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What Caused The Current Global Financial Crisis?

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Christopher Profile
Christopher answered
The current global economic crisis is by far the most serious since the 1929 Stock Market Crash, which started the infamous Great Depression of the early 1930s. The countries most affected by the current crisis are those that are the most industrialized and westernized, including the United States, the United Kingdom, all continental European countries to differing degrees and parts of Asia. The three main causes behind the economic crisis include the collapse of the housing market, a very dramatic drop in stock market values and the bankruptcy or merger of some of the largest companies and financial institutions in the world. All of these are interrelated factors and when combined, they wiped out trillions of dollars worth of wealth worldwide, caused millions of job losses in the United States alone and made it almost impossible for many young professionals, workers or middle-class couples to purchase a home, due to a lack of loans and bank credits.

The Beginning of the Crisis

[Source: The London Times]

Most people will point to September 2008 as the beginning of the current financial crisis, since this is when Lehman Brothers, an international financial services company which loaned money to major banks, filed for bankruptcy on September 14, 2008. Lehman Brothers was an international giant and the firm's bankruptcy did not only have ripple effects throughout the United States, but also in London. In fact, Lehman Brothers was at the centre of the financial boom that the British capital city had experienced over the past several years and its vibrant banking sector turned it into the economic capital of Europe. All of this changed in September 2008.

The collapse of Lehman Brothers caused markets around the world to decline by dramatic proportions. The Dow Jones, for example, dropped by more than 500 points in just one day of trading, representing the single worst day for the New York City-based stock exchange since the terrorist attacks of September 11, 2001.

The Madoff Scandal

[Source: MSNBC]

While the stock market collapse of Autumn 2008, the housing crisis and credit crunch were bad enough, the economic situation was made even worse by the most severe case of corporate fraud ever committed in world history. In March 2009, the 71 year old billionaire entrepreneur and con artist was convicted of running a massive Ponzi scheme, through which he stole approximately $65 billion from thousands of investors who were promised high returns on their money. According to his own admission, Madoff deposited hundreds of millions of dollars provided to him by investors into his personal business bank account, rather than actually investing these funds and making high levels of interest for his clients, as had been promised. Occasionally, clients would ask to withdraw money, and in order to do this, Madoff simply used funds deposited with him by other investors. The prominent entrepreneur ended up stealing unprecedented amounts of money from 4,800 investors.

The judge presiding over the Madoff case decided to send him straight to an infamous jail in Manhattan, where the convict must wait for his sentencing in June. Considering Madoff's advanced age, he will almost certainly spend the rest of his life in prison and American justice system opens the possibility that the former stock exchange chairman will receive a 150 year sentence and be forced to pay out as much as $170 billion in restitution to his victims.

The Madoff affair did not only have a deeply negative impact on thousands of private investors who lost their life savings, but also on a long list of charitable organizations. For example, the New York-based JEHT Foundation—which promoted international justice, health care and tolerance—went bankrupt due to the Madoff scandal, since the Ponzi scheme wiped out the organization's endowment fund. Major international financial institutions have also lost billions through the Ponzi scheme. For example, Austria's Bank Medici lost a staggering $2.10 billion, HSBC was swindled out of $1 billion, while the Royal Bank of Scotland lost hundreds of millions of dollars.

The Madoff investment scandal has also taken a very tragic, human toll. Two victims of the scheme are believed to have committed suicide, because they could not bear to live with their loss. William Foxton, a 65 year old retired British soldier killed himself in February 2009; he shot himself in public at a park in Southampton, shortly after he discovered that his entire life savings—and that of his family—had been wiped out by Madoff. A French aristocrat, Thierry de la Villehuchet, who lived in New York City and had co-founded one of the investment companies which had been affected by the Madoff scam, reportedly killed himself in his Madison Avenue office, by slitting his left wrist.

Economic disaster in Iceland

[Source: AllVoices.com]

The country most affected by the current global economic crisis is undoubtedly Iceland, a tiny nation of only 320,000 inhabitants, which remains independent of the European Union. Iceland earned the dubious reputation of all but declaring itself nationally bankrupt, when all of the country's major banks collapsed in September 2008. The three largest banks were nationalized or taken into receivership following the collapse and panic spread throughout the country. The situation threatened to get even further out of control, and in order to prevent this, the country's stock exchange, the Nordic Iceland Exchange, was shut down for eight days. When the stock exchange did re-open, 90 percent of its value had evaporated.

People who had money in savings accounts or otherwise invested in the Icelandic Krona—the country's national currency—lost the vast majority of its value against the euro and other major currencies, following the collapse of the country's economy. While in January 2008, one euro was worth 90 krona, by autumn the euro exchange rate reached a staggering 340 krona. This means that the currency lost over two thirds of its value and thus wiped out the savings of people not only in Iceland, but in other parts of north-western Europe. In fact, the Isle of Man was most heavily hit by Iceland's economic collapse. Thousands of residents on the Isle of Man had investments with Icelandic banks that went into receivership. As such, the island' government had to empty out 50 percent of its cash reserves, in order to offer residents deposit insurance.

Economic Chaos in Eastern Europe

[Source: The Telegraph]

The financial crisis did not only strike the northern tip of Europe, but also the generally poorer, formerly socialist states of the east. Hungary was by far the most heavily hit and the only factor that saved the country from declaring national bankruptcy was a $25 billion loan that the Hungarian government received from the International Monetary Fund (IMF). Hungary became the first member of the European Union to seek such a large loan from the IMF and other international bodies, in order to avoid complete financial collapse. Since then, the Hungarian forint has lost 25 percent of its value against the euro, and this has fueled the number of personal bankruptcies.

The biggest problem in this formerly socialist state is that most people who took up bank loans when purchasing houses or cars did so in foreign currencies, especially the euro and the Swiss franc. Yet because Hungarian citizens receive their salaries in forints, their monthly payments on mortgages and other loans skyrocketed, as the value of the forint dropped sharply against major world currencies. The economic crisis is even more troubling in Hungary because the national debt is now nearly 80 percent of the country's gross domestic product (GDP), unemployment is at 10 percent and the economy is shrinking by 6.5 percent.

In addition to Hungary, Ukraine and the Baltic states are all experiencing very deep difficulties, partly  because their economies rely heavily on selling exports to the West, at a time when more prosperous countries are spending much less.

Bankruptcies and Unemployment in the United States and Britain

[Source: San Francisco Gate]

Despite President Barack Obama's massive $775 billion stimulus package, the United States remained locked in a very severe recession. Nearly 600,000 Americans end up losing their job each month and the unemployment rate has been steadily rising since late 2008. If the US automobile industry goes bankrupt, every layer of society will feel the repercussions. Chrysler has already filed for bankruptcy protection and if its is unable to restructure in the coming months, tens of thousands of auto workers will be out work and thousands of dealerships in the US and Canada will have to close, endangering the livelihoods of a large portion of the population.

The situation in Britain is also dire. According to the most recent statistics, almost one third of all housing tenants owe their landlords money, due to rental arrears. Additionally, Britain's economic well-being relied heavily on London's powerful financial sector, which is now weaker than it has been in many years. Economists and politicians are cautiously optimistic, however, that the US, UK and Western Europe may start to climb out of this very deep recession by early 2010, provided that the various stimulus packages work as hoped.
Anonymous Profile
Anonymous answered

  1. Banks that make us pay for our houses 10 times.

  2. Selfishness that people have in their egos.

  3. Corruption

  4. Greed

  5. Hatred

  6. What you give is what you get back.

  7. Violent weather is caused by all of the above. The "High Universe" is in control, not man or woman.

  8. We need to change our ways now before The "High Universe" does it for us!
Anonymous Profile
Anonymous answered
Try greed as the real reason
Anonymous Profile
Anonymous answered
Well, it's very simple. There has been an overstock in many purchases. What's wrong with that? The more merchandise you have, the harder it is to sell it @ the appropriate unit rate price. This causes an overload in businesses forcing the government to produce more money. This is called inflation, and this is one of the main causes of the Great Depression. Many people believe that producing more money is the answer. If you have too much money, it will push many banks into fore closer because they can't hold money and end up giving away people's life savings! Thank You Pres, Bush!!!!!!

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