What does the financial crisis mean for the future?

Tomas Martin @ 19-03-2008

A joker puts the value of a share on the $1Billion headquarters of failed bank Bear StearnsWith the sale of Bear Stearns for £2 a share on Sunday (it was worth £170 a share in April last year), the Credit Crunch claimed a high-profile casualty. But in the long run, what does a possible US and global recession bode, after things clear up? Some people think this may be the worst we get, others think there’s a fair few other banks and businesses looking shaky. However it continues, there’s no doubt that the markets are going to change following the collapse of a lot of mortage-based finance.

The crisis has been caused by an decrease in the enforcement on banking legislation. Without sufficient checks, financial companies offered loans to people who couldn’t afford it, then traded the loans like shares across the world economy. As lenders failed to pay up and defaulted, the companies who traded the paper behind the loans began to make losses and a lack of trust led to less liquidity, or money available for lending between firms. Bear Stearns was one of the companies most at risk, like Northern Rock here in the UK.

Many economists and analysts are starting to look at the repercussions of the credit crunch. Some say that the reduced interest rates by the Federal Reserve and Bank Of England will lead to inflation problems, especially with commodities like wheat, gold and oil recently at all-time highs. Others compare the crisis to other recessions around the world. Although Japan in the eighties and the Great Depression are scary comparisons to make, some say that Sweden in the early nineties is the best one to make, and a good example of how the Fed can get out of this situation: more regulation to clear that bad debt quickly.

But if we’re looking at ways to stimulate the economy, surely we should be looking at moving the focus away from the financial markets and ‘bubbles’? During the dotcom and housing bubbles, wages have stagnated and many have succumbed to borrowing large amounts to keep consuming. A possible solution: invest in new infrastructure for alternative energies, mass public transport and energy-efficient products. Jobs will be created to keep the economy afloat and the financial world could settle to a fairer and more balanced system.

[photo via Calculated Risk]

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One Response to “What does the financial crisis mean for the future?”

  1. Khannea Suntzu says:

    While it is very sad for the poor people in the US, most of which are decent, hardworking folks, it is ESSENTIAL the US, which has been hijacked by a terrifying fascist elite, is reduced to such a degree it gives up its imperialist tendencies. If this requires crippling the US with a 1929-style/USSR collapse-style crisis, too bad. If this involves a civil war, the alternative is WORSE.