Global Financial Crisis : Its Origin

           Yeh jo world hai naa world….. yeh har waqt kissi naa kissi se ladta hi rehta hai….. Chahe who Terrorism ho ya phir religion ya phir “Financial crisis”…Yes the most recent problem before the World economy is the ongoing Financial crisis started in the US supposedly by the negligence of the “Big Brother” :- The Federal Reserve… The negligence is already accepted by the former head of the FED, Mr. Allan Greenspan in front of the U.S. Senate.
           The financial crisis or the “credit crunch”, is more popularly known as the “sub-prime crisis”. The credit crunch means that there is no liquidity in the market, less of cash flow and more of assets whose value is rapidly falling. It all started in America with the “sub-prime mortgage loan”.
           It begins like this: an American wanting to live the famed American dream, “having a house”. So he seeks a loan, a “housing loan” But the issue is that he does not have enough credit to back the loan. Here comes the dream of another American, this time a Bank who sanctions the loan, which is more likely to be defaulted and thereby taking risk. Now the bank invests this money somewhere and the chain is built. So a bubble is made, fondly called “a housing bubble”.
           Now when someone in the chain defaulted, usually starting with the people lower down the chain, the investors started losing faith in the “securitized mortgages” and alas, the so called Housing Bubble bursts :-‘bhooommm’ and gave way to a liquidity crisis….. Indeed, a dangerous equation. The whole business based on mortgages and derivatives received a knee jerk. At this point of time the government had to step in and inject volumes of cash and bail-outs to keep their economy on track
           The first victims were the banks which have a highly leveraged nature, the “investment banks”. Remember, Bear Sterns, now acquired by JP Morgan Chase, was the first of the bail-outs. Those who did not seek bailouts even when there conditions was very bad, “Mooh ke bal ghir gaye”….. Guess whom I am pointing towards. “Lehman Brothers”, aapprox 150 year old institution, had to file for Bankruptcy. Two pillars of the US investment banking had already affected one shattered and the other collapsed. The next in the list was Merrill Lynch which is now acquired by Bank of America. Many others included Freddie Mac, Fannie Mae, and Washington Mutual etc.
           It adds fuel to a decade old debate that the “investment bank” cannot sustain itself; it needs to be controlled under a “commercial bank”. It’s like once the investor looses its confidence in the company or an organization or any institution for that matter the equation worsens the respective. The American government has given a bail out package of 700 billion USD to restore the economy and win back the confidence to the investor and get the cash flowing again in the market.
           Still the economy is under recession. And it might some time to get back on the growth track… But this does not end here. There are a lot many aftermaths …. I would soon be making another post to discuss them… for the time I would like to invite readers to discuss This particular issue.....