial sector regulatory changes are expected as a result of the crisis.
Fareed Zakaria believes that the crisis may force Americans and their government to live within their means. Further, some of the best minds may be redeployed from financial engineering to more valuable business activities, or to science and technology.
Roger Altman wrote that “the crash of 2008 has inflicted profound damage on [the U.S.] financial system, its economy, and its standing in the world; the crisis is an important geopolitical setback…the crisis has coincided with historical forces that were already shifting the world’s focus away from the United States. Over the medium term, the United States will have to operate from a smaller global platform — while others, especially China, will have a chance to rise faster.”
GE CEO Jeffrey Immelt has argued that U.S. trade deficits and budget deficits are unsustainable. America must regain its competitiveness through innovative products, training of production workers, and business leadership. He advocates specific national goals related to energy security or independence, specific technologies, expansion of the manufacturing job base, and net exporter status.”The world has been reset. Now we must lead an aggressive American renewal to win in the future.” Of critical importance, he said, is the need to focus on technology and manufacturing. “Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy – and somehow still expect to prosper,” Jeff said. “That idea was flat wrong.”
Economist Paul Krugman wrote in 2009: “The prosperity of a few years ago, such as it was-profits were terrific, wages not so much-depended on a huge bubble in housing, which replaced an earlier huge bubble in stocks. And since the housing bubble isn’t coming back, the spending that sustained the economy in the pre-crisis years isn’t coming back either.” Niall Ferguson stated that excluding the effect of home equity extraction, the U.S. economy grew at a 1% rate during the Bush years. Microsoft CEO Steve Ballmer has argued that this is an economic reset at a lower level, rather than a recession, meaning that no quick recovery to pre-recession levels can be expected.
The U.S. Federal government’s efforts to support the global financial system have resulted in significant new financial commitments, totaling $7 trillion by November, 2008. These commitments can be characterized as investments, loans, and loan guarantees, rather than direct expenditures. In many cases, the government purchased financial assets such as commercial paper, mortgage-backed securities, or other types of asset-backed paper, to enhance liquidity in frozen markets. As the crisis has progressed, the Fed has expanded the collateral against which it is willing to lend to include higher-risk assets.
The Economist wrote: “Having spent a fortune bailing out their banks, Western governments will have to pay a price in terms of higher taxes to meet the interest on that debt. In the case of countries (like Britain and America) that have trade as well as budget deficits, those higher taxes will be needed to meet the claims of foreign creditors. Given the political implications of such austerity, the temptation will be to default by stealth, by letting their currencies depreciate. Investors are increasingly alive to this danger…”
Thomas Friedman wrote in May 2010 that technological and financial innovation have made us more globally interdependent, but that ethics and values have not kept up. He supported the ideas of author Dov Seidman, that “sustainable values” that reflect our interdependence should replace “situational values” that optimize outcomes for one at the expense of many others.
The crisis has cast doubt on the legacy of Alan Greenspan, the Chairman of the Federal Reserve System from 1986 to January 2006. Senator Chris Dodd claimed that Greenspan created the “perfect storm”. When asked to comment on the crisis, Greenspan spoke as follows:
The current credit crisis will come to an end when the overhang of inventories of newly built homes is largely liquidated, and home price deflation comes to an end. That will stabilize the now-uncertain value of the home equity that acts as a buffer for all home mortgages, but most importantly for those held as collateral for residential mortgage-backed securities. Very large losses will, no doubt, be taken as a consequence of the crisis. But after a period of protracted adjustment, the U.S. economy, and the world economy more generally, will be able to get back to business.
he economy of Greece is the twenty-seventh largest economy in the world by nominal gross domestic product (GDP) and the thirty-third largestby purchasing power parity, according to the data given by the International Monetary Fund for the year 2008. Its GDP per capita is the 25th highestin the world, while its GDP PPP per capita is also the 25th. Greece is a member of the OECD, the World Trade Organization, the Black Sea Economic Cooperation, the European Union and the Eurozone.
The Greek economy is a developed economy with the 22nd highest standard of living in the world. The public sector accounts for about 40% of GDP. The service sector contributes 75.8% of the total GDP, industry 20.8% and agriculture 3.4%. Greece is the twenty-fourth most globalized country in the world and is classified as a high income economy.
* 1 History
o 1.1 The Greek economy
o 1.2 2010 debt crisis
* 2 Maritime industry
* 3 Tourism
* 4 References History
See also: Economic history of Greece and the Greek world
GDP Growth of Greece compared to theEurozone between 1996 and 2006
The evolution of the Greek economy during the 19th century (a period that transformed a large part of the world due to the Industrial revolution) has been little researched. Recent research examines the gradual development of industry and further development of shipping in a predominantly agricultural economy, calculating an average rate of per capita GDP growth between 1833 and 1911 that was only slightly lower than that of Western European nations. Other studies support this view, providing comparative measures of standard of living. The per capita income (in purchasing power terms) of Greece was 65% that of France in 1850, 56% in 1890, 62% in 1938, 75% in 1980, 90% in 2007, 96.4% in 2008, 97.9% in 2009 and larger than countries such as South Korea, Italy, and Israel. The country’s post-World War IIdevelopment has largely been connected with the Greek economic miracle.
In 2004, Eurostat, the statistical arm of the European Commission, after an audit performed by the New Democracy government, revealed that the budgetary statistics on the basis of which Greece joined the European monetary union (budget deficit was one of four key criteria for entry), had been massively under-reported by the previous Greek government (mostly by not recording a large share of military expenses – although it was claimed that the differences were due to accounting practices, i.e., recording expenses when material was received rather than when ordered). However, even according to the revised budget deficit numbers calculated according to the methodology in force at the time of Greece’s application for entry into the Eurozone, the criteria for entry had been met. Official Eurostat calculation according to the current methodology is still pending for the 1999 budget deficit (entry application reference year); according to the same calculations, the budget deficit criterions were met in 2006.
The subprime crisis in the US, following the collapse of the housing sector boom, has sent ripples through the economies of many countries. During the high demand period for housing loans in the US, when the real estate sector was booming, people with a bad credit history, and a higher chance of defaulting on on their payments, were provided loans at higher-than-normal interest rates (sub-prime rates).
A decline in economic activity in the US resulted in lower disposable incomes and hence a decline in demand. Simultaneously there was a rise in supply due to repayments and foreclosures arising out of a higher interest rate. This triggered the subprime crisis.
Over the last few months, the world has been hit by the heat of the US subprime crisis. It was initially thought by some that other major world economies would not be significantly affected.
However, the crisis is quickly becoming a problem, affecting major economies worldwide both directly and indirectly.
Some experts feel that this crisis could match or even outmatch the economic devastation of the great depression.
Such sectors as stock markets and bank investment funds have been affected worldwide, especially in Europian and Asian countries.The central banks of many countries on these continents have taken evasive action to prevent credit crises that could lead to economic recession. The European Central Bank (ECB) took action to prevent a liquidity crunch in Europe. This intervention by the ECB was an major revelation. Some of its major impacts in Europe include:
* The French bank BNP Paribas had three investment funds that were connected to the subprime market in the US. The bank stopped withdrawals from these funds.
* Losses were faced by NIBC, a Dutch investment bank during the first half of 2007.
* Losses were faced by Dillon Read, the fund affiliated with UBS, the Swiss Bank.
* Rhineland Funding, which is affiliated with the German bank IKB, was substantially hit by the subprime crisis.
* The Japanese Yen did not benefit from the advantages of lower interest rates because of an increase in the value of the Yen. This increase was due to the US subprime crisis. Japan’s central bank has noted that the impacts of the crisis on the country have been far more intense than anticipated and that Japan’s economic growth has slowed considerably.
* Impacts have started to surface in China with a sharp fall in the shares held by Chinese banks. Shares held by the Bank of China fell by 6.4% and 4.1% in Hong Kong and Shanghai markets.
* In India, the rise in the value of the Rupee versus the US Dollar is expected to damage exports . Indian companies involved in mortgage processing for the US have faced a decline in work orders. India has also recently faced major falls in stock markets, which have been attributed, by many experts, to the US subprime crisis .
The Greek economy
Greece is a developed country, with a high standard of living and “very high” Human Development Index, ranking 25th in the world in 2007, and 22nd on The Economist’s 2005 worldwide quality-of-life index. According to Eurostat data, GDP per inhabitant in purchasing power standards (PPS) stood at 95 per cent of the EU average in 2008. Greece’s main industries are tourism, shipping, industrial products, food and tobacco processing, textiles, chemicals, metal products, mining and petroleum. Greece’s GDP growth has also, as an average, since the early 1990s been higher than the EU average. However, the Greek economy also faces significant problems, including rising unemployment levels, inefficient bureaucracy, tax evasion and corruption.
In 2009, Greece had the EU’s second lowest Index of Economic Freedom (after Poland), ranking 81st in the world. The country suffers from high levels of political and economic corruption and low global competitiveness compared to its EU partners.
Although remaining above the euro area average, economic growth turned negative in 2009 for the first time since 1993.[verification needed] An indication of the trend of over-lending in recent years is the fact that the ratio of loans to savings exceeded 100% during the first half of the year.
By the end of 2009, as a result of a combination of international (financial crisis) and local (uncontrolled spending prior to the October 2009 national elections) factors, the Greek economy faced its most severe crisis since 1993, with the second highest budget deficit (after Ireland) as well as the second highest debt (after Italy) to GDP ratio in the EU. The 2009 budget deficit stood at 13.6% of GDP. This, and rising debt levels (115% of GDP in 2009) led to rising borrowing costs, resulting in a severe economic crisis. Greece has been accused of trying to cover up the extent of its massive budget deficit in the wake of the global financial crisis. This resulted from the massive revision of the 2009 budget deficit forecast by the new Socialist government elected in October 2009, from “6-8%” (estimated by the previous government) to 12.7% (later revised to 13.6%). This revision (which, as claimed by members of the previous government, at least in part reflected the Socialists’ failure to control tax collection during their first months in office) has seriously undermined Greece’s credibility leading to higher borrowing costs for Greece.
The Greek labor force totals 4.9 million, and on average work the second most hours per year amongst OECD countries, after South Korea. TheGroningen Growth & Development Centre has published a poll revealing that between 1995 and 2005, Greece was the country whose workers worked the most hours/year among European nations; Greeks worked an average of 1,900 hours per year, followed by the Spanish (average of 1,800 hours/year).
2010 debt crisis
See also: 2010 European sovereign debt crisis
In the first weeks of 2010, there was renewed anxiety about excessive national debt. The CEE Council has argued that the predicament some mainland EU countries find themselves in today is the result of a combination of factors, including over-expansion of the eurozone, and a combination of monetarist policy, tax evasion,  pursued by local policy makers and EU central bankers.
Some senior German policy makers went as far as to say that emergency bailouts should bring harsh penalties to EU aid recipients such as Greece. However, such plans have been described as unacceptable infringements on the sovereignty of eurozone member states and are opposed by key EU nations such as France.
Some politicians, notably Angela Merkel have sought to attribute some of the blame for the crisis to hedge funds and other “speculators” stating that “institutions bailed out with public funds are exploiting the budget crisis in Greece and elsewhere”.
On 23 April 2010, the Greek government requested that the EU/IMF bailout package (made of relatively high-interest loans) be activated. The IMF had said it was “prepared to move expeditiously on this request”. The initial size of the loan package was €45 billion ($61 billion) and its first instalment covered €8.5 billion of Greek bonds that became due for repayment. On 27 April 2010, the Greek debt rating was decreased to BB+ (a ‘junk’ status) by Standard & Poor’s amidst fears of default by the Greek government. The yield of the Greek two-year bond reached 15.3% in the secondary market. Standard & Poor’s estimates that in the event of default investors would lose 30-50% of their money. Stock markets worldwide and the Euro currency declined in response to this announcement.
On May 1, a series of austerity measures was proposed. The proposal helped persuade Germany, the last remaining holdout, to sign on to a larger, 110 billion euro EU/IMF loan package over 3 years for Greece (rataining a relatively high interest of 5% for the main part of the loans, provided by the EU). On May 5, a national strike was held in opposition to the planned spending cuts and tax increases. Protest on that date was widespread and turned violent in Athens, killing three people.
As of July 19, 2010 reports on evolutions in the Greek economy have been modestly positive, citing a 46% budget deficit reduction in the first half of 2010, major labor and pension system reforms and early indications of a recession milder than originally feared.
Main articles: Greek shipping and List of ports in Greece
The Greek maritime fleet is the largest in the world, at approximately 18% of the worlds maritime fleet, and the shipping industry is a key element of Greek economic activity dating back to ancient times. Today, shipping is one of the country’s most important industries. It accounts for 4.5% of GDP, employs about 160,000 people (4% of the workforce), and represents 1/3 of the country’s trade deficit.
During the 1960s, the size of the Greek fleet nearly doubled, primarily through the investment undertaken by the shipping magnates Onassis and Niarchos. The basis of the modern Greek maritime industry was formed after World War II when Greek shipping businessmen were able to amass surplus ships sold to them by the United States Government through the Ship Sales Act of the 1940s.According to the BTS, the Greek-owned maritime fleet is today the largest in the world, with 3,079 vessels accounting for 18% of the world’s fleet capacity (making it the largest of any other country) with a total dwt of 141,931 thousand. In terms of ship categories, Greece ranks first in both tankers and dry bulk carriers, fourth in the number of container ships, and fourth in other ships.However, today’s fleet roster is smaller than an all-time high of 5,000 ships in the late 1970s.
Main article: Tourism in Greece
Greece attracts more than 16 million tourists each year, thus contributing 15% to the nation’s Gross Domestic Product. In 2008, the country welcomed over 16.5 million tourists. The number of jobs directly or indirectly related to the tourism sector were 659,719 and represented 16.5% of the country’s total employment for 2004.
CNN) — European Union leaders have hailed an agreement to use funds from both Europe and the International Monetary Fund to help financially-crippled Greece as important for the euro zone.
So what’s the problem in Greece?
Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn struck. This whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the eurozone.
How big are these debts?
National debt, put at €300 billion ($413.6 billion), is bigger than the country’s economy, with some estimates predicting it will reach 120 percent of gross domestic product in 2010. The country’s deficit — how much more it spends than it takes in — is 12.7 percent.
So what happens now?
Greece’s credit rating — the assessment of its ability to repay its debts — has been downgraded to the lowest in the eurozone, meaning it will likely be viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped most of its pre-election promises and must implement harsh and unpopular spending cuts.
Will this hurt the rest of Europe?
Greece is already in major breach of eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe’s economic scale, with Portugal and the Republic of Ireland coming under scrutiny. If Europe needs to resort to rescue packages involving bodies such as the International Monetary Fund, this would further damage the euro’s reputation and could lead to a substantial fall against other key currencies.
So what is Greece doing?
As already mentioned, the government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by more than €10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts and applied tough new tax evasion regulations.
Are people happy with this?
Predictably, quite the opposite and there have been warnings of resistance from various sectors of society. Workers nationwide have staged strikes closing airports, government offices, courts and schools. This industrial action is expected to continue.
How are Greece’s European neighbors helping?
Led by Germany’s Chancellor Angela Merkel, all 16 countries which make up the euro zone have agreed a rescue plan for their ailing neighbor. The package, which would only be offered as a last resort, will involve co-ordinated bilateral loans from countries inside the common currency area, as well as funds and technical assistance from the International Monetary Fund (IMF).
According to a joint statement on the EU Web site, a “majority” of the euro zone States would contribute an amount based on their Gross Domestic Product (GDP) and population, “in the event that Greece needed support after failing to access funds in the financial markets.”
This means Germany will be the main contributor, followed by France. Although the announcement did not mention any specific figure, a senior European official quoted by Reuters said that the potential package may be worth around 20 billion euro (US$26.8 billion).
However any European-backed loan package requires the unanimous approval of European Union members, meaning any euro zone country would have effective veto power.
That is Dubai-sky piercing towers, rotating buildings, spectacular architectural designs,flow of petro-dollers,broad and clean road notworks, etc,etc.Businessmen, investers, and lusury-seekers, used to visit Dubai with all zeal.
Some weeks ago, Dubai had issued to international investers, bonds worth $1.9trillion,whiched sent the message that its economic position is unshakable!
But now that foundation has shaken!
inability to rapay loan instalments
DUBAI government has announced just recently, that it is,for the timebeing , not in a position to repay its outstanding debt of $7,40,000.At the same time, Government owned mega finance institution-DUBAI WORLD also declared that it may not be able to repay any loan for 6months.This ‘Dubai World’ is engaged in different business enterprises like-transport,ship building,township building,etc.A sister-concern of Dubai world,a building construction company, named NAKHEEL is also telling that it requires some more time to repay its debt instalments.
All these indicate that Dubai’s financial foundation is …… SHAKING!
Dubai, unlike other six emirates of UAE is not a country rich with oil resources.This city state is purely a business city wholly depending upon tourism and other businesses.Dubai World, in a haste to attract world enterprenuers started spending more and more on building fine roads, star hotels,etc. Foreign institutional investers also invested much here, especially during the last four years.But, for some reason, may be due to economic crisis mainly, FIIs didnot turn to Dubai for investment..AS a result, real-estate businessin Dubai suddenly collapsed.This made an impact on other businesses also.
Dubai world, has business tie-ups in different countries including India.Thes projects, may be delayed( resulting in cost increase), or dropped, or prolonged.
Unemployment problem may arise in Dubai. Enterprises may have to retrench a portion of their employees.!0 lakh Indians are working in Dubai and other UAE countries.
Foreign Institutional investers, who have business ties with Dubai World, may face loss.70 financial institutions have lent credits to Dubai world.
Banks in Duabi may face crisis.
When the world is recovering from last year’s economic recession, this may push it back to same position.
Ray of hope.
Inspite of all these, experts hope that it is possible to recover.It comes out of past experience. Dubai had faced similar economic crisis in 1999.Then Abudhabhi, another emirette in UAE, had helped Dubai by lending a loan of $1,00,000.Abudhabhi is a financially stable country..It can help.
But the quantum of need this time is muchmore than it was in 1999.Just on 29th,November,Abudhabhi has announced that it would concider the financing aspect,item wise, taking each main transaction on merits.It has also clarified,it is not going to take full responsibility of all loans.
There are many wonderful constructions in Dubai.( some photoes are attached).It appears more like a fancy, a show biz. than a result of concrete planned develpoment projects.
* Top ten financial institutions of the world
By greater optimism and assurances by America, major part of the world succumbed to globalization and WTC agreements. American companies, for their profit, encouraged the buying habits of people in the globe,…