Financial Crisis Part III

By | October 21, 2021

China is seen by many as the great challenger. But China also seems to be weakened by the financial crisis. The order intake is not as it was a short time ago; factories must cease and the internal social tensions worry. On the other hand, China has recently used its large foreign exchange reserves to buy large amounts of securities issued by the US government. China is also injecting an extra $ 600 billion into its economy. To save the United States so that the American state can step in with rescue packages? Maybe, but also to save itself and ensure continued export and stability. This is how the interdependence between giants works.

Today, according to dictionaryforall, many people see ideological reorientation in the wake of the financial crisis. They believe in seeing a return to more state-based solutions, more state regulation of markets. Some of the big questions in that connection are who will pay for the help packages that are on the way. To what extent should the state and taxpayers (“Main street”) or financial institutions (“Wall Street”) pay themselves? Should the gains from the upswing be private and the payment for the downswing public? What came out of the G20 summit in Washington (Nov. 15, 2008) and where did the dividing lines go at the summit?

Many also wonder what will happen now with the fight against poverty and the UN’s Millennium Development Goals and the work against climate change. But the picture of possibilities is not entirely black at all. But the picture of possibilities is not entirely black at all. Some see opportunities for a “greener” economy – including the fact that car manufacturers may have to switch to “greener” cars.

Fact 1: Violent trust

Especially in four periods in the last century, technological advances have contributed to a tremendous enthusiasm and sharp rise in the price of securities:

  • Early 20th century: New trains, transatlantic radio transmissions, long-distance transmission of electricity.
  • 1920s: Mass production of cars, highways, commercial radio broadcasts, extensive electrification of production.
  • 1950s and 1960s: mass introduction of television, people moving to the suburbs, space travel.
  • Late 1990s: access to the Internet, innovations in computer and information technology, the emergence of Internet-based business models.

Fact 2: «Subprime loans»

“Subprime loan” is a financial term for credit to borrowers who are considered “below prime” (low income, no job…). They are more likely than others to default on their loans. “Subprime” includes both mortgages, car loans and credit card loans.

The scope of subprime loans developed rapidly as the increasingly hot housing market throughout the 1990s and 2000s led to high demand for loans also from smaller prime customers. Many financial institutions entered this market when interest rates were low and US authorities relaxed the regulations. Lenders (and borrowers) thought that in a rising housing market, subprime borrowers would also be able to pay for themselves.

When fixed and very low interest rates after the first years were replaced by floating and significantly higher interest rates, many borrowers had problems. In the third quarter of 2007, subprime loans accounted for about 13% of outstanding mortgage debt in the United States and as much as 55% of forced sales.

Fact 3: The G20 summit in November 2008

At the G20 meeting in Washington 15-17. November, the Heads of State agreed on some basic principles that must apply to the financial sector:

  • Strengthen transparency and predictability
  • Improve the regulations for the financial market through more effective regulation
  • Strengthen international cooperation
  • Reforming the International Monetary Fund, the World Bank and other financial institutions

Supervision without loopholes
Everyone – players in the financial markets, financial products and regions – must be subject to regulated supervision. Admittedly, this is a national responsibility, but it also calls for closer international cooperation and common standards.

Transparency and trust
Everyone involved must be given the opportunity to assess the risk of products. The accounting rules in the world must become more equal. Unregulated areas must be subject to rules and stricter requirements for equity. … All rating agencies must be registered and operate more openly and under the supervision of the authorities.

The tax havens
Regulators need to protect the financial system from the risks and distortions of competition from tax havens.

Global monitoring
Among other things, the Monetary Fund (IMF) and a couple of other intergovernmental organizations must play a more prominent role.

Financial Crisis 3