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Venezuela Crisis The Crisis in Bolivarian Venezuela refers to the socioeconomic crisis that Venezuela has undergone since Hugo Chavez’s tenure stretched out into the present administration of Nicolas Maduro. The political foundations of the challenges go back to 2016, when the Supreme Tribunal of Justice suspended the election of four legislators for alleged voting irregularities. Venezuela has seen near-daily demonstrations with anti and pro-government protesters taking to the streets over a long period of time. The crisis influenced the normal existence of Venezuelans on different levels, consumer prices rose 800%, the economy shrunk by 18.6%, and hunger raised to the point that the "Venezuela's Living Conditions Survey" discovered about 75% of the population had lost a normal of 8.7 kg in weight because of absence of legitimate sustenance. The increment in unemployment, political corruption, shortage of fundamental products, closure of companies, downturn of productivity and competitiveness are few problems that have worsened the crisis. Because of anti-government protests, many people were killed in protestrelated violence since April, 2017. Venezuela was divided into Chavistas, the name given to the followers of the socialist approaches of the late President Hugo Chavez, and those people who cannot wait to see an end to the 18 years in energy of his United Socialist Party (PSUV). After the socialist pioneer died in 2013, Nicolas Maduro, also of the PSUV, was chosen the president on a guarantee to proceed with Mr Chavez's policies.
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Chavistas took measures to curtail inequality and for lifting numerous Venezuelans out of poverty. But the opposition says that since the PSUV came to control in 1999, the socialist party has dissolved Venezuela's popularity based foundations and mishandled its economy. Chavistas thus blame the opposition of being elitist and of misusing poor Venezuelans to their own wealth. A sequence of events further increased tensions between the government and the opposition leading to renewed street protests. Key was the unexpected declaration by the Supreme Court on 29 March, 2017 that it was taking over the powers of the opposition-controlled National Assembly. The opposition said that the ruling undermined the country's separation of powers and took Venezuela a step closer to one-man rule under President Nicolas Maduro. The court contended that the National Assembly had neglected past Supreme Court rulings and was therefore in contempt. The key demands of the Chavistas included expulsion of the Supreme Court justices who issued the 29 th march ruling, leading a general election in 2017, formation of a "humanitarian channel" to allow medication to be imported to counter deficiencies in Venezuela, release of all the "political prisoners". In spite of every day protests, President Maduro was not willing to give in to the opposition's demand for early presidential elections so he announced the creation of a constituent assembly. President Maduro says the opposition was trying to illegally overthrow his elected government and blames the country's problems on an "economic war" being waged against him. He argues that a new constitution would "neutralise" the opposition and promote peace in Venezuela. Opposition leaders claim the move was an attempt by President Maduro to maximise his power and cling on to it for longer. They argue that the process of setting up a constituent assembly and drawing up a new constitution would almost certainly mean that regional elections due to be held this year and presidential polls scheduled for December 2018 would be delayed. They also fear that the constituent assembly would further weaken the National Assembly. International media has described conditions in the country as “brutal� with the citizens receiving the worst of it. With the blame game going on, it remains to be seen how Venezuela will cope with the situation. By: Jessica Kaur
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OPEC oil price shock, 1973
The Organization of the Petroleum Exporting Countries (OPEC), which then comprised twelve countries, including Iran, seven Arab countries (Iraq, Kuwait, Libya, Qatar, Saudi Arabia and the United Arab Emirates), plus Venezuela, Indonesia, Nigeria and Ecuador, was formed at a Baghdad conference on September 14, 1960. OPEC was organized to resist pressure by the "Seven Sisters" (seven large, Western oil companies) to reduce oil prices. The 1973 oil crisis began in October 1973 when the members of the Organization of Arab Petroleum Exporting Countries proclaimed an oil embargo. The embargo occurred in response to United States' support for Israel during the Yom Kippur War. By the end of the embargo in March 1974, the price of oil had risen from US$3 per barrel to nearly $12 globally; US prices were significantly higher. The embargo caused an oil crisis, or "shock", with many short- and long-term effects on global politics and the global economy. It was later called the "first oil shock", followed by the 1979 oil crisis, termed the "second oil shock”.
Causes: • President Nixon prompted the embargo when he decided to take the United States off of the gold standard in 1971. While it sent the price of gold skyrocketing, it also sent the value of the dollar down. •
The plummeting value of the dollar hurt OPEC countries. Their oil contracts were priced in U.S. dollars. That meant their revenue fell along with the dollar. The cost of imports that were denominated in other currencies stayed the same or rose. OPEC even considered pricing oil in gold, instead of dollars, to keep revenue from disappearing. 5
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For OPEC, the last straw came when the U.S. supported Israel against Egypt in the Yom Kippur War. On October 19, 1973, Nixon requested $2.2 billion from Congress in emergency military aid for Israel. The Arab members of OPEC responded swiftly, halting oil exports to the United States and other Israeli allies.
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Egypt, Syria, and Israel declared a truce on October 25, 1973. But OPEC continued the embargo until March 1974. By then, oil prices had skyrocketed from $2.90/barrel to $11.65/barrel.
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The oil embargo is widely blamed for causing the 1973-1975 recessions. But the recession and the stagflation that accompanied it were caused by U.S. government policies. They included Nixon's wage-price controls and the Federal Reserve's stop-go monetary policy. Wage-price controls forced companies to keep wages high, which meant businesses lay off workers to reduce costs. At the same time, they couldn't lower prices to stimulate demand, which also fell.
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To make matters worse, the Fed raised and lowered interest rates so many times that businesses were unable to plan for the future. As a result, they kept prices high which worsened inflation. They were afraid to hire new workers. That exacerbated the recession.
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The oil embargo aggravated inflation, already at 10 percent for some commodities, by raising oil prices. It came at a vulnerable time for the U.S. economy. Domestic oil producers were running at full tilt. They were unable to produce more oil to make up the slack. Furthermore, U.S. oil production was declining as a percent of world output.
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It also worsened the recession by shaking consumer confidence. People were forced to change habits, making it feel like a crisis that the government tried unsuccessfully to resolve. This lack of confidence made people spend less.
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The national speed limit was reduced to 55 miles per hour to conserve gas. In 1974, daylight savings time was instituted year round. Also, higher gas prices meant consumers had less money to spend on other goods and services. This lowered demand, worsening the recession. By: Rohan Shad 6
Euro Zone Debt Crisis The Euro zone consists of Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia ,Austria, Belgium, Cyprus, Estonia, Finland, France, Germany and Spain. These countries abandoned their former currencies and allowed the newly formed European Central Bank (ECB) to make economic policies. On 7th February 1992, The Maastricht treaty was signed and went into effect on November 1st 1993. One of its goals was to "establish economic and monetary union". The objectives were to create a single currency that is Euro and to ensure price stability. The creation of the Monetary Union (MU) consisted of three steps: firstly, there was liberalisation of capital movement, next there's convergence of economic policies, and finally there is the establishment of the European Central Bank (ECB) and a single currency (Euro). The Maastricht Treaty also established that the Central Bank is independent of national and community political authorities. The ECB is run by 19 governors from each one off the nation. The ECB was empowered to make only monetary policies and that’s the core of the problem Europe faces: the ECB made monetary policies (i.e.; how much money is there in the market and what the interest rates will be) while member states continued to make fiscal policies (i.e.; how much a government will collect, borrow and spend the money). After the creation of the ECB, countries like Greece borrowed large amounts of money at very low-interest rates. Interest rates for loans to smaller European countries which were previously above 20% became less than 5%.
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Countries usually spend more than they collect in taxes. The government wants money and the investors were ready to lend money if they receive a bit of interest in return. For country like Germany, investors didn’t have to think much for lending as Germany had a strong economy and paid debts on time whereas if compared to Greece, its government collapsed in 1970, small economy, low tax income so initially investors resisted lending but later on they thought if Greece can’t pay back the debt then Germany will as they share the same currency. So, through this the Southern European countries borrowed a lot of money. Greece began to borrow recklessly – primarily so politicians could use it for populist programmes like high pensions, low taxes, higher salaries etc. This led to increasing government debt – which Greece managed to repay with even more borrowed money and had been misreporting government budget data. In Ireland and Spain at that time this cheap borrowing lead to housing bubble, this means you can buy a house which you can’t afford with cheap loan and then to repay the loan you just sell the house and make a bit of extra profit. The same happened in USA when too many people were trying to sell their house the price of property went down. The investors were left with no money for lending and hence the cheap borrowing of European Countries came to halt and Global Recession began. All companies who invested in Ireland, Spain housing were close to bankruptcy. Those that would still lend money to Greece wanted higher interest rates. This meant Greece couldn’t refinance its debts and needed a bailout. The fears created in Greece then spread to other countries that were risky. If this continued, Greece could be declared bankrupt. Normally, a small country like Greece defaulting wouldn’t cause international concern. But because of the Euro zone, if Greece defaults, Spain or Ireland could be next. Then Italy, Portugal, France and Germany – and with that the entire world will be dragged into the major economic crisis. To overcome the crisis Greece received several bailouts from European Union and International Monetary Fund. Affected countries sold government owned companies and made it easier to start business. Secondly EU set up fund of €200 billion to keep up failing companies and government. Thirdly European Central Bank started buying government debt, so the investors who invested can now sell it to ECB and immediately recover their investment. Further ECB started checking government expenditure and force the countries who is over spending. By: Monika Sinha 8
Balance of Payment Crisis The Balance of Payments is a combination of two different accounts - the current account and the capital account. The current account is a repository of all the transactions that a country does for goods and services, e.g., oil imports, capital goods imports, IT services exports, BPOs etc. When India provides a service like IT outsourcing or sells goods like refined petroleum products, it gains foreign currency in exchange. This currency is usually dollars (may not always be the case but let's assume for this answer that it is). The other side of the coin is the capital account which records financial transactions like foreign direct investment, foreign institutional investment, NRI deposits, remittances etc. Now, Balance of Payments = Current Account + Capital Account When we say that the BoP is in balance it means that a surplus or deficit in one of the accounts is compensated by a corresponding deficit or surplus in the other. In India, typically our current account is in deficit and this deficit is compensated by a surplus in the capital account thanks to the huge investments by FIIs. When we say that the BoP is in not in balance, it means that there is a surplus or deficit in one account that is not being met by a corresponding deficit or surplus in the other account.
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Again, taking the case of India, especially in 1991, there was huge deficit in the current account as the major expenditure was done by government on welfare, defence, education and health care to fix the problem of poverty and unemployment. So, government expenditure increases continuously with no increase in revenue. But since BoP is an accounting entity and the balance has to be maintained, compensation comes from the foreign exchange reserves held by the Reserve Bank in terms of dollars, gold, and special drawing rights (SDR) with the IMF. By withdrawing a proportional amount of dollars from its coffers and releasing to the market to make payments, the RBI forces the BOP to balance. In the late eighties oil prices had started climbing. This increase in prices of oil coupled with the inelastic demand for it led to a severe deficit in our current account. Consequently, the central bank had to release large amounts of its forex reserves to compensate for the deficit. By the second quarter of 1991, our reserve had dropped to $600 M from $1.2 B, which was barely enough to cover imports for next three weeks. This depletion of reserves and consequently the increase in probability of a country defaulting on its foreign payment obligations is called a BoP crisis. By: Shikha Mangtani
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Wall Street Crisis The Wall Street Crash of 1929 was when the Dow Jones Industrial Average (Stock Market Index) dropped by 25% in a span of four days. The crash began on October24, 1929 and continued till October29, 1929. This day is known as ‘Black Tuesday’. The crash began on October 24, 1929. This day came to be known as Black Thursday. The stock market opened at 305.85. It immediately fell 11 percent, signalling a stock market correction. Trading was triple the normal volume. Wall Street bankers feverishly bought shares to prop it up. The strategy worked. By the end of the day, the Dow was down just 2 percent. On Friday, the positive momentum continued. The Dow rose 1 percent to 301.22. A short trading day on Saturday removed that gain. The Dow closed at 298.97. On Black Monday, October 28, the Dow fell 13 percent to 260.64.The next day was Black Tuesday. The Dow fell 12 percent to 230.07. Panicked investors sold 16,410,310 shares. It was the most devastating Stock Market Crashes when taken into consideration the full extent and duration of its effects. Causes of the Crisis: •
Credit Boom: In the 1920s, there was a rapid growth in bank credit which lead to surplus money available with the investors and when the change of confidence came in october1929, those who had borrowed were particularly exposed and to redeem their debts by selling of shares.
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Buying on the margin: Buying on credit was the practise of buying shares on credit. This meant you only have to pay 10-20% of the value of share and the remaining 80% value was borrowing. It is said that there were many ‘margin millionaire’ investors but when the market exposed and stock prices fall in 1929 these margin millionaire investors got wiped out off the market. It also affected those banks who lent money to these investors.
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Creation of Speculative Bubble: A lot of the stock market crash can be blamed on over exuberance and false expectations. In the years leading up to 1929, the stock market offered the potential for making huge gains in wealth. It was the new gold rush. People bought shares with the expectations of making more money. As share prices rose, people started to borrow money to invest in the stock market. The market got caught up in a speculative bubble. – Shares kept rising, and people felt they would continue to do so. 11
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Mismatch between production and consumption: The 1920s saw great innovation in production techniques, especially in industries like automobiles. The production line enabled economies of scale and great increases in production. However, demand for buying expensive cars and consumer goods were struggling to keep up. This caused some of the disappointing profit results which precipitated falls in share prices
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Weakness in banking system: America had over 30,000 banks and if these banks run short on deposits there were high chances of banks going bankrupt. Many banks in the rural area went bankrupt due to agricultural recession and the banking industry was affected badly leading to collapse of 5000 banks.
Impacts on the economy: •
The Crash led to higher trade tariffs as governments tried to shore up their economies.
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In America unemployment went from 1.5 million in 1929 to 12.8 million by 1933. It took 23 years for the U.S. market to recover
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The crash forced people to sell businesses and use their life savings. That's because brokers called in their loans when the stock market started falling.
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By July 8, the Dow was down to 41.22. That was a 90 percent loss from its record-high close of 381.2 on September 3. It was the worst bear market in terms of percentage loss in modern U.S. history. By: Shubhankar Jindal 12
Stock Market Crashes 1987 ‘Black Monday’ “Black Monday” was the name familiar in the history of the stock market world. On October 19, 1987,”with the drop in the index points of the Dow Jones Industrial by 22.6 per cent in value, its largest single day percentage drop ever to be recorded. The crash came to visibility after a two-week period in which the Dow dropped 15 per cent. “Business leaders were shaken by the collapse, which wiped out huge amounts of the market value of their companies. And they seemed to have been caught by surprise. But many leaders were confident the panic would pass.” The Stock Market Crash of 1987 or "Black Monday" was the largest one-day market crash in history. The Dow lost 22.6% of its value or $500 billion dollars on October 19th,1987. Both 1986 and 1987 were known as the banner years for the stock market. During these years there was an extension of extremely powerful bull market that had started. The lower interest rates are the sources for takeovers, leveraged buyouts and also mergers, so this is kind of chaos situation that has been created during the period. Many companies were scrambling to raise capital to buy each other out. The capital that raised by selling junk bonds would go towards the purchase of the desired company that the company or the stock issuer might be interested. How the Stock Market Crash of 1987 Began During this growth boom, the SEC found it increasingly difficult to prevent shady IPOs and conglomerates from proliferating. In early 1987, the SEC conducted numerous investigations of illegal insider trading, which created a wary stance among many investors. During the same time, inflation and overheating became a problem because of high rate of economic and credit growth. Many trading firms began to utilize portfolio insurance to protect themselves from the further stock dips. Portfolio insurance is a hedging strategy that uses stock index futures to cushion equity portfolios against broad stock market declines. As the interest rates rose, many institutional money managers had made it as an opportunity to hedge their portfolios at the same time. On October 19th 1987, the stock index futures market was flooded with billions of dollars’ worth of sell orders within minutes, causing both the futures and stock markets to crash. 13
Additionally many investors having a common stock attempted to sell simultaneously, which completely overwhelmed the stock market.
On October 19th 1987, $500 billion in market capitalization was evaporated from the Dow Jones stock index. Markets in nearly every country around the world plunged in a similar fashion. At the time of market crash individual investors who heard the news had to rush to call their brokers to sell their stocks. This was unsuccessful because each broker had many clients. Many people lost millions of dollars instantly.. After the October 19th plunge, many futures and stock exchanges were shut down for a day. Within the short period of the crash, the Federal Reserve decided to intervene to prevent an even greater crisis. During this period short term interest rates were instantly lowered to prevent a recession and banking crisis.. The postcrash bull market was driven by companies that bought back their stocks that that the considered to be undervalued after the market meltdown. The other reason why stocks continued to rise even after the crash of the Dow Jones was because of the Japanese economy and stock market that were embarking on their own and also the massive bull market, which helped to pull the U.S. stock market to previously unforeseen heights. After the great recession of 1987 there has been a significant change in stock market system, there was an reinforcement of the system has been done by the introduction of circuit breakers, which were put into place to electronically halt stocks from trading if they plummet too quickly. By: Swatantra Priya 14
Japanese Asset Price Bubble It was in the late 1980’s, Japan was on the heels of three-decade long “Economic Miracle” where the country experienced its infamous ‘Bubble Economy’ due to Speculative Mania. The real estate and stock market prices were greatly inflated. Japan’s Nikkei Stock Average hit an all time high in 1989, only to crash in a speculator fashion shortly after causing their real estate bubble to collapse, thereby throwing the country into a severe financial crisis and long period of stagnation known as ‘Lost Decades’. Rapid Acceleration of asset prices, Overheated Economic Activity along with the Uncontrolled Money Supply and majorly the Credit Expansion were the characteristics of the Bubble Formation.
From 1960 until 1990, post-war (World War II) Japan was the world’s fastest growing economy. At an average annual GDP growth rate of 6.10%, the record expansion was coined the “Asian Miracle”, but the miracle unfortunately turned sour. From 1990 to 2010, growth slowed dramatically and only averaged 0.97% annually, inflation turned negative and public debt increased exponentially; the period was eventually termed the Lost Decades. In 1990, nine of the world’s top ten banks in asset size were Japanese, but a mere decade later, two large banks had collapsed and none remained ranked among the world’s top ten rankers. In year 1985-1991, asset price bubble affected the entire nation. Though the differences in the impact depended on three main factors- ‘the size of the city’, ‘The Geographical Distance from Tokyo and Osaka & the ‘Historical Importance of the City in the Central Government’s Policy. Cities closer to the Tokyo metropolis experienced far greater pressure in the asset prices compared to cities located in further from the Tokyo metropolis. The 6 major cities affected by the great price inflation wereYokohama (kawakawa), Nagoya (Aichi), Kyoto (Kyoto), Osaka (Osaka) & Kobe (Hyogo). 15
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Deregulation and Liberalization of Banking- In the 1970s, the economy of Japan shifted to an economy in which savings > investment, and pressures for a financial system based on competitive banks and market-based interest rates became irresistible. Because of new competitive environment, Banks began diversifying into profitable but risky investments in small and mid-sized companies and in real estate. Mortgage limits rose from 65% of home value on average to 100% and between 1983 and 1989, and Japanese banks doubled their lending to firms involved in the real estate sector from 6% of total lending to 12%. Deregulation of these prices thus created the necessary conditions for a boom in equity and land prices.
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Financial Innovation and Speculation- The equity and real estate bubble was drilled by an increase in speculation enabled by financial innovation. Regulation could not keep up with this situation. Relative to US Dollars, Yen was appreciated to a great extent, hence exporters dropped trade, hence, banks and corporate bodies turned to speculate bodies to boost profit.
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Prolonged Monetary Easing- he cheap credit and increased liquidity fueled run up of equity and land prices in the Japanese market. In the year 1986, the Bank of Japan responded to a short-term economic slowdown resulting from Yen appreciation by monetary stimulus; money supply expanded and interest rates were reduced to postwar lows. The policy was successful in stimulating growth, but was also responsible for strong increases in consumption, investment and risk-taking, directly fueling an asset price bubble.
Japanese Government Response Policy mistakes are not only credited for partially causing the 1986-1990 asset price boom, but also for allowing the crisis to endure after the bust. The government’s response not only included lacked commitment but it was simply too little and too late. In terms of monetary policy, government took five years to reduce interest rates to the 0% nominal bound. The immediate response was slow and not nearly aggressive enough which led to the expansion of the crisis. In terms of the long-term response, the government decided to provide subsidies to banks, that would otherwise fail, and by pushing them to extend credit to firms despite limited prospects of repayment. By: Sonal Agarwal
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Credit Crisis of 1772: Earliest Financial Crisis Around 1772, people were highly confident on banks and whole economic growth was dependent on credit system. Neal, James, Fordyce and Down was a London banking house established in 1757. On 8 June 1772, Alexander Fordyce, a Scottish banker and a partner in the banking house fled to France to avoid debt repayment, people lost confidence in financial institution and the resulting collapse of the firm stirred up panic in London and spread to other parts of Europe such as Netherlands and Scotland. Relationship between Great Britain and thirteen colonies of America became worse. Alexander Fordyce daring speculation include speculative investments, investing in financial instruments bearing high risk with the aim of profiting from the market price fluctuations, also speculative selling of stocks of East India Company which brought him fame and lot of wealth.
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Effects of the Crisis: Effects on London: East India Company were generating huge profits but because of death of millions of people in Bengal due to drought. And company refusal to intervene leads to protests in South India. This led to fall of shares of East India Company drastically. The bank, Neal, James, Fordyce and Down, was under huge debts and thus, Fordyce fled to France to avoid debt repayments. This provoked credit crunch. The crisis was a major blow to the British financial system and led to the collapse of around 22 banks in England, with savings lost worth around ÂŁ 3 billion.
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Effects on Scotland: As credit crisis soon became an international crisis. It led to the failure of speculative banks like Scottish bank, Douglas, Heron & Company, popularly known as Ayr Bank. Ayr bank was involved in issuance of Bills in the markets of Scotland, and London. Failure of Neal, James, Fordyce and Down bank caused a huge panic in the creditors of the Scottish bank as it was the largest buyer of Scottish bills in London. This led to a pressure developing on the bank to repay its creditors, with very less assets on its balance sheet. The partners of Ayr Bank paid around £ 663,397 to the creditors.
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Effects on Netherlands: Cities like Amsterdam in Netherlands were also affected. Merchant banking firm Clifford and Sons and many more went bankrupt because of Dutch investors’ investments in East India Company.
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Effects on American Colonies: In the period between 1952 and 1972, the exports from North America outnumbered the imports to North America. This extensive high level export was powered by the credits granted by the British financial institutions. British merchants, who were involved in lending to the American colonies, were now asking for a debt repayments. The American colonies were facing the problem to pay the debts in such a short span of time. These led to huge problems in maintenance of the balance of payments in the colonies.
Outcome: British Parliament passed Tea Act in 1773 which gave East India Company monopoly to trade its huge amount of tea which was lying unsold without taxes to recover from its debts. Now company can export the tea directly to the colonies without paying any regular taxes at lower cost. This led to a huge uproar in the colonies and led to the boycott of tea. It is later known as Boston Tea Party, 1773.
By: Anjulika
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Latin American Crisis 1980 The period of 1980s is referred as the ‘LOST DECADE’. Because many LATIN AMERICAN countries was not able to repay their –FOREIGN debt. In the 1970s the LATIN AMERICAN countries borrowed a huge amount from the US commercial banks and other creditors in name of industrial development, as the economy of the country was soaring at that time, therefore everyone was willing to provide them with loans. As the result of it, at the end of 1970 the external debt was only $29million,but at the end of 1978, that number had skyrocketed to $159million. The percentage increased at a cumulative annual rate of 20.9 percent, or 50 percent of the regions Gross Domestic Product (GDP). Now, this is how the great debt crisis in Latin America triggered , Firstly what is debt crisis? It is simple situation when a country is not able to repay back its borrowed amount. In the year 1970, the world economy was facing great depression, as the result of which the oil prices rose upto 300 percent. And most Latin American countries namely Brazil Argentina and Mexico, being huge importer of oil , had to bear the increased prices of oil. And as the result of this there was an economic slowdown , the countries was not able to repay back the amount they borrowed as loan from various US commercial banks and other creditors. The new policies led to the depreciation of currency (decrease in the value of currency), which means that they had to pay more of a currency to buy any unit. Which meant that it was more harder for the country to repay back their loan they had borrowed, from various countries that financial institution, because the amount they had to pay back increased. The money that had been borrowed was external debt and had been borrowed from international creditors and now that international lender of money began increasing their interest rate, which worsen the situation for the Latin American countries as they had repay the amount borrowed with high rate of interest. As a result of the increase in oil prices and the import cause and then the economic slowdown of the country, the currency devaluation and increase in the interest rate lead to the economic stagnation of the Latin American countries. The combination of these factor meant that their national income of insufficient to repay back the amount they borrowed and this gave rise to the debt crisis of Latin American countries. 19
After the crisis had hit the country, the INTERNATIONAL MONENTARY FUND (IMF) came for its rescue and decided to lent money. The IMF was established in the year 1994 to foster global monetary cooperation secure financial stability, promote high employment and sustainable economic growth . But these help from the IMF comes with a predefined conditions that every country has follow. There were many conditions that IMF imposed on the Latin American country. Few of them were •
Privatization- It means the transfer of business, industry and service from public to private ownership and control
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Removal of tariff barriers – switching from import substitution to export oriented trade policy.
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To implement austerity plans and programs that lowered total spending in an effort to recover from the debt crisis.
Latin America's growth rate fell dramatically due to government austerity plans that restricted further spending. Living standards also fell alongside the growth rate, which caused intense anger from the people towards the IMF, a symbol of "outsider" power over Latin America. By: Riddhi Jain
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Global Financial Crisis The 2008 financial crisis was the worst economic disaster since the Great Depression of 1929. It occurred despite aggressive efforts by the Federal Reserve and Treasury Departmentto prevent the U.S. banking system from collapsing.It led to the Great Recession. That's when housing prices fell 31.8 percent, more than during the Depression. Global Financial Crisis or Financial Crisis of 2007-2008 was result of shortage of liquidity in the market. The main causes of crisis were less or no liquidity and lending of loans to the unreliable people without proper scrutinizing of the necessary and legal documents like person’s income, any pending loans on that person etc., i.e. lending to subprime mortgages. The first sign was shown in 2006 when the house prices started to decline. The popular investment bank, Lehman Brothers announced its bankruptcy in September 2008 and the process surpassed to other banks and insurance companies also like AIG, Goldman Sachs etc. During the 1999 to early 2006, there was very rapid growth in the Real Estate sector. The IB’s both private and looked this as huge profit-making opportunity. To avoid recession in 2000-01, the Federal Reserve had already reduced the federal fund rate from 6.5% to just 1.75%. So, this make the things easy for the IB’s to raise up the funds from reserve at a very lower rate. As a result, they raised as much as fund as they can raise from the reserve and started lending loans to public at a lower the interest rate than earlier with more lending to subprime mortgages over prime mortgages.
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Secondly IB’s started purchasing mortgages from mortgage lenders to heavily invest in housing and making bigger profit. They then converted these into CDOs and MBSs and rated property as risky, okay, safe with different rate of interest upon them. But they never saw the bubble which was coming beneath them. As they heavily lend the funds to subprime mortgages, they were not able to turn up with interest as well as capital which lead to heavy losses to all the IB’s. Their last hope was also hit by the supply surplus. The IB’s were thinking that they can adjust this loss via selling CDOs and MSBs, but due to supply surplus the prices of the housing nosedived, which led to heavy losses and bankruptcy of the major and almost all big IBs.
Also, the US govt spent additional 700 Billion USD to bail out these IBs and insurance companies, thereby affecting the economies of the whole world. Now about the consequences, every crisis have deep and negational effect on the economies of the whole world. Here also the major impacted category was the middle to upper middle class. The market which was collapsed had lowered the prices of the real estate far less than their cost prices, thereby incurring huge losses. Not only did this affect consumers, but business too found it harder to borrow funds to finance expenditure. A lack of business expenditure could have a negative effect on both the demand and supply-side of the economy; a lack of investment both reduces aggregate demand as well as leads to a decrease in the productivity and possibly size of the workforce. The financial crisis of 200708 has taught us that the confidence of the financial market, once shattered, can't be quickly restored. But the silver lining is that, after every crisis in the past, markets have come out strong to forge new beginnings. By: Namit Gupta
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Two Sides of A Tale: An American Dream or an Economic Collapse “Having a house of your own, taking pride in a property and engaging in a community for the long term “, this is said to be every Americans’ dream. But what happens when this harmless dream leads to the collapse of an entire economy. This is what happened in The United States of America between 20072010.The prices of housing fell dramatically in 2007. This led to the subprime borrowers becoming unable to pay their debt and thus resulted in the nationwide banking emergency. This came to be known as the Subprime Mortgage Crisis. Before moving ahead, what do you mean by ‘subprime’? A subprime mortgage is a type of loan granted to individuals who have poor credit histories. Because subprime borrowers present a higher risk for lenders, subprime mortgages charge interest rates above the prime lending rate. Causes Apart from the burst of the United States Housing Bubble, easy loan availability because of loan incentives provide by government , clubbed with a long –term trend of rising housing prices, the borrowers were encouraged to takes loans in aspirations to quickly refinance at more favourable terms. However, with the burst of bubble, their hopes of same were also burst, as the prices of real estate fell at an alarming rate. The borrowers became unable to pay their debts back which led to the crash of banking sector as well. Further, the real problem with the Collateralized Debt Obligations (CDOs) was that the buyers did not know how to price them. This was because it was very complicated and quite new.
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Early Indicators Before every storm, the winds speed up. Similarly, before any crisis, the will be some danger alarms, if being heard, would result in a complete different outcome. Same was the case with the crisis. Warren Buffett addressed his shareholders, in 2003, “In our view, however, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.” By 2004, the housing prices were skyrocketing and by June 2006, the rates were as high as hitting 5.25 percent. The National Association of realtors, reported that the median prices of existing home sales fell 1.7 percent from the prior year. These situations, had they been taken into consideration, maybe, the loss the economy suffered would have been minimised. Impacts •
Impact on USA: In the aftermath of the crises, Real estate prices had fallen by 20% and a prediction of fall of 35% was made for future. The total loss amounted to $8.3 trillion . The Real GDP contracted and did not grow until 1st quarter of 2010. In February 2013, the real GDP remained 5.5% below its potential level. Unemployment rate rose from 8% to 10% by late 2009. And most importantly, U.S. total National debt rose 66% GDP to 103% by the end of 2012.
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Impact on India: India, being an economy based on domestic market, and not on exports, the impact face by it was quite limited. Because all economies are interlinked, India did see a slow growth in the global economy.
Conclusion Any crisis, be it small or big, leaves a lasting scar on the economy. Burst of the housing bubble followed by the sub prime crisis, the real estate and banking sector of The United States was left paralysed. It can be seen, by early 2013, U. S. Stock market had recovered its pre- crisis peak, however , the housing prices are still near low points and the unemployment remains elevated. It has come a far way, but the economy still needs to continue recovering. By: Jayni Shah
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