The Times reports that the credit crunch is so serious that it may force the
As much as $400 billion could be wiped out from the
The mass of defaults on high-risk home loans in America has emergedin greater detail over the last 3-4 months but more and more banks andlending institutions are having to own up to the full extent of theirlosses as the financial world is being rocked to it’s core with thesheer scale of the financial melt-down.
Mr Jan Hatzius, chief economist at Goldman Sachs estimates that withevery $1 dollar in losses, equates to the inability of highly leveragedWall Street lending by $10, as they typically aim for a so-calledcapital ratio of 10 per cent.
“If leveraged investors see $200 billion of the $400 billionaggregate credit loss, they might need to scale back their lending by$2 trillion,” Mr Hatzius said.
Mr Hatzius’s actual prediction of a $400 billion write-off would reduce lending by $4,000 billion.
“The likely mortgage credit losses pose a significantly biggermacroeconomic risk than generally recognised. It is easy to see howsuch a shock could produce a substantial recession,” Mr Hatzius said.
“While the uncertainty is huge, the associated downward pressure onlending raises the risk of significant weakness in economic activity.”
Goldman’s forecast predicts further disastrous consequences forglobal economy, sighting numerous factors such as the cost of the warin
“The potential for an economic implosion and subsequent worldrecession is huge and could surpass the biggest financial crash inhistory of that of the Great Depression”.
Billions were wiped off the world financial system in the 1920’s /30’s. This period was known as ‘The Great Depression’ (also known inthe
It all started with the stock market crash on October 29, 1929,known as Black Tuesday. The depression had devastating effects in boththe industrialised countries and those which exported raw materials.
With similar beginnings to the current crisis, the Great Depressionwas not a sudden total collapse but more of a slow burning fuse thatsparked a sequence of major financial catastrophes across the
The stock market had suffered losses due to the October 1929 crash –not too dissimilar to the Northern Rock and the Sub-Prime mortgagecrisis of today.
Having faced severe losses from the initial crash, consumerismplunged dramatically and a severe drought ravaged the agriculturalheartland of the
Credit was ample and available to sub-prime borrowers at low ratesand few were reluctant to avoid borrowing. By May 1930, vehicle saleshad declined to below the levels of 1928. Oil prices had risen sharplywhile retail values in general began to decline.
Wages began to drop in 1931. Conditions were worst in farming areaswhere commodity prices plunged, and in mining and logging areas whereunemployment was high and there were few other jobs. The decline in theAmerican economy was the motor that pulled down most other countries atfirst, then internal weaknesses or strengths in each country madeconditions worse or better. By late in 1930, a steady decline set inwhich reached bottom by March 1933.
Many experts and scholars believe that it wasthe fault of governments and the banking institutions who were to blamefor the great depression. It was said that the problems began withexcessive lending and a blatant disregard for cheap loans.
Massive bank failures were largely to blame for the great depressionand the stock market crash of the 1930’s, huge layoffs occurred,resulting in unemployment rates of over 25%. Banks which had financed alot of bad debt began to fail as debtors defaulted on debt and bankdepositors became worried about their deposits and began massivewithdrawals.
Government guarantees and Federal Reserve banking regulations toprevent these types of panics were ineffective or not used. Bankfailures led to the evaporation of billions of dollars in assets. Up to40% of the available money supply normally used for purchases and bankpayments was destroyed by all these bank failures.
By 1933, depositors saw $140 billion of their deposits disappear dueto uninsured bank failures. Bank failures snowballed as desperatebankers tried calling in loans which the borrowers did not have time ormoney to repay. With future profits looking poor, capital investmentand construction slowed or completely ceased. In the face of bad loansand worsening future prospects, the surviving banks became even moreconservative in their lending. Banks built up their capital reserves,which intensified deflationary pressures. The vicious cycle developedand the downward spiral accelerated. This kind of self-aggravatingprocess may have turned a 1930 recession into a 1933 great depression.
There are frightening similarities in the current situation in the
In addition to making it much harder to secure a mortgage or loan,such a dramatic decline in lending would hamper the ability ofconsumers to borrow money to finance smaller purchases such as cars,televisions and washing machines.
Since two-thirds of the
Goldman’s prediction comes after Wall Street firms such asCitigroup, Merrill Lynch and Morgan Stanley have collectively reportedmore than $50 billion in losses on investments related to sub-primemortgages.
It follows the US Federal Reserve’s second cash infusion of themonth on Thursday, when it injected $47.25 billion into the financialsystem, the largest since the terrorist attacks of September 11, 2001 .
The latest injection was administered two weeks after the Fedinjected $41 billion, as the fallout from the housing crisis gatheredmomentum.
There is no end in sight and with other countries economies clearly suffering in tandem with the
