The present the economic slowdown in our economy has been long coming. In 2002, we were in the clutches of an economic recession when the dot com bubble burst. But, we were given a reprieve when the housing bubble filled the vacuum and now that the housing bubble has also burst, we have nowhere to go. This crisis has been long coming and it has taken the whole world with it. It all began with the fall in real estate prices. Many of the investment banks held or traded an unbelievable amount of collateralized debt which made up a large part of their balance sheet. To make matters worse, all the credit rating agencies gave these instruments AAA ratings which enabled them to be traded all over the place. These highly liquid instruments remained liquid only as long as the real estate prices climbed and when the housing bubble burst, the real estate prices crashed. Many of the largest and oldest investment banks got stuck with these securities whose value was fast depreciating and which no longer had buyers. This meant that they had to do massive write-offs to account for this. As a result many of the banks had to do multibillion dollar cleaning up which left them with little trust or money and led to many seeking
debt advice and not many people at all bieng debt free.
Now, this had a twofold effect; the rating agencies started to downgrade some of the banks and the interbank credit swaps froze. Many of the banks had to declare bankruptcy and others were saved by the treasury using taxpayer’s money. The freezing of the interbank swaps meant that there was an intense credit crunch in the system. The Federal Reserve tried to infuse more funds and to ease the situation by lowering the interest rates. But they have not been completely successful. Now this credit crunch means only one thing. Many of the companies have used up their capital and in the face of massive layoffs, the domestic consumers demand slowed down. Along with the unavailability of funds and reduced consumer demand, companies had no other option but to do massive layoffs and try to weather out the storm. The credit crunch and the ensuing problems have spread out from the US to other parts of the world. Many countries in Europe have already seen a negative GDP. The loss of jobs and financial hardships is expected to continue for six more quarters. The Obama administration will have a lot of work cut out for them.
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Many of the largest and oldest investment banks got stuck with these securities whose value was fast depreciating and which no longer had buyers. This meant that they had to do massive write-offs to account for this. As a result many of the banks had to do multibillion dollar cleaning up which left them with little trust or money and led to many seeking
debt advice and not many people at all bieng
debt free.
