Global Economic Crisis

In 2008 a great economic crisis led to a recession of the economies around the world. What began as a credit crisis turned out to be the biggest banking crisis since the Great Depression. Although the implications of the crisis are mostsevere in the USA, banks and insurance companies all over the world havecollapsed and governments have come to the rescue by lending them money.

The American government wants to save the global financial system with 700 b dollars. With this money it wants to restore trust in America’s banking system.

Causes of the crisis

There are many reasons for the current crisis.

• Governments, especially the American government, did not control the banking sector enough and let the banks give loans to people without asking for securities.

• Many companies, banks and firms have become too greedy and wanted to make a lot of quick money.

• Since the 1970s too many goods and services have been produced.

Background

The Post-war Period 1945 – 1975

After World War II economies around the world grew very quickly. Europe and Japan were being rebuilt. Workers received higherwages.

This period of growth came to an end in the mid 1970s. Developing nations like Brazil or the tiger states of Asia (Taiwan, South Korea, Singapore and Hong Kong) started producing more and more, which led to overproduction. In the industrial countries consumers were not able to buy as much as they did before because prices and inflation went up. On top of all this a dramatic energy crisis and the rise in oil prises led to a world wide recession in the mid and late 1970s.

Globalization

At the beginning of the 1980s companies and firms in industrialized nations began looking for new ways of making more money. They started transferring their companies to Asia where they hired cheaper workers and had access to less expensive raw materials. Because of low labour costs they could produce more cheaply and make more profit.

The economic bubble

In the last 15 years more and more investors and companies wanted to make larger profits. They bought real estate, stocks at high prices and sold them at even higher prices in the hope of making quick money. When prices got too high nobody bought stocks and real estate any more. Prices fell and as time went on they became worthless.

Such an economic bubble burst in Asia between 1997 and 1998. It led to the economic collapse of some countries, including Japan. Within a few weeks stock market prices fell and nobody bought stock or real estate any more. Foreigninvestors pulled out their money out of Asia.

The current bubble

The current crisis goes back to the late 1990s when Internet companies started emerging from nowhere. Their stocks went up sharply and then the value collapsed resulting in a recession in 2001 and 2002.

In order to fight against recession the main bank in America, the Federal Reserve, lowered its interest rates, so that borrowing money became cheaper. People started to invest, most of them in real estate.

Because banks had enough money they started giving it to people without asking for securities. Investment companies persuadedpeople to buy real estate, houses and homes although they knew that some of these customers did not have the money to pay back.

Everyone seemed to be happy with the housing boom. Consumers could buy their new houses, constructors had a lot of work to do and banks and investment firms made a lot of profit too. However, everything went uncontrolled by the government.

When interest rates went up again house buyers were not able to pay back their mortgages. In many cases they had to give their houses to the banks. These were left without money and with houses and real estate that were worth far less.

Banks themselves passed these bad credits on to other banks and institutions in complicated financial packages that nobody understood. Nobody seemed to know who really owned what and within a few years the whole banking system was infected. Banks couldn’t get money from other banks because they didn’t trust each other.

What is being done?

Governments around the world are trying to help banks that are stuck with bad assets. They are trying to make banks credible again, so they are giving them money. Many big companies, like Lehman brothers had to declare bankruptcy but other investment giants, like the American International Group (AIG), the world’s largest insurance company, were rescued by the American government.

Central banks are lowering their interest rates so that lending and borrowing money will become cheaper again.

Whole countries, Iceland for example, are facing the worst economic crisis in its history. Its banks borrowed much more money from international banks than it had in its deposits. Iceland received about 5 billion dollars in loans from Russia and money from the International Monetary Fund.

Other countries have taken steps to prevent people from taking their money out of banks and investing it somewhere else.

The Future

There will probably be more bankruptcies and governments around the world will take over weak banks. The worldwide recession will also deepen because countries trade with each other and everyone is involved. In addition, oil prices – at a record high – are driving up inflation. Consumers have to pay more for their fuel and to heat their homes and food prices have also gone up. The results are zero growth for many economies.

Words

• access = to have something that you can use
• although =while
• asset = the things that a company owns and usually can be sold for money
• bankruptcy = if you don’t have enough money to pay back what you have borrowed from someone
• burst = break open, explode
• collapse = break apart, break down
• complicated = difficult to understand, complex
• constructor = a person or company that gets money to build houses or other objects
• consumer = a person who buys something
• credible = believable
• current = existing, present, now
• customer =a person who buys goods or services
• deposit = the money you pay into a bank account
• developing nation = a poor country that is trying to increase production and improve life for its people
• economic bubble = when a situation comes up in which people there is too much money in circulation and people invest in real estate, stocks etc.. This leads to high prices and inflation. Then the bubble bursts and all of a sudden prices go down again leaving objects at a much lower value
• economy =the buying and selling of goods and the money that circulates in a country
• emerge = to come up
• especially =above all
• Federal Reserve Bank = the American central bank ; it sets the interest rates that banks must pay when they borrow money
• foreign = from another country
• fuel = substance like gas or oil that can be burned to make energy
• greedy = if you always want more and more money
• growth = expansion
• hire = to offer someone a job; to give a person money to work for you
• implication = a future result or effect of something
• in addition =add another piece of information to what you already know
• insurance company = a company that you pay money to ; when something bad happens to you or if you get hurt the company pays some of the costs
• interest rate = the money that you have to pay when you borrow money from a bank or the money that you get when you save money in a bank account. The interest rate is always in per cent
• International Monetary Fund = organization that tries to help poorer countries develop
• investment company or firm = companies that buy and sell stock, real estate or other valuable things
• investor = someone who gives money to a company or bank and expects to get more money back
• involved = to be connected in some way
• labour = work
• loan = the money you borrow from a bank
• lower = to go down
• mortgage = you borrow money from a bank in order to buy a house and agree to pay back the money over a longer period of time
• own = if something belongs to you
• persuade = to make someone believe you
• prevent = to stop something from happening
• raw material =resources like coal, oil or wood
• real estate = land and houses that you can sell or buy
• receive = get
• recession = a difficult economic time when there is less trade. Factories produce fewer products and people cannot afford to buy many things
• restore = bring back
• result = here: lead to
• rise = to go up
• securities = something like land, a house or other valuable things that you promise to give to someone if you can’t pay back the money you borrowed from them
• service = the work that you do for someone
• severe = very bad
• stick – stuck = here: if you can’t get rid of something
• stock = a share or part of a company
• stock market = place where you trade stocks
• transfer = move
• trust =hope in something
• value = what something is worth
• wages = money that you earn for your work
• worthless = if something does not have any value
• zero growth = to stay at the same level and not get bigger