The financial crisis of 2007 to the present is a crisis that was triggered by a liquidity shortfall in the United States banking system caused by the overvaluation of assets. The immediate cause or trigger of the crisis was the bursting of the United States housing bubble which peaked in approximately 2005–2006. Already-rising default rates on 'subprime' and adjustable rate mortgages (ARM) began to increase quickly thereafter.
Low interest rates and large inflows of foreign funds created easy credit conditions for a number of years prior to the crisis, fueling a housing construction boom and encouraging debt-financed consumption. The combination of easy credit and money inflow contributed to the United States housing bubble. Loans of various types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an unprecedented debt load.
As part of the housing and credit booms, the number of financial agreements called mortgage-backed securities (MBS) and collateralised debt obligations (CDO), which derived their value from mortgage payments and housing prices, greatly increased. Such financial innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major global financial institutions that had borrowed and invested heavily in subprime MBS reported significant losses...and the rest is history Lehman Brothers, AIG, Merrill Lynch, Fannie Mae & Freddie Mac, RBS, Lloyds, HBOS, etc, etc.
The International Monetary Fund estimated that large U.S. and European banks lost more than US $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit US $1.2 trillion and European bank losses will reach US $1.6 trillion.
A good example of what banks went through can be seen below, in terms of the loss of of Market Capitalisation of major banks prior to the outset of the crisis (in Q2 2007) and at January 20th 2009....
Not surprisingly the financial crisis precipitated a global recession. There was an immediate breakdown of the system of international financial intermediation, which had been smoothly transferring China’s unprecedented surpluses to cover the unprecedented current payments deficits of the United States...suddenly some of the long-term questions about the sustainability of China’s early twenty-first-century growth strategy demanded immediate answers.
Could China replace export-oriented growth with similarly strong growth focused on opportunities in the domestic market?
Could China expand expenditure enough and quickly enough if developments in the international economy prevented the accommodation of China’s huge and growing external surpluses?
2. China's Emergence as a Major Player Post-Economic Crisis
The superb Beijing Summer Olympic games in August 2008 and the very impressive show of power presented on the 60th anniversary celebration of the People's Republic of China on October 1, 2009 were major events held in the midst of the global financial crisis that clearly announced the arrival of China into the world stage and a sign to the troubled western economies that a strong and assertive China was moving forward towards the top spot.
3. IMF's endorsement of China's Economic Performance
In a recent report (29.07.10) from the International Monetary Fund (IMF) the Chinese government is praised for skillful response to the global financial crisis.
http://www.imf.org/external/pubs/ft/survey/so/2010/new072910a.htm
In an interview, the Fund’s lead economist on China, Nigel Chalk, said that despite the global slump, the country’s economy had posted an impressive performance. He explains, they clearly understood that the downturn of the global economy would greatly affect China, and you saw a response that involved a large fiscal package to stimulate the economy. It also involved a quite significant amount of monetary stimulus.
All of these things kind of work together, they’re all very helpful in supporting the economy in the face of this very large external shock. And you see that in the outturn for 2009. During that year you had more than 4% of GDP drag on the economy from the decline of exports. Nevertheless the economy grew overall by more than 9%, which is quite an impressive achievement. Our assessment is a large part of that was driven by the public sector stimulus.
The IMF said China’s 'quick, determined, and effective policy response' meant it was now spearheading the global recovery.
There is no argument in regards to the scale of China’s achievement, which can now be viewed over three decades, is extraordinary by any standard! It has industrialised at roughly three times the pace that the West did. What took 100 years in Europe has taken one generation in China. And in handling this massive transformation, what is really striking is the absence of large-scale violence.
It is true that China is a dictatorship...but so were many Western countries when they industrialising their economies, and they had much more mass violence. Other East Asian countries have made this journey, but none has the size and scale to alter the world in the same way China is doing...
The net effect is that we have the rise onto the world stage of a new great power and one with massive potential for further growth along all dimensions. Of course, nothing can be taken for granted. China does have a restless middle class, persecuted minorities, border disputes, and the challenge of moving up the economic ladder, all within the context of a one-party system.
The superb Beijing Summer Olympic games in August 2008 and the very impressive show of power presented on the 60th anniversary celebration of the People's Republic of China on October 1, 2009 were major events held in the midst of the global financial crisis that clearly announced the arrival of China into the world stage and a sign to the troubled western economies that a strong and assertive China was moving forward towards the top spot.The media started talking of a world dominated not by G-7, but by G-2 consisting of the US and China. The credit crisis has certainly pushed China from behind America’s shadow into a central position on the world stage...
3. IMF's endorsement of China's Economic Performance
In a recent report (29.07.10) from the International Monetary Fund (IMF) the Chinese government is praised for skillful response to the global financial crisis.
http://www.imf.org/external/pubs/ft/survey/so/2010/new072910a.htm
In an interview, the Fund’s lead economist on China, Nigel Chalk, said that despite the global slump, the country’s economy had posted an impressive performance. He explains, they clearly understood that the downturn of the global economy would greatly affect China, and you saw a response that involved a large fiscal package to stimulate the economy. It also involved a quite significant amount of monetary stimulus.
All of these things kind of work together, they’re all very helpful in supporting the economy in the face of this very large external shock. And you see that in the outturn for 2009. During that year you had more than 4% of GDP drag on the economy from the decline of exports. Nevertheless the economy grew overall by more than 9%, which is quite an impressive achievement. Our assessment is a large part of that was driven by the public sector stimulus.
The IMF said China’s 'quick, determined, and effective policy response' meant it was now spearheading the global recovery.
There is no argument in regards to the scale of China’s achievement, which can now be viewed over three decades, is extraordinary by any standard! It has industrialised at roughly three times the pace that the West did. What took 100 years in Europe has taken one generation in China. And in handling this massive transformation, what is really striking is the absence of large-scale violence.
It is true that China is a dictatorship...but so were many Western countries when they industrialising their economies, and they had much more mass violence. Other East Asian countries have made this journey, but none has the size and scale to alter the world in the same way China is doing...
The net effect is that we have the rise onto the world stage of a new great power and one with massive potential for further growth along all dimensions. Of course, nothing can be taken for granted. China does have a restless middle class, persecuted minorities, border disputes, and the challenge of moving up the economic ladder, all within the context of a one-party system.
No comments:
Post a Comment