The Global financial crisis

The Global financial crisis

Introduction

In 2008, a global economic crisis was suggested by several important indicators of economic downturn worldwide. These included high oil prices, which led to both high food prices (due to a dependence of food production on petroleum, as well as using food crop products such as ethanol and biodiesel as an alternative to petroleum) and global inflation; a substantial credit crisis leading to the bankruptcy of large and well established investment banks as well as commercial banks in various nations around the world; increased unemployment; and the possibility of a global recession.

The global financial crisis of 2008 is a major financial crisis, the worst of its kind since the Great Depression, which is ongoing as of mid-November 2008. It became prominently visible in September 2008 with the failure, merger or conservatorship of several large United States-based financial firms. The underlying causes leading to the crisis had been reported in business journals for many months before September, with commentary about the financial stability of leading U.S. and European investment banks, insurance firms and mortgage banks consequent to the subprime mortgage crisis.

Beginning with failures of large financial institutions in the United States, it rapidly evolved into a global crisis resulting in a number of European bank failures and declines in various stock indexes, and large reductions in the market value of equities (stock) and commodities worldwide. The crisis has led to a liquidity problem and the de-leveraging of financial institutions especially in the United States and Europe, which further accelerated the liquidity crisis. World political leaders and national ministers of finance and central bank directors have coordinated their efforts to reduce fears but the crisis is ongoing and continues to change, evolving at the close of October into a currency crisis with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund. The crisis was triggered by the subprime mortgage crisis and is an acute phase of the financial crisis of 20072008.

I.      Beginning and Causes

On October 15, 2008, Anthony Faiola, Ellen Nakashima, and Jill Drew wrote a lengthy article in the Washington Post titled, 'What Went Wrong'. In their investigation, the authors claim that former Federal Reserve Board Chairman Alan Greenspan, Treasury Secretary Robert Rubin, and SEC Chairman Arthur Levitt vehemently opposed any regulation of financial instruments known as derivatives. They further claim that Greenspan actively sought to undermine the office of the Commodity Futures Trading Commission, specifically under the leadership of Brooksley E. Born, when the Commission sought to initiate regulation of derivatives. Ultimately, it was the collapse of a specific kind of derivative, the mortgage-backed security, that triggered the economic crises of 2008.

On October 17, 2008, attorney Timothy D. Naegele, wrote an article in the American Banker entitled, 'Greenspan's Fingerprints All Over Enduring Mess,' which argues that Alan Greenspan's actions and inactions triggered the economic crises of 2008. The article discusses the economic tsunami that has been rolling worldwide with devastating effects; and the author asserts that Greenspan is the architect of the enormous economic 'bubble' that burst globally. The author cites Giulio Tremonti, Italy's Minister of Economy and Finance, who said: 'Greenspan was considered a master. Now we must ask ourselves whether he is not, after [Osama] bin Laden, the man who hurt America the most.'

While Greenspan's role as Chairman of the Federal Reserve has been widely discussed (the main point of controversy remains the lowering of Federal funds rate at only 1% for more than a year which, according to the Austrian School of economics, allowed huge amounts of 'easy' credit-based money to be injected into the financial system and thus create an unsustainable economic boom), there is also the argument that Greenspan actions in the years 2002-2004 were actually motivated by the need to take the U.S. economy out of the early 2000s recession caused by the bursting of dot-com bubble - although by doing so he did not help avert the crisis, but only postpone it.

Many libertarians, including Congressman and former 2008 Presidential candidate Ron Paul and Peter Schiff in his book Crash Proof, predicted the crisis prior to its occurrence. They are critical of theories that the free market caused the crisis and instead argue that the Federal Reserve's printing of money out of thin air and the Community Reinvestment Act are the primary causes of the crisis. However Alan Greenspan himself has conceded he was partially wrong to oppose regulation of the markets, and expressed 'shocked disbelief' as the failure of the self interest of the markets, which according to neo-liberal economic theory should have protected shareholder equity.

It has also been argued that the root cause of the crisis is overproduction of goods caused by globalization. Professor Herman Daly suggests that it is not actually an economic crisis, but a crisis of overgrowth beyond sustainable ecological limits.

The financial crisis of 20072008 and perhaps beyond, initially referred to in the media as a 'credit crunch' or 'credit crisis', began in July 2007 when investors, finally realizing that sub-prime was a euphemism for 'not so good', and that lending money to people who probably could not pay it back was a bad idea, finally began to question the value of securitized mortgages. With Wall Street no longer able to convincingly hide problems, mortgage security markets fell into a state of disarray, resulting in a liquidity crisis that prompted a substantial injection of capital into financial markets by the United States Federal Reserve and the European Central Bank. The TED spread, an indicator of perceived credit risk in the general economy, spiked up in July 2007, remained volatile for a year, then spiked even higher in September 2008, reaching a record 4.65% on October 10, 2008. In September 2008, the crisis deepened, as stock markets world-wide crashed and entered a period of high volatility, and a considerable number of banking, mortgage and insurance company failures in the following weeks.

Although America's housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of intricate and over-leveraged financial contracts and operations, a U.S. monetary policy making the cost of credit negligible therefore encouraging such over-leverage, and generally a 'hypertrophy of the financial sector' (financialization).

One example was credit derivatives - Credit Default Swaps (CDS), which insure debt holders against default. They are fashioned privately, traded over the counter outside the purview of regulators. The U.S. government's seizure of the mortgage companies prompted an auction of their debt so that traders who bought and sold default protection (CDS) could settle contracts. The auctions are used to set a price by which investors can settle the contracts with cash rather than having to physically deliver a bond to their counter-parties. Sellers of protection pay the face value of the contracts minus the recovery value set on the bonds.

A) Scope

After affecting banking and credit, mainly in the United States, the situation evolved into a global general financial crisis verging on a systemic crisis. Mechanical phenomena (domino effect, as many institutions had financial links), and also psychological contagions, made it spread at the same time worldwide and to many financial and economic areas:

Financial markets (stock exchanges and derivative markets notably) where it developed into a market crash,

Various equity funds and hedge funds that went short of cash and had to get rid of assets,

Insurance activities and pension funds, facing a receding asset portfolio value to cover their commitments,

With also incidences on public finance due to the bailout actions.

Forex, at least for some currencies (Icelandic crown, various Eastern Europe and Latin America currencies), and with increased volatility for most of them

The first symptoms of what is called the Economic crisis of 2008 ensued also in various countries and various industries.

B) Historical background

The initial liquidity crisis can in hindsight be seen to have resulted from the incipient subprime mortgage crisis, with the first alarm bells being rung by the 2006 HSBC results. The crisis was widely predicted by a number of economic experts and other observers, but it proved impossible to convince responsible parties such as the Board of Governors of the Federal Reserve of the need for action. One of the first victims outside the US was Northern Rock, a major British bank. The bank's inability to borrow additional funds to pay off maturing debt obligations led to a bank run in mid-September 2007. The highly leveraged nature of its business, unsupportable without fresh infusions of cash, led to its takeover by the British Government and provided an early indication of the troubles that would soon befall other banks and financial institutions.

Excessive lending under loosened underwriting standards, which was a hallmark of the United States housing bubble, resulted in a very large number of subprime mortgages. These high-risk loans had been perceived to be mitigated by securitization. Rather than mitigating the risk, however, this strategy appears to have had the effect of broadcasting and amplifying it in a domino effect. The damage from these failing securitization schemes eventually cut across a large swath of the housing market and the housing business and led to the subprime mortgage crisis. The accelerating rate of foreclosures caused an ever greater number of homes to be dumped onto the market. This glut of homes decreased the value of other surrounding homes which themselves became subject to foreclosure or abandonment. The resulting spiral underlay a developing financial crisis.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial. Financial institutions which had engaged in the securitization of mortgages such as Bear Stearns then fell prey. Later on, Bear Stearns was acquired by JP Morgan Chase through the deliberate assistance from the US government. Its stock price fell from the record high $154 to $3 which was the acquisition price by JP Morgan Chase, subsequently the acquisition price was agreed on $10 between the US government as well as JP Morgan. On July 11, 2008, the largest mortgage lender in the US, IndyMac Bank, collapsed, and its assets were seized by federal regulators after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac, which it did by placing the two companies into federal conservatorship on September 7, 2008 after the crisis further accelerated in late summer.

It then began to affect the general availability of credit to non-housing related businesses and to larger financial institutions not directly connected with mortgage lending. At the heart of many of these institution's portfolios were investments whose assets had been derived from bundled home mortgages. Exposure to these mortgage-backed securities, or to the credit derivatives used to insure them against failure, threatened an increasing number of firms such as Lehman Brothers, AIG, Merrill Lynch, and HBOS. Other firms that came under pressure included Washington Mutual, the largest savings and loan association in the United States, and the remaining large investment firms, Morgan Stanley and Goldman Sachs.

II. Developing global financial crisis

Beginning with bankruptcy of Lehman Brothers on Sunday, September 14, 2008, the financial crisis entered an acute phase marked by failures of prominent American and European banks and efforts by the American and European governments to rescue distressed financial institutions, in the United States by passage of the Emergency Economic Stabilization Act of 2008 and in European countries by infusion of capital into major banks. Afterwards, Iceland almost claimed to go bankrupt. Many financial institutions in Europe also faced the liquidity problem that they needed to raise their capital adequacy ratio. As the crisis developed, stock markets fell worldwide, and global financial regulators attempted to coordinate efforts to contain the crisis. The US government threw out the $700 billion plan which was an attempt to purchase the unperforming collaterals and assets. However, the plan was vetoed by the US congress because some members rejected the idea that the taxpayers money be used to bail out the Wall Street investment bankers. The stock market plunged as a result, the US congress amended the $700 billion bail out plan and passed the legislation. The market sentiment continued to deteriorate and the global financial system almost collapsed. While the market turned extremely pessimistic, the British government launched a 500 billion pound bail out plan aimed at injecting capital into the financial system. The British government nationalized most of the financial institions in trouble. Many European governments followed suit, as well as the US government. Stock markets appeared to have stabilized as October ended. In addition, the falling prices due to reduced demand for oil, coupled with projections of a global recession, brought the 2000s energy crisis to temporary resolution. In the Eastern European economies of Poland, Hungary, Romania, and Ukraine the economic crisis was characterized by difficulties with loans made in hard currencies such as the Swiss franc. As local currencies in those countries lost value, making payment on such loans became progressively difficult.

As the financial panic developed during September and October, 2008 there was a 'flight to quality' as investors sought safety in U.S. treasury bonds, gold, and strong currencies such as the dollar and the yen. This currency crisis threatened to disrupt international trade and produced strong pressure on all world currencies. The International Monetary Fund had limited resources relative to the needs of the many nations with currency under pressure or near collapse.

A) Global trends

The decade of the 2000s saw a commodities boom, in which the prices of primary commodities rose again after the late-twentieth century commodities recession of 1980-2000. But in 2008, the prices of many commodities, notably oil and food, rose so high as to cause genuine economic damage, threatening stagflation and a reversal of globalization.

In January 2008, oil prices surpassed $100 a barrel for the first time, the first of many price milestones to be passed in the course of the year. By July the price of oil reached as high as $147 a barrel although prices fell soon after. The food and fuel crises were both discussed at the 34th G8 summit in July.

Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 6-fold in less than 1 year whilst producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.

In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.

In mid-October 2008, the Baltic Dry Index, a measure of shipping volume, fell by 50% in one week, as the credit crunch made it difficult for exporters to obtain letters of credit.

Inflation

In February 2008, Reuters reported that global inflation was at historic levels, and that domestic inflation was at 10-20 year highs for many nations. 'Excess money supply around the globe, monetary easing by the Fed to tame financial crisis, growth surge supported by easy monetary policy in Asia, speculation in commodities, agricultural failure, rising cost of imports from China and rising demand of food and commodities in the fast growing emerging markets,' have been named as possible reasons for the inflation.

In mid-2008, IMF data indicated that inflation was highest in the oil-exporting countries, largely due to the unsterilized growth of foreign exchange reserves, the term unsterilized referring to a lack of monetary policy operations that could offset such a foreign exchange intervention in order to maintain a countrys monetary policy target. However, inflation was also growing in countries classified by the IMF as 'non-oil-exporting LDCs' (Least Developed Countries) and 'Developing Asia', on account of the rise in oil and food prices.

Inflation was also increasing in the developed countries, but remained low compared to the developing world.

Unemployment

The International Labour Organization predicted that at least 20 million jobs will have been lost by the end of 2009 due to the crisis - mostly in 'construction, real estate, financial services, and the auto sector' - bringing world unemployment above 200 million for the first time.

Return of volatility

For a time, major economies of the 21st century were believed to have begun a period of decreased volatility, which was sometimes dubbed The Great Moderation, because many economic variables appeared to have achieved relative stability. The return of commodity, stock market, and currency value volatility are regarded as indications that the concepts behind the Great Moderation were guided by false beliefs.

Economic governance

In the final quarter of 2008, the financial crisis saw the G-20 group of major economies assume a new significance as a locus of economic and financial crisis management.

B) National Trends

1. United States

The United States entered 2008 during a housing market correction, a subprime mortgage crisis and a declining dollar value. In February, 63,000 jobs were lost, a 5-year record. In September, 159,000 jobs were lost, bringing the monthly average to 84,000 per month from January to September of 2008.

Possible recession

In the early months of 2008, many observers believed that a U.S. recession had begun. As a direct result of the collapse of Bear Stearns, Global Insight increased the probability of a worse-than-expected recession to 40% (from 25% before the collapse). In addition, financial market turbulence signaled that the crisis will not be mild and brief.

Alan Greenspan, ex-Chairman of the Federal Reserve, stated in March 2008 that the 2008 financial crisis in the United States is likely to be judged as the harshest since the end of World War II. A chief economist at Standard & Poor's, said in March 2008 he has a worst-case-scenario in which the country could endure a double-dip recession in which the economy would briefly recover in the summer 2008. Under this scenario, the economy's total output, as measured by the gross domestic product, would drop by 2.2 percentage points, making it the third worst recession in the post World War II period.

The former head of the National Bureau of Economic Research said in March 2008 he believed the country was then in a recession, and it could be a severe one. A number of private economists generally predicted a mild recession ending in the summer of 2008 when the economic stimulus checks going to 130 million households started being spent. A chief economist at Moody's predicted in March 2008 that policymakers would act in a concerted and aggressive way to stabilize the financial markets, and that then the economy would suffer but not enter a prolonged and severe recession. It takes many months before the National Bureau of Economic Research, the unofficial arbiter of when recessions begin and end, makes its own ruling.

According to numbers published by Bureau of Economic Analysis in May 2008, the GDP growth of the previous two quarters was positive. As one common definition of a recession is negative economic growth for at least two consecutive fiscal quarters, some analysts suggest this indicates that the U.S. economy was not in a recession at the time. However this estimate has been disputed by some analysts who argue that if inflation is taken into account, the GDP growth was negative for the past two quarters, making it a technical recession. In a May 9, 2008, report, the chief North American economist for investment bank Merrill Lynch wrote that despite the GDP growth reported for the first quarter of 2008, 'it is still reasonable to believe that the recession started some time between September and January', on the grounds that the National Bureau of Economic Research's four recession indicators all peaked during that period.

New York's budget director concluded the state of New York was officially in a recession. Governor David Paterson called an emergency economic session of the state legislature for August 19 to push a budget cut of $600 million on top of a hiring freeze and a 7 percent reduction in spending at state agencies already implemented by the Governor. An August 1 report, issued by economists with Wachovia, said Florida was officially in a recession.

White House budget director Jim Nussle said the U.S. avoided a recession following revised GDP numbers from the Commerce Department showing a 0.2 percent contraction in the fourth quarter of 2007 down from a 0.6 percent increase and a downward revision to 0.9 percent from 1 percent in the first quarter of 2008. The GDP for the second quarter was placed at 1.9 percent below an expected 2 percent. Martin Feldstein, who headed the National Bureau of Economic Research until June and serves on the group's recession-dating panel, said he believed the U.S. was in a very long recession and that there was nothing the Federal Reserve could do to change it.

In a CNBC interview at the end of July 2008 Alan Greenspan said he believed the U.S. was not yet in a recession, but that it could enter one due to a global economic slowdown.^[28]

A study released by Moody's found two-thirds of the 381 largest metropolitan areas in the United States were in a recession. The study also said 28 states were in recession with 16 at risk. The findings were based on unemployment figures and industrial production data.

In March 2008, Warren Buffett stated in a CNBC interview that by a 'common sense definition', the U.S. economy is already in a recession. Warren Buffett has also stated that the definition of recession is flawed and that it should be 3 quarters of GDP growth that is less than population growth. However, the U.S. only experienced two consecutive quarters of GDP growth less than population growth.

Rise in unemployment

On September 5, 2008, the United States Department of Labor issued a report that its unemployment rate rose to 6.1%, the highest in five years. The news report cited the Department of Labor reports and interviewed Jared Bernstein, an economist:

The unemployment rate jumped to 6.1 percent in August, its highest level in five years, as the erosion of the job market accelerated over the summer. Employers cut 84,000 jobs last month, more than economists had expected, and the Labor Department said that more jobs were lost in June and July than previously thought. So far, 605,000 jobs have disappeared since January. The unemployment rate, which rose from 5.7 percent in July, is now at its highest level since September 2003. Jared Bernstein, economist at the Economics Policy Institute in Washington, said eight months of consecutive job losses had historically signaled that the economy was in a recession. 'If anyone is still scratching their head over that one, they can stop,' Mr. Bernstein said. Stocks fell after the release of the report, with the Dow Jones industrials down about 100 points after about 40 minutes of trading.

CNN also reported the news, quoted another economist, and placed the news in context:

'Job losses are still mild by recession standards, but the losses are relentless and they are accumulating,' said Bob Brusca of FAO Economics. 'If job growth had paced with population growth during this year, it would have meant 1.3 million new jobs would have been created. Instead 605,000 were lost. That means about 2 million fewer people are working than if the economy were on a steady path. And that's a big number.' But while economists generally study the payroll numbers most closely, it's the unemployment rate that registers with most Americans when they think about the labor market.

Liquidity crisis

In early July, depositors at the Los Angeles offices of IndyMac Bank frantically lined up in the street to withdraw their money. On July 11, IndyMac - the largest mortgage lender in the US - was seized by federal regulators. The mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. That day the financial markets plunged as investors tried to gauge whether the government would attempt to save mortgage lenders Fannie Mae and Freddie Mac. The two were placed into conservatorship on September 7, 2008.

During the weekend of September 1314, Lehman Brothers declared bankruptcy after failing to find a buyer, Bank of America agreed to purchase Merrill Lynch, the insurance company AIG sought a bridge loan from the Federal Reserve, and a consortium of 10 banks created an emergency fund of at least $70 billion to deal with the effects of Lehman's closure, similar to the consortium put forth by J.P. Morgan during the stock market panic of 1907 and the crash of 1929. Stocks on 'Wall Street' tumbled on September 15.

On September 16, news emerged that the Federal Reserve may give AIG an $85 billion (48 billion) rescue package; on September 17, 2008, this was confirmed. The terms of the rescue package were that the Federal Reserve would receive an 80% public stake in the firm. The biggest bank failure in history occurred on September 25 when JP Morgan Chase agreed to purchase the banking assets of Washington Mutual.

The year 2008 as of September 17 has seen 81 public corporations file for bankruptcy in the United States, already higher than the 78 in 2007. Lehman Brothers being the largest bankruptcy in U.S. history also makes 2008 a record year in terms of assets with Lehman's $691 billion in assets all past annual totals. The year also saw the ninth biggest bankruptcy with the failure of IndyMac Bank.

The Wall Street Journal states that venture capital funding has slowed down which in the past led to unemployment and slowed new job creation.

Bailout of U.S. financial system

On September 17, Federal Reserve chairman Ben Bernanke advised Secretary of the Treasury Hank Paulson that a large amount of public money would be needed to stabilize the financial system. Short selling on 799 financial stocks was banned on September 19. Companies were also forced to disclose large short positions. The Secretary of the Treasury also indicated that money market funds will create an insurance pool to cover themselves against losses and that the government will buy mortgage-backed securities from banks and investment houses. Initial estimates of the cost of the Treasury bailout proposed by the Bush Administration's draft legislation (as of September 19, 2008) were in the range of $700 billion to $1 trillion U.S. dollars. President George W. Bush asked Congress on September 20, 2008 for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. The crisis continued when the United States House of Representatives rejected the bill and the Dow Jones took a 777 point plunge. A revised version of the bill was later passed by Congress, but the stock market continued to fall nevertheless.

As of mid-November, it was estimated that the new loans, purchases, and liabilities of the Federal Reserve, the US Treasury, and FDIC, brought on by the financial crisis, totalled over $5 trillion: $1 trillion in loans by the Fed to broker-dealers through the emergency discount window, $1.8 trillion in loans by the Fed through the Term Auction Facility, $700 billion to be raised by the Treasury for the Troubled Assets Relief Program, $200 billion insurance for the GSEs by the Treasury, and $1.5 trillion insurance for unsecured bank debt by FDIC. (Some portion of the Fed's emergency loans would already have been repaid.)

2. Europe

Denmark showed a contraction of 0.6 percent in the first quarter of 2008 following a contraction of 0.2 percent in the fourth quarter of 2007. Estonia similarly saw an economic contraction of 0.9 percent in the second quarter, following a 0.5 percent contraction in the first quarter. Latvia's gross domestic product fell 0.2 percent in the second quarter following a fall of 0.3 percent in the first quarter. Sweden's economy showed zero growth in the second quarter of 2008. The entire economy of the European Union declined by 0.1 percent in the second quarter. A European Commission forecast predicted Germany, Spain and the UK would all enter a recession by the end of the year while France and Italy would have flat growth in the third quarter following second quarter contractions.

Chairwoman of the Association of Estonian Food Industry, Sirje Potisepp, warned the Estonian food industry would probably face bankruptcies citing two major beverage companies in Estonia filing for bankruptcy. Ratings agency Fitch warned Ukraine could be headed for a currency crisis as economic fundamentals deteriorate and the country enters another period of political uncertainty. Fitch said the current account deficit was likely to widen further as prices of gas imports rise and prices of its steel exports fall and said Ukraine was likely to need to borrow more at a time when global debt markets have ground to a virtual standstill. Ukraine's central bank chief, Petro Poroshenko, said he saw no need to intervene to protect the currency. Only a few countries retained their high GDP predictions for the year 2008, and can be mentioned Romania and Slovakia. Despite high economic growth for this year (8.7%), Romania will be touched by the crisis, analysts forecasting only 4.7 growth for 2009.

UK

The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis. Sir Win Bischoff, chairman of Citigroup, said he believes that house prices in Britain will keep falling for another two years. The Ernst & Young Item club predicted growth of only 1.5 percent in 2008, slowing to 1 percent in 2009. They also predicted consumer spending would slow to only 0.2 percent, and forecast a two-year drop in investment. The Institute of Directors quarterly business opinion survey showed business optimism at its lowest level since the survey began in 1996. Deputy Governor of the Bank of England, John Gieve said inflation would accelerate 'well over' 4 percent while economic growth is 'slowing fast.' Bank of England Governor Mervyn King said there may be 'an odd quarter or two of negative growth,' following the first quarter of 2009. Gieve said he couldn't rule out the U.K. economy heading into a recession, adding the economy was 'quite a long way' from the end of the slowdown.

Nationwide, the UK's biggest building society, warned the UK could head into a recession after house prices in July fell 8.1 percent from the previous year. Housing prices declined by 1.7 percent in July, double the decline recorded in June. Standard & Poor's said on July 30, 2008 that 70,000 homeowners were in negative equity and it could rise to 1.7 million or about one in six homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England reported that mortgage approvals fell by a record of nearly 70 percent. In Northern Ireland, house sales saw a fall of some 50 per cent according to a survey by the University of Ulster/Bank of Ireland and housing prices fell on average by 4 percent. British manufacturing activity declined by the most in almost a decade in July, the third consecutive month of declines. The number of companies that went into administration in MayJuly was 938, an increase of 60 percent compared with the same period in 2007. The number of company liquidations in the second quarter rose to 3,689, a 16 percent increase and the highest quarterly figure in five years. House builders expect the number of houses built in 2008 in England and Wales to be the lowest since 1924. The declines are seen as an indication the United Kingdom has high chance of entering a recession. Factory production in the UK dropped 0.5 percent in June when twelve out of 13 categories of factory production fell. The economic output of the UK was reported to have increased by just 0.2 percent in the second quarter, the joint-slowest pace since 2001. The Office for National Statistics later gave a revised number saying growth in the British economy was at zero, the worst since the second quarter of 1992. The current slowdown has ended 16 years of continuous economic growth, the longest period of economic expansion in Britain since the 19th century. A report from the National Institute for Economic and Social Research said the economy contracted by 0.1 percent in the period from May to July and 0.2 percent from June to August.

A voter backlash due to the personal financial effects of the global credit crunch was widely attributed by politicians of the United Kingdom Labour Party, which had been in power since 1997, as the reason their political fortunes took a dramatic downturn through May 2008, with a succession of defeats in by-elections and the London Mayoral election, and the worst opinion poll result in their history. Political opponents countered this apparent excuse by pointing to the fact that the incumbent Prime Minister Gordon Brown, who had taken office in June 2007 just before the crisis broke, had been the country's 'Iron Chancellor', and had allegedly not ensured the country had sufficient monetary reserves to be able to lower taxes and ease the burden on voters, despite overseeing one of the longest sustained periods of economic growth in the country's history. In August 2008 the party also faced calls to impose a windfall tax on the utility companies, who were reaping record profits due to the fuel crisis, perceived as in bad taste given rising food and fuel prices.

On 17 September 2008, news emerged that the banking and insurance group HBOS (Halifax Bank of Scotland) was in merger talks with Lloyds TSB about creating a UK retail banking giant worth 30bn. The move received the backing of the British government which stated that it will over-rule any claims from the competition authorities.

According to the Office for National Statistics unemployment claims in August 2008 increased by 32,500 to reach 904,900. The wider Labour Force Survey measure found joblessness rose by 81,000 to 1.72 million between May and July, the largest increase since 1999.

In September, British bank Bradford & Bingley's 20billion savings business was acquired by Spanish bank Grupo Santander. While its retail deposit business along with its branch network will be sold to Santander. The mortgage book, personal loan book, headquarters, treasury assets and its wholesale liabilities will be taken into public ownership.

By November, unemployment had risen to over 1.8 million and is projected to surpass 2 million by Christmas and perhaps even as high as 3 million by 2010.

Spain

Spain s Martinsa-Fadesa, a construction company, has declared bankruptcy as it failed to refinance a debt of 5.1 billion. The two banks with most exposure to Martinsa-Fadesa are reportedly Caja Madrid, at 900m, and Banco Popular, at 400m. Spain's finance minister Pedro Solbes has said it would not bail out the company. In the second quarter in Spain house prices reportedly fell 20 percent. In Castilla-La Mancha some 69 percent of all houses built over the past three years are still unsold. Deutsche Bank said it expects a 35 percent fall in real house prices by 2011. Spain's premier, Jose Luis Zapatero, blamed the European Central Bank for making matters worse by raising interest rates. More than 98 percent of home loans in Spain are priced off floating rates linked to Euribor, which has risen 145 basis points since August. Housing accounts for over 10 percent of Spain's economy. The Bank of Spain is concerned about the health of smaller regional lenders with heavy exposure to the mortgage market.

Although Spain has avoided recession in the first half of 2008, unemployment in the country has risen by 425,000 over the past year, reaching 9.9 percent. Car sales in Spain fell 31 percent in May. Spain's factory output slumped 5.5 percent in May. The country's business lobby Circulo de Empresarios warned of a 'high probability' that Spain's economy would fall into recession in the second half of 2008 due to the housing collapse. Spain had a 7.9 percent decline in retail sales in June compared to the previous year, the largest drop since Spain began registering the results and the seventh consecutive monthly decline. This included a 17.9 percent drop in retail sales of household goods. June food sales in Spain fell by 6.8 percent. Morgan Stanley issued a major alert on the health of Spanish banks and the Spanish economy in a report, saying, 'A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009.' Morgan Stanley also warned there was 40 percent chance of a 0.5 percent contraction of the Spanish economy in 2009, with a risk of an even more extreme 1.4 percent contraction in 2009. According to Spanish automobile manufacturers' association ANFAC new car sales fell 27.5 percent in July from the same time in 2007, the third consecutive monthly drop of over 20 percent. Spain's government forecast the unemployment rate would rise to 10.4 percent in 2008 and to 12.5 percent in 2009. Spain's second largest bank predicted the unemployment rate could reach 14 percent in 2009. Spain's Purchasing Managers Index for the manufacturing sector in July fell to a new low suggesting a deep recession. In the second quarter Spain's economy grew by 0.1 percent, the lowest gain in 15 years.

Germany, Italy, Greece, Portugal

In Germany officials are warning the economy could contract by as much as 1.5 percent in the second quarter because of declining export orders. The economy of Germany contracted in both the second and third quaters putting Germany now in a technical recession. Industrial output in both Italy and Greece has slumped 6.6 percent over the past year.

However, Greece s economy will continue to grow for both 2008 and 2009; Eurostat expects the Greek economy to grow 3.1% and 2.5% respectively.Portugal is off 6.2 percent. Germany's industrial output was down 2.4 percent in May, the fastest rate for a decade. Orders have now fallen for six months in a row, the worst run since the early 1990s. The German Chamber of Industry and Commerce warned of up to 200,000 job losses in coming months. German retails sales fell 1.4 percent in June more than any expectations. The German economy declined by 0.5 percent in the second quarter.

In Italy, Fiat announced plant closures and temporary layoffs at factories in Turin, Melfi, Imola and Sicily. Car sales in Italy have fallen by almost 20 percent over each of the past two months. Metalmeccanici, Italy's car workers' union said, 'The situation is evidently more serious than had been understood.' On July 10, 2008 economic think tank ISAE lowered its growth forecast for Italy to 0.4 percent from 0.5 percent and cut the 2009 outlook to 0.7 percent from 1.2 percent. Analysts have predicted Italy had entered a recession in the second quarter or would enter one by the end of the year with business confidence at its lowest levels since the 9-11 terrorist attacks. Italy's economy contracted by 0.3 percent in the second quarter of 2008.

France, Finland, Benelux

Other Eurozone members saw a decline in their economy in the second quarter. The French economy declined by 0.3 percent, Finland s economy declined by 0.2%, and the Netherlands showed zero growth in the second quarter. According to INSEE, France's statistical agency, the French GDP was projected to decline by 0.1 percent in the third quarter of 2008 with another 0.1 percent decline in the fourth quarter and Eric Woerth, the French budget minister, said France was in a technical recession. However the final estimations gave by the INSEE showed the French GDP actually increased by 0,14% thus avoiding a technical recession.

On September 28, Dutch-Belgian bank Fortis was partially nationalized with a cash infusion from the Benelux countries amounting to 11.2 billion. Fortis' troubles started in the beginning of the year with an announcement that it faced around $1.5 bn of losses in the American sub-prime catastrophe. In June, the company announced a selloff of assets to raise 5 bn to improve the liquidity of the organisation. This, however, proved insufficient. On 6 October 2008, the French bank BNP Paribas took over 75% of Fortis' activities in Belgium, and 66% in Luxembourg, in exchange for the Belgian government becoming the new group's major shareholder.

In May industrial output fell in the Netherlands by 6 percent.

3. Asia

China

In China, a struggle was underway to see who would swallow the losses on US Agencies and Treasuries. On November 9, 2008 China announced a package of capital spending plus income and consumption support measures. Four trillion yuan ($586 billion) will be spent on upgrading infrastructure, particularly roads, railways, airports and the power grid; on raising rural incomes via land reform; and on social welfare projects such as affordable housing and environmental protection.

Japan

In Japan exports in June declined for the first time in about five years falling by 1.7 percent. Exports to the United States and European Union fell 15.4 percent and 11.2 percent respectively. The decline in exports and increase in imports cut Japan's trade surplus $1.28 billion a decline of 90 percent from the previous year. An economist at the Royal Bank of Scotland said the decline means the Japanese economy most likely declined in the second quarter. Taro Aso, secretary-general of Japan's ruling Liberal Democratic Party, said he believes Japan had entered a recession. Japan's economy declined by 0.6 percent in the second quarter of 2008. This was later revised to a decline of 0.7 percent. Japanese exports grew 0.3 percent in August of 2008 compared to a year before down from 8 percent the previous month. Exports to the U.S. fell 21.8 percent, the biggest decline on record, and exports to Europe fell 3.5 percent. Two Japanese banks appeared on the list of major Lehman creditors. On November 17th, the Japanese Economy Minister announced that the nation was officially in a recession.

Official forecasts

On November 3, 2008, the EU-commision in Brussels predicted for 2009 only an extremely low increase by 0.1% of the BIP, for the countries of the Euro-zone (France, Germany, Italy, etc.). They also predicted negative numbers for the UK (-1.0% ), Ireland, Spain, and other countries of the EU. Three days later, the IMF at Washington, D.C., predicted for 2009 a worldwide decrease, -0.3%, of the same number, on average over the developed economies (-0.7% for the US, and -0.8% for Germany). Economically, the car industry is especially concerned; as a consequence, several countries have already launched immediate help-packages, each involving several billions of dollars, euros or pounds.