Nowadays, Financial Crisis is a very hot topic all over the world. It's unavoidable. You can see it anywhere, from the newspaper, TV, online, radio... So, what is it?
I'm not a finance expert, I just want to share some information that I have and what I know about the crisis.
What’s the financial crisis?
- As the definition on Wikipedia: The term financial crisis is applied broadly to a variety of situations in which some financial institutions or assets suddenly lose a large part of their value. In the 19th and early 20th centuries, many financial crises were associated with banking panics, and many recessions coincided with these panics. Other situations that are often called financial crises include stock market crashes and the bursting of other financial bubbles, currency crises, and sovereign defaults.
- In terms of Scope, Financial crisis is usually used for at least a country or a region. The border in this world now is not very clear, means all the markets are interconnecting. That’s why the financial crisis is easily spreading.
What’s the current financial crisis?- The biggest cause of the crisis was the bankruptcy of some big US banks, especially Lehman Brothers. In fact, there were some early signs of the global financial crisis from the end of last year. When the price of real estate was so high versus its original price, some experts predicted that there would be a real estate crisis and it would probably lead to a bigger financial sink.
The prediction came true almost six months later. The first systems collapsed were the banking and the secured loan financial system. Since most of the assets were pledged were real estate, and after the real estate issue, these securities became cheaper and then indirectly became bad credits.
Consequently, the bad credits made the bank system run out of cash and faced the asset-liability mismatch. And it critically impacted to the credit-worthiness of these banks.
The situation at that time was worst when consumers tried to withdraw their cash from these banks. And it directly made these banks bankrupted.
- The bankruptcy of some major banks in US led to some other bigger problems with some big corporations. Consumers lost the trust to the US stock market and they at the same time withdrew as much cash as the can from the market. The US stock market soon sunk within a week. Other investors from Europe and Japan (especially some big corporations) lost a lot from the stock market. Consequently, their consumers knew about the situation and withdrew cash from them as well. Europe and Japan soon became in the crisis with US.
- Of course not only the real estate bubble and the bank issue lead US and their “partners” – Europe – to the financial crisis. The inflation and the regulatory failures of US are the next two biggest issues impact to the US financial. US inflation was high (around 4 – 7%/year some recent years), high import while low export, the FED (the Federal Reserve System) had some failure policies like cutting the interest to help the stock market many times to increase the cash flow and the bank bad credit – indirectly led the bank system to the issue of asset-liability.
Steps the world is taking to fight against the crisis?- The first step that all countries are trying to do now is to save their banks. All the countries are now trying to partially or fully commit with their citizens of the guarantee for their deposit accounts in their banks and buy back the bad credits from their banks. This is an extremely important step. Except quite few countries can have enough cash on their hand to provide to their markets, most of the countries can’t get enough cash on hand now.
Even when the government has enough cash, they need to be very careful to release the cash to the market. Because it will create another bigger issue: Inflation. The more inflation they have, the less power of their cash is. It’s a big round, and finally, they won’t have enough cash to supply for their market.
- Increase cash flow, as I know, will be the second important step to save the market form the financial crisis. You have to pay either cash or credit for your good. But in the time that bad credits are everywhere, cash flow is the single choice for the government.
- Save stock markets: in almost any case, stock market is the third choice for the country. Banking system and inflation must be the first choice; the consumers’ trust in the market is the second one. Stock market at that time will be easier to save if these 2 biggest issues are solved. At the end of the day, stock market is very much relied on the banking system and the trust of their consumers.
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