At the very core, a credit crisis is when a number of financial institutions see the loans they have issued start to default. As this phenomenon occurs, the financial institutions’ balance sheets are shrunk significantly. Their assets, the loans, become non-performing assets and do not provide them with any income or payments; this results in financial institutions not issuing further loans, which, in turn, leads to lower funding ability and higher interest rates. The credit crisis then moves into a liquidity crisis, as the borrower can’t pay the higher rates and is unable to fund daily operations. A credit crisis could then lead to insolvency and bankruptcy.
Between 2007 and 2009, the U.S. economy witnessed a credit crisis that was initiated by massive downturn in the housing market. As the value of home prices declined, those who had mortgages started to default; banks, in return, saw their balance sheets shrink immensely. The banks essentially stopped lending to consumers and each other. Less credit in the market took the U.S. economy towards a downturn, resulting in lower consumption and business investments.
To fight all this, the Federal Reserve and the U.S. government had to intervene, bailing out banks that were facing severe liquidity crisis. Many banks were closed by the government, investment banks like Lehman Brothers filed for bankruptcy, and others were sold.
Six years ago this month, in the midst of the Great Recession, Lehman Brothers, one of the most well-known investment banks in the U.S. economy, filed for bankruptcy.At the time, Lehman’s bankruptcy sparked widespread worries…and the U.S. financial system teetered on the verge of collapse. For those of us who remember that time,. Read More
The U.S. dollar is still regarded as the reserve currency of the world. The majority of international transactions are settled in U.S. dollars and most central banks around the word hold it in their foreign exchange reserves.But since the Credit Crisis of 2008, and the multi-trillion-dollar printing program by the Federal Reserve,. Read More
Remember Alan Greenspan? He was the chairman of the Federal Reserve from 1987 to 2006. Several media sources, including this one, blamed the sub-prime mortgage fiasco that led to the Credit Crisis of 2008 on the easy money policies under the leadership of Greenspan.But the Credit Crisis aside, it is ironic but true that Greenspan has. Read More
My colleague Robert Appel (BA, BBL, LLB) issued a research paper to the subscribers of one of his financial advisories earlier this week. I thought it important that all my readers be aware of and understand the crux of what Robert is saying about our current economic situation and where it will eventually lead.Here it is:“The actions. Read More
In 2012, I predicted that if the Federal Reserve couldn’t get the economy growing again, it would take interest rates into the negative zone.Well, yesterday, the European Central Bank (ECB), the second-biggest central bank in the world, trumped the Fed and became the first major central bank to offer depositors negative interest. Read More