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Understanding the Financial Crisis of 2008 – 2011 - Part 3 Royal Gazette Newspaper November 2011
November 15, 2011
The question that I hear asked the most about the current financial crisis that we are living through is: “Why has a mortgage crisis and real estate crash in the US affected the entire global economy?” The answer to that question is that the vast changes in attitude toward savings and indebtedness by western governments, corporations, and households over the last 30 years, caused the financial sector to experience enormous growth in demand for its services. That demand was global in scope.
Thus by the early 1980’s finance, especially banking, had become the world’s first globally connected enterprise model. Today the world’s largest banks and finance companies operate 24/6, in every time zone and in every geographic jurisdiction. In other words, the globalization of banking and finance made the contagion possible.
Understanding the Financial Crisis of 2008 – 2011 - Part 4 Royal Gazette Newspaper December 2011
November 1, 2011
There are varying estimates of the amount of wealth that has been destroyed by the 2007-2011 financial markets crisis. The figures range from a combined global loss of $34 trillion, on the low end, to $50 trillion at the high end. Just which figure is quoted seems to be based on whether the calculation of the losses includes only the losses related to declines in the value of publicly listed stocks, or includes losses experienced by investors in real estate and bonds as well. Another factor in quantifying the losses is whether the person making the assessment considers the crisis to have ended in 2009, or in 2010, or considers it to be still ongoing. At $50 trillion, the lost wealth
would be equivalent to the combined 2010 GDPs of the 27-country European Union, the United States, China, Japan, India, and Germany.
A great portion of the global wealth that had been accumulated prior to the peak of the US real estate market in June 2006, and the US stock market in October 2007, had been created via the price appreciation of assets that had been financed with debt. Debt is a legal obligation to repay one’s creditors. A stock valued at 27 times its earnings (the approximate price earnings multiple of the S&P 500 at the peak in October 2007) or a house price that represents a 70% increase in value since purchase, is ephemeral, unless you actually sell the asset to realize that financial
valuation before a price decline. With the large declines experienced in the equity, bond, and property markets during the 2008 to 2009 market meltdown, much global wealth simply vanished into thin air, leaving the debt which had financed the assets behind, like an orphaned stepchild.
Those who had taken on these debts, most of which were banks, other finance companies of all types, and households with high loan-to-value ratio mortgages, suddenly found themselves taking large losses and were unable to access the global capital markets to raise liquidity, or to refinance, as they had so easily done in prior times. Many of the banks and finance companies collapsed, or required bailouts from the government, especially those in the US, but also many in the UK and the Eurozone too. Many households defaulted on their mortgages, which further threatened the survival of other banks and finance companies. As a result, by Thanksgiving of 2008, the global
capital markets; especially the day to day liquidity markets, had completely locked up like a rusted gear mechanism.
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