Facing a world economic crisis

18 September 2008 Sören Zschoche 55 Comments Economy

In 2006 the German economist Max Otte published a book with the title “The crash comes“, in which he pointed up the risks of the present housing bubble in the U.S. and the fact that most of these houses were sold on credit to people who actually couldn´t afford such high debits. He also predicted an enormous fall in the value of the dollar and a new world economic crisis in which all finally ended. When I read his book one year ago I thought either this guy is a bit crazy or this book is one of the most ingenious ones I ever read, nowadays I´m more given to the latter case.

Only now many people understand how serious the crisis is and the wishful thinking that governments could´t rescue every bank like they did in the case of Bear Stearns, Fanny Mae or Freddie Mac slowly disappears. But what are the consequences when the once fourth biggest investment bank of the U.S. files under chapter 11? First of all the stock quotation falls and many bank employees who believed their company are loosing everything their savings and later their jobs. That sounds bad but the real problem is another one, for example Lehman Brothers has a value of nearly 700 billion Dollars on the passive side securities, bonds, mortgages all these things are on the active side of other bank, funds or insurance companies. So if one bank falls under chapter 11 it´s logical that others will follow, but others could also be insurance companies like AIG although I´m not sure at this moment if the FED really has the nerve to let the biggest insurance company of the U.S crash. Sure this goes on so long till the market has adjusted all overratings and bad credits. That´s also why the governments won´t help the banks anymore, because they wouldn´t solve the problem and unless they help the faster the “crisis” or adjustment will be over, so we could say the crisis has just begun.

However let´s get back to the world economic crisis because a world financial crisis doesn´t absolutely have to be a world economic one, it´s just an actuator. The problem is that the people have forgotten that the international money supply has achieved absurd high worth, during the world industrial production stayed relative constant. So what did we do with all that money hadn´t that inevitably lead into an super inflation ? The answer is no because we always found ways to invest our money and funny bubbles like the Asia, DotCom or commodity-bubble arise which always burst again. By the way one reason for the incredible high money supply is also the fact that the issue banks always pumped more money into the system when a bubble burst so that the investors aren´t so gloomy. However these bubbles weren´t a big problem but the people have disregarded that since more than 10 years there accrued a new bubble, a super bubble, the housing bubble, founded on weak mortgages worth 9000 trillion U.S. dollar. This bubble burst now and what we are facing is the situation that the people have to find a new thing to invest in, before they realise that there is actually too much money in the system and this brings us to a very big danger because in my opinion the new investment target will be gold. But when the gold price will achieves to 2000-3000$ per unce the issue banks won´t be able anymore to cover the banknotes they printed. Finally the people will loose their trust in money and a super inflation coupled with a deep recession would lead into a financial failure.

55 Comments »

  • Michael Lutz said:

    There was no question that the housing market was going to destroy the American economy. In 2006 the effidence was visable in the unbalanced supply and demand of houses. Houses were being built at an unprecidented rate with no demand evident to back up the housing production. Greed was driving everyone at that point. Banks were greedy to cash in on as many mortgages as possible and consumers were greedy to sell their houses a beyond normal rates for high returns as well as builders. The government should have seen this coming and placed a hold on banks back in 2006 from allowing them to distribute mortgages like candy throughout the United States knowing that it was impossible for all these mortgages to be paid for. This was for a number of reasons. One reason is that many of these houses sit empty with no buyers. Second these Adjustable rate mortgages and housing prices were way beyond what the average american could afford.

    What’s left for the American economy. I don’t believe that anyone has a solid answer to this question. I say that prayer at this point definetly can’t hurt. Personally I don’t believe that the rest of the world can stand by and watch the United States economy crumble for the fact that American spending fuels their economies.

    The best solution for America, though it will take years to accomplish, is the shift of production to return to the United States. The return of production will bring about more jobs and increase individual wealth in America. That is the solution we have been waiting for at that is the bailout that is needed in America. Failure to push businesses to pursue this venture will lead to economic failure at some point.

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  • ISA savings said:

    Stumbled upon a post and thought I would share with you guys. Had a similar opinion but will just want to get your views first. http://jessescrossroadscafe.blogspot.com/2008/06/barclays-warns-of-financial-storm.html

    Thanks for sharing

  • The bailout plan | Investing | World Financial Blog said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • P.Nageshwar.Rao said:

    Hi,
    financial crisis…is stage where proper ractification should be made… investments measures should be taken companies have too many options but not using money is there but confiedence of investment is lacking portfolio investment.. is the area ..take out new formula…of investment.. tie up wit govts reults public interest..for investment.. in asian markets.. as savings are there with people.. for US MARKETS SOFTWARE N REALESTATE.is the back bone…money generation is possible..gold deposits..mines…gives in current situation..in asian market..hold is there..but..govt intervension make it possible

  • P.Nageshwar.Rao said:

    Hi,
    there is disturbance that yielded investors to get market clash govt should have intrvained early that would made possible to investors major holdings also led to the market crash.. beyond the norms investments taken place … pool of money withdrawn on single shot.. it made critical imbalances..in market

  • Rodolfo Ornelas Chávez said:

    I congratulate World Financial Blog for this so much responsible article “Facing a world economic crisis”, which differs so much with most of analisis about the actual crisis, that are mainly useless apologetic.

    Please forgive my very bad english.

    Rodolfo Ornelas Chávez, from Mexico.

  • The bailout plan | the daily john said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • Forex Grid said:

    Yeah, I always thought that this crisis was predictable…

  • David Dzidzikashvili said:

    Current global financial crisis was a result of greed by large investment & financial institutions, CEOs and individual investors, whose policies dragged whole world down and resulted in inflation, unemployment, foreclosures and bankruptcies. The worst still yet to come in 2009. There is a need for more stable financial system that leaders around the world can agree on to guarantee long-term stability. In addition, the investors who personally were involved in the greed schemes that caused the economic chaos should be arrested and jailed for their involvement in the world economic catastrophe. We can’t tolerate anymore some individuals’ greedy aspirations ruining the lives of people around the world.

  • yamlal aryal said:

    it is really very hard time for the common people all over the world. it came all of a sudden and no one was ready to face it. that’s why many people lost their job and many company went bankrupt. there is certain causes about this big problem that is 1. American housing policy 2. so called war against the terrorism. American banks were completely failure how and where they need to invest where highly educated CEO are working but their strategy not working properly. while making investment they need to think about long term prospective and its consequences. why other banks which are working in the world not failed or got huge amount loss. for example Standard Charter bank which is global bank and still doing well though other baks suffers lot.
    the American war against terrorism is not giving good response and rather it is making us to suffer more. they pounding millions of dollar a day on its military and apparatus. there some people like brokers they found the place to make unexpected speculation about oil price and it went up to 150 dollar a barrel . They were not able to hold that and now oil price is decreasing its lowest ever price. for among all the causes Americans are more responsible and they are going down to a big well with pulling all others who are behind them. But this is very bad feelings and experiences for them and they need to think about how to make strategy and do not involve worldwide them self in the name of maintaining peace and restoring democracy. they are not the only to guide all of us to maintain democracy. Forget about other country what they are doing first solve the problem inside your country.

  • Forex scalping said:

    Unfortunately we will face the worst situation in coming 2009.

  • Mr. Divyang Joshi said:

    Hi,

    The article is all about the US crisis and its cause. Currently US Govt face major problem of liquidity. As ” the best sollution of poison is poison itself.” Why not govt start to add more liquidity into market? Even govt can offer some good investemtn opportunity to the ivestors like, govt bond. Govt can increase their gold reserve and issur more currency into market. so, liquidity may increase. which leads demand among the people.
    The steps of US govt like 700 billion dollar package, they can issue some package so banks can reform and again start to doing business. US Govt can also attract other country to invest in US by issuing Bonds. So, they will get funds, which they can use for solving the problem of crisis.

  • Steven Burda said:

    In the end, everything will be “fine” …

    Thank you.
    - Steven Burda, MBA
    http://www.linkedin.com/in/burda
    http://www.cio.com/article/print/470122

  • Racquel said:

    This world economic crisis is something that most people tend to take at face value. It has deeper implications than what we are merely hearing. It is a great sign of the END TIME.People should concentrate on trying to please G_d instead of their pockets.

  • Khusnora said:

    As i think, today all of us are facing natural cycle. Each system has its ups and downs. Unfortunately, we are crossing with rapid but predictable down. Without doubt, one of the chief cause of current situation (from my point of view) is the fact that companies became too independant from authorities and people relied too much on this system. Consequently, this factor became a root for world crisis. Nevertheless, as history shows humanity was always able to recover and even be stronger))) So let’s be optimistic when it comes to our future

  • Muzito Anne marie said:

    Oh my goodness!!!
    the current financial crisis is as the result of greed and leack of good accoutability of how to bring their economies more efficient to satisfy theit people’s needs instead they spend sleepless night seeking the way to fill their own pockets rather than create incentives that would push people to invest into productive business for sustainable development or well bing of the nation.

    Thanks.

  • dolarkumar said:

    Very good sight-
    My view :-
    Every sale is purchase and every purchase is sale.The sale and purchase constitute one identical act, an exchange between commodity-owner and an owner of money.If this circulation stop, the economic crises can take her place. More and more money started to convert in to commodity ( Like share stock, land & buiding, metal etc). Conversion was very huge. Therefore,buyer disappeared. This appears to be root of crise. From : Dolarkumar Shah, Attorney-at-law, Maliwada road, JUNAGADH (Gujarat state) INDIA

  • The bailout plan | writteninfo.com said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • The bailout plan | Diroloo said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • The bailout plan | blogeconomia.net said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • Breaking News Update – The bailout plan said:

    [...] on something more and more banks will fall under chapter 11 like I discussed in my last post “Facing a world economic crisis” yet. I think after the shock waves are finished in the banking sector they will achieve [...]

  • The day after Lehman Brothers - Economy - World Financial Blog said:

    [...] nothing. Stock quotes of AIG, Fannie MAE, Freddie MAC are starting to rise again, when I wrote “Facing a world economic crisis” one year ago I thought the government had decided to choose the quick and painful way to solve the [...]

  • The year after Lehman Brothers | Diroloo | All About loans, mortgages and much more said:

    [...] nothing. Stock quotes of AIG, Fannie MAE, Freddie MAC are starting to rise again, when I wrote “Facing a world economic crisis” one year ago I thought the government had decided to choose the quick and painful way to solve the [...]

  • The year after Lehman Brothers said:

    [...] nothing. Stock quotes of AIG, Fannie MAE, Freddie MAC are starting to rise again, when I wrote “Facing a world economic crisis” one year ago I thought the government had decided to choose the quick and painful way to solve the [...]

  • Finlay Richardson said:

    i always avoid to have bad credit because i want a great credit score;:-

  • Lucas Parker said:

    i am always avoid to have bad credit because bad credit is difficult to repair”,.

  • Security Light  said:

    Bad Credit is of course hard to erase so always maintain a good credit record*`,

  • Compact Fluorescent Bulb : said:

    at one point in our life we will always have some bad credit because of some unpredictable factors ..

  • Dumbbell Set Weights · said:

    i hate it when i get some bad credit, but that is life and you sometimes you end up with a bad credit ‘

  • Transistor %0A said:

    bad credits can happen at any point in your life so be prepared to always get some extra income “-:

  • Vitalie said:

    Every sale is purchase and every purchase is sale.The sale and purchase constitute one identical act, an exchange between commodity-owner and an owner of money.
    Thanks for the article.

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  • darshan said:

    Reasons for failure of world economy
    According to my opinion the main reason is unnecessary productions and unorganised system of the government for the failure of world economy.
    I am going to investigate these two categories of the statements.
    First is unnecessary productions
    I mean there is variety of productions for satisfy a need. Need changed through technological innovations but the productions changed with the technological innovation for the market competitiveness. The major problem is starting here. So many investors investing their capital for capturing the market competitiveness but the demand for the same good never increased for their purpose. So there is a market failure for the good and services. However the producers intend the people for the consumptions of their good and services. It means so many substitutions for a satisfaction of a need of the consumers. In the market mechanism the consumers also feel complications about the productions that which is good ?
    So here we have to mention the production for the people even not the production of the people
    Here I mention the production for the people, which express technological innovation with the targeting people for the production
    Here I mention as the ‘production of the people’ mean the technological innovation with satisfaction of the people
    So many producers targeting the people for high level of profit,so the cost of productions also high even it is a standard goods or services.
    So the mechanism of the market giving the reply for it such as Nokia versus Sony Ericsson
    Sony Ericsson mainly target the satisfaction of the people with small profit and it grownup as long duration even the growth is very smaller past years. But Nokia is the fast company and world famous company. It mainly target the people with the technological innovation and maximize profits. However Nokia handled many ways for getting the world market through advertisement or any variety changes like that Sony Ericsson also handled in a part of this. Anyhow the front Nokia defeated by Sony Ericsson in the market field and I think Sony Ericsson would be still in the field long term rather than Nokia. …..CONTINUE MY WRITTING

  • darshan said:

    Demand and Supply should have to consider the psychological conditions of the contemporary situation

    However the theory of demand and supply express the old Version.In the contemporary context both theory of demand and supply mislead the suppliers and consumers. Because new theory should explain the mechanism of New Demand and New Supply for the globalization and global integration. However the new theory express the new theory for both supply and demand there must be considered the government role in the root of production and investment on production. However the Demand for good and services depend on the satisfaction and price ,there is an intention to pushes. So the intention should have to consider in the theory of demand as well as theory of supply. Here I mention as an intention that a psychological condition of contemporary context. I know that this is very depth study even it is must and necessity for the present world mechanism. We should mention the virus of the world economy at present because the decisions making for demand and supply are going on for capturing profits even not clearly mention the stand and strong in the market mechanism. The lack of beta between supply and demand in the Global Economy is the major problem for the failure of market mechanism. What to produce and whom to produce are nor clearly decided in the old economic version for the modern society therefore the market failure is must for the contemporary world. Because the resources allocation ,factor endowment,and choice of productions were not clearly expressed by the old versions of economic theories. So we have to consider and correct or create a new theory for the contemporary world mechanism.

  • darshan said:

    Technological development is a flying process ,people mind is running process but the market mechanism is the walking process even some producers are sitting process. The present conception of the world mechanism is the durable process. People wish a large subject with a small time. The technology is doing the mater but achievement of the market mechanism is late and short it for expanding the new things such goods or services. Companies missed to achieve the mind of the people through the Goals because they show the quality and quantity of the good or services through the advertisement. Producers not a producers they are the learners and teachers for the people about the production and services. People expect more to short time,this means not a quality production but also means knowledge of people. Technology is not a growth of selfish,this is by the producers have the obligation to expand the knowledge to the people. Without knowledge how to consume ?,the producers should have to be answered to this question before invest in a production. Such as Operating System Windows XP versus any Windows productions like Vista ,Windows 7.etc. So many people are using XP however the windows Vista,or Windows 7.Why?.

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  • Financial blog - The year after Lehman Brothers said:

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