US Global Financial Crisis: Timeline of Causes and Effects

US Global pecuniary Crisis Timeline of Causes and Effects entryThe world(a) fiscal crisis of 2008-2009 began in July 2007 when a loss of federal agency by investors in the prize of securitized owes in the yield together States resulted in a liquid crisis that prompted a important injection of groovy into fiscal merchandises by the unite States federal officialeral qualification, Bank of England and the europiuman Central Bank. In September 2008, the crisis deepened, as stock commercialises dry landwide crashed and entered a block of high volatility, and a wide number of affirms, mortgage l annulers and restitution companies failed in the fol baseing weeks.ScopeThe crisis in documentary estate, sticking and recognize in the joined States had a world(prenominal) r all(prenominal), bear on a wide range of fiscal and frugal activities and institutions, including theOverall alter of identification with monetary institutions making some(prenominal) corpor ate and consumer acknowledgement harder to getFinancial markets (stock ex budges and derivative markets) that experienced steep declinesLiquidity problems in rectitude funds and hedge fundsDevaluation of the as get ups underpinning insurance contracts and pension funds ahead(p) to concerns or so the top executive director of these instruments to meet future obligationsIncreased state- provideed debt public finance due to the provision of public funds to the monetary operate sedulousness and former(a) affected industries, and theDevaluation of some currencies (Icelandic crown, some Eastern Europe and Latin the States currencies) and extendd coin volatility,BackgroundIn the old age guide up to the crisis, high pulmonary tuberculosis and low savings order in the U.S. contri thated to signifi layaboutt amounts of foreign m unrivaledy flowing into the U.S. from fast- plowing economies in Asia and oil-producing countries. This inflow of funds combined with low U.S. inter est rates from 2002-2004 resulted in easy credit conditions, which fueled two housing and credit bubbles. Loans of respective(a) types (e.g., mortgage, credit card, and auto) were easy to obtain and consumers assumed an strange debt load. As leave- taking of the housing and credit booms, the amount of fiscal agreements called mortgage-backed securities (MBS), which derive their valuate from mortgage payments and housing prices, greatly increased. Such monetary innovation enabled institutions and investors around the world to invest in the U.S. housing market. As housing prices declined, major world(a) fiscal institutions that had borrowed and invested heavily in subprime MBS reported significant losses. Defaults and losses on different loan types also increased significantly as the crisis expand from the housing market to other piece of musics of the parsimoniousness. Total losses ar estimated in the trillions of U.S. dollars globally.While the housing and credit bubble s built, a series of factors caused the fiscal system to become increasingly fragile. Policymakers did not recognize the increasingly master(prenominal) role played by monetary institutions much(prenominal) as enthr mavinment swans and hedge funds, also known as the shadow banking system. both(prenominal) experts study these institutions had become as important as commercial-grade (depository) banks in providing credit to the U.S. economy, but they were not subject to the uniform rulers. These institutions as considerably as certain regulated banks had also assumed significant debt burdens while providing the loans describe above and did not make a financial cushion capable to absorb large loan defaults or MBS losses. These losses impacted the ability of financial institutions to lend, slowing frugal employment. Concerns regarding the stability of expose financial institutions herd central banks to take action to provide funds to pull ahead lend and to restore fa ith in the commercial paper markets, which are total to funding line of descent operations. presidential terms also bailed out key financial institutions, presume significant additional financial commitments.Cause Of The Financial CrisisVarious causes break been proposed for the crisis, with experts placing different weights upon fractionicular issues. The proximate cause of the crisis was the turn of the housing roulette wheel in the United States and the associated line up in delinquencies on subprime mortgages, which imposed substantial losses on umpteen financial institutions and shook investor authorization in credit markets. However, although the subprime debacle triggered the crisis, the learnings in the U.S. mortgage market were only one aspect of a much larger and to a greater extent encompassing credit boom whose impact transcended the mortgage market to affect m either other forms of credit. Aspects of this broader credit boom included widespread declines in u nderwriting standards, breakdowns in lending oversight by investors and rating agencies, increased reliance on tangled and opaque credit instruments that proved fragile under stress, and unusually low compensation for adventure-taking. The abrupt end of the credit boom has had widespread financial and economic ramifications. Financial institutions have seen their hood depleted by losses and write downs and their balance sheets clogged by complex credit products and other illiquid assets of uncertain value. Rising credit risks and intense risk aversion have pushed credit spreads to unprecedented levels, and markets for securitized assets, except for mortgage securities with government guarantees, have unopen down. Heightened systemic risks, falling asset values, and tightening credit have in turn taken a heavy toll on moving in and consumer confidence and precipitated a sharp slowing in global economic exercise. The damage, in terms of lost output, lost jobs, and lost wealth, is already substantial. etymon with failures caused by misapplication of risk controls for bad debts, collateralization of debt insurance and fraud, large financial institutions in the United States and Europe faced a credit crisis and a slowdown in economic activity. The crisis rapidly highly-developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock world poweres, and large reductions in the market value of equities and commodities. Moreover, the de-leveraging of financial institutions further accelerated the liquid crisis and caused a decrease in international trade. World political leaders, national ministers of finance and central bank directors coordinated their efforts to reduce fears, but the crisis continued. At the end of October a currency crisis developed, with investors transferring vast great(p) resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading m any step upnt economies to seek aid from the International Monetary Fund.Ultimately, smell for a cause of the real financial crisis, it is critical to remember that organizations failed to do a number of thingsTruly adopt an first step risk focal order culture.Embrace and demonstrate appropriate enterprise risk centering bearings, or attributes.Develop and reward internal risk management competencies, andUse enterprise risk management to inform management decision-making in both taking and avoiding risks.Enterprise risk management to be effective essential unsoundedly change the way organizations think about risk. When enterprise risk management becomes part of the DNA of a companys culture, the warning signs of a market through with(p) for(p) astray cannot go unseen so easily. When every employee is part of a larger risk management process, companies can be much more resilient in the face of risks. It is an important lesson to learn now, before the bout renews itself and busines ses find themselves facing the next rack of business failures, lapses in risk management and shortcomings in governance. The cycle does not have to repeat itself as it always has in the past. Enterprise risk management is an important key to preventing it. Enterprise risk management, when designed and implemented comprehensively and systemically, can change future outcomes. When it is practiced fully, enterprise risk management does not skillful help protect businesses from setbacks, it enables better overall business performance.Effects Of The Financial CrisisEconomic Effects And ProjectionsGlobal AspectsA number of commentators have suggested that if the liquidness crisis continues, there could be an extended inlet or worse. The continuing development of the crisis prompted fears of a global economic collapse. The financial crisis is possible to yield the biggest banking shakeout since the savings-and-loan meltdown. The United Kingdom had started systemic injection, and the w orlds central banks were now cutting interest rates. restrictive Proposals And Long-Term SolutionsA variety of regulative changes have been proposed by economists, politicians, journalists, and business leaders to minimize the impact of the on-line(prenominal) crisis and prevent recurrence. However, as of April 2009, many of the proposed solutions have not yet been implemented. These includeBen Bernanke test resolution procedures for termination troubled financial institutions in the shadow banking system, such as enthronization banks and hedge funds.Joseph Stiglitz Restrict the leverage that financial institutions can assume. take up executive compensation to be more occupyd to great-term performance. Re-instate the separation of commercial (depository) and investment banking established by the Glass-Steagall arrange in 1933 and repealed in 1999 by the Gramm-Leach-Bliley Act.Simon Johnson Break-up institutions that are too big to fail to limit systemic risk.capital of Minn esota Krugman Regulate institutions that act like banks correspondently to banks.Alan Greenspan Banks should have a stronger capital cushion, with graduated regulatory capital requirements (i.e., capital ratios that increase with bank size), to caution them from becoming too big and to offset their competitive advantage.Warren Buffett subscribe to minimum down payments for home mortgages of at least 10% and income verification.Eric Dinallo run into any financial institution has the necessary capital to support its financial commitments. Regulate credit derivatives and ensure they are traded on well-capitalized exchanges to limit counterparty risk.Raghuram Rajan Require financial institutions to maintain sufficient contingent capital (i.e., pay insurance premiums to the government during boom periods, in exchange for payments during a downturn.)A. Michael Spence and Gordon Brown Establish an early-warning system to help detect systemic risk.Niall Ferguson and Jeffrey Sachs Impos e haircuts on bondholders and counterparties anterior to using taxpayer money in bailouts.Nouriel Roubini Nationalize insolvent banks. Reduce mortgage balances to assist homeowners, giving the lender a share in any future home appreciation.Timeline Of EventsPredecessorsMar-2000 Dot-com bubble peakJan-2001 First fell in Fed Funds rate for this cycle (from 6.5% to 6.00%)Stock market downturn of 2002Jun-2003 Lowest Fed Funds rate for this cycle (1%) posthumous 2003 Lowest 3mo T-bill rate for this cycle (0.88%)2003-2004 Prolonged period of low Fed Funds and positively sloped yield curveJun-2004 First increase in Fed Funds rate for this cycle (from 1% to 1.25%)2003-2005 menses of maximum inflation of the United States housing bubble2004-2006 Slow rise in Fed Funds rate with positively sloped but narrowing yield curveFeb-2005 Greenspan calls long-term interest rate behavior a conundrumJun-2006 Fed Funds reach peak for this cycle of 5.25%Oct-2006 Yield curve is flatEvents Of 2007marchla nd, 2007 Yield curve maximum sexual inversion for this cycleAugust, 2007 Liquidity crisis emergesSeptember, 2007 Northern judder seeks and receives a liquidity support facility from the Bank of EnglandOctober, 2007 Record high U.S. stock market October 9, 2007 Dow Jones industrial total (DJIA) 14,164Events Of 2008January, 2008 Stock Market VolatilityFebruary, 2008 Nationalisation of Northern RockMarch, 2008 Collapse of Bear StearnsJune 27, 2008 Bear Market of 2008 declaredJuly 1, 2008 Bank of America buys Countrywide FinancialJuly, 2008 Oil prices peak at $147 per barrel as money flees housing and stock assets toward commoditiesSeptember, 2008 Emergency Economic Stabilization Act of 2008September, 2008 Troubled Assets Relief chopineSeptember, 2008 Bankruptcy of Lehman BrothersSeptember, 2008 Federal takeover of Fannie Mae and Freddie macSeptember, 2008 American International GroupFederal Reserve bailoutSeptember, 2008 Merrill Lynch change to Bank of America CorporationSeptembe r, 2008 Morgan Stanley and Goldman Sachs confirmed that they would become traditional bank holding companiesSeptember, 2008 partial nationalization of Fortis holdingOctober, 2008 Large losses in financial markets world wide throughout September and OctoberOctober, 2008 Passage of EESA of 2008October, 2008 Icelands major banks nationalizedNovember, 2008 China creates a stimulus planNovember, 2008 Dow Jones Industrial Average (DJIA) touches new low point of 7,507 pointsDecember, 2008 The Australian politics injects economic stimulus megabucks to avoid the country going into recession, December, 2008December, 2008 Madoff Ponzi scheme scandal eruptsDecember, 2008 Belgium government resigns as a result of Fortis nationalizationEvents Of 2009January 2009 Blue Monday Crash 2009January 2009 U.S. President Barack Obama proposes federal spending bill approaching $1 trillion in value in an attempt to remedy financial crisisJanuary 2009 Lawmakers propose massive bailout of flunk U.S. banksJ anuary 2009 the U.S. House of Representatives passes the aforementioned spending bill.January 2009 Government of Iceland collapses.February 2009 Canadas Parliament passes an early cypher with a $40 gazillion stimulus package.February 2009 JPMorgan Chase and Citigroup formally forecast a temporary moratorium on residential foreclosures. The moratoriums forget remain in effect until March 6 for JPMorgan and March 12 for Citigroup.February 2009 U.S. President Barack Obama signs the $787 one million million million American Recovery and Reinvestment Act of 2009 into law.February 2009 The Australian Government seeks to enact some other economic stimulus package.February 2009 2009 Eastern European financial crisis arises.February 2009 The Bank of Antigua is taken over by the Eastern Caribbean Central Bank after Sir Allen Stanford is charge by U.S. financial authorities of involvement in an $8bn (5.6bn) investment fraud. Peru, Venezuela, and Ecuador, had preceding suspended operati ons at banks owned by the group.February 23, 2009 The Dow Jones Industrial Average and the SP 500 indexes stumbled to lows not seen since 1997.February 27, 2009 The SP index closes at a level not seen since December 1996, and also closes the ii month period beginning January 1 with the crush two month opening to a year in its history with a loss in value of 18.62%March 2, 2009 The SP index finishes the first trading day of March with a drop of 4.7%, the worst opening to a March in NYSE history.March 6, 2009 The UK Government takes a controlling interest in Lloyds Banking Group by insuring their debt.March 8, 2009 United States bear market of 2007-2009 declaredMarch 18, 2009 The Federal Reserve announced that it will purchase $1.15 trillion in U.S. assets ($750 billion in mortgage backed securities, $300 billion in Treasuries, $100 billion in Agencies) in a bid to prop up liquidity and lending to spur economic growth. The markets initially rallied on the news, however concerns bega n to grow regarding long term devaluation of the U.S. dollar and subsequent inflation.March 23, 2009 In the United States, the FDIC, the Federal Reserve, and the Treasury Department jointly announce the Public-Private Investment Program to leverage $75-$100 billion of TARP funds with private capital to purchase $500 billion of Legacy Assets (a.k.a. toxic assets).June 3, 2009 The Australian Government announces that the Australian economy did not show negative growth for two consecutive quarters, and thus has not officially entered recession.Literature ReviewThe financial crisis motivates the below literatures to express their views from different angles, the below section highlights the main points for each1. Jos De Gregorio Inflation targeting and financial crises Governor of the Central Bank of Chile, Colombia, Bogota, 28 may 2009.Financial stability must be preserved with an adequate regulatory system. Agencies must analyze the strength of institutions, while central banks must estimate the systems overall stability. Regulators and central banks must closely cooperate and work in the effort of maintaining the integrity of the financial system.Regulating specific institutions is not full, because interconnections follow that could derive in a systemic crisis. The current crisis proves that the regulatory cooking stove must encompass every agent with a systemic importance. So a proper macro-prudential regulatory system is needed.A first set of instruments has to do with capital adequacy. However, this is not enough, and it is no trivial to judge the sapience of the financial system by its capital and leverage levels. Higher levels of capital will certainly have to be required in the future, peculiarly as banks gra treblely assume higher levels of risk.Central banks must modulate and perfect the models with which they carry out their stress tests. They should take into account the interconnections at heart the financial system and detect vulnerabilit ies opportunely.It is important to allow securitization, but establishing incentives for both credit screening and monitoring of payments to remain at the banks and that the process of transferring credit risk away from single institutions balance sheets does not escape the authoritys eye. The current crisis should not become a hindrance to financial development, but a sign of alert in favor of prudence and rigor when assessing the innovations.2. George Provopoulos Reflections on the economic and financial crisis Athens, 18 May 2009.The key priority among indemnity makers is to bring back economic growth and help bring about prosperity for everyone. The indemnity response should also be of a dual nature, one part of which involves a short-run response and the second part of which involves a medium-term response. In the short run, whatever is feasible should be done to support economic convalescence. In the medium term, is the preparation to pursue a credible exit strategy from t he extraordinary insurance policy interventions while evolution an effective modeling for financial supervision. The short-term, response will help surface the way to retrieval. The second, medium-term, response will help ensure that organizations do not experience a similar crisis in the future.3. Rakesh Mohan Global financial crisis causes, impact, policy responses and lessons , London, 23 April 2009.The ongoing global financial crisis can be generally attributed to extended periods of excessively loose monetary policy over the period 2002-04. Very low interest rates during this period encouraged an war-ridden search for yield and a substantial compression of risk-premia globally. Abundant liquidity in the advanced economies generated by the loose monetary policy put its way in the form of large capital flows to the emerging market economies. All these factors boosted asset and commodity prices, including oil, across the spectrum providing a boost to consumption and invest ment. The ongoing deleveraging in the advanced economies and the plunging consumer and business confidence has led to recession in the major advanced economies.4. Jean-Claude Trichet The global dimension of the crisisJapan, Tokyo, 18 April 2009.The current crisis has shown that there is a need for more rigorous regulation of the global financial system. Such regulation needs to meet two fundamental requirements. First, it needs to prevent the excessive risk taking that we have been observing in financial markets over the past years and that led to the universe of asset price bubbles and large imbalances in the global economy. At the same time, it needs to create an environment that is conducive to sustainable growth for economies in the long run.The international community has swiftly reacted to the need for greater coordination of policies and regulation of international financial marketsNational governments have in addition undertaken an unprecedented concerted fiscal expansion to stimulate demand and foster confidence in economies. Governments have also decided on a broad set of measures to support the banking heavens and strengthen the stability of the international financial system. These measures include the injection of new capital, guarantees on bank debt and deposits, as well as large-scale schemes that aim at coping with the issue of impair assets.5. Ben S Bernanke Four questions about the financial crisisAtlanta, Georgia, 14 April 2009.The current crisis has been one of the approximately difficult financial and economic episodes in modern history. there are tentative signs that the sharp decline in economic activity may be slowing. A leveling out of economic activity is the first step toward recovery.6. Philipp Hildebrand Developments in the current financial crisis, Berne, 2 April 2009.The financial market turbulence, which began some 20 months ago, has grown into the largest and most complex crisis since the 1930s. The real world economy is now feeling the full force of this financial crisis its a very difficult period, although there are a few signs that the global economy could possibly be close to the cyclical trough. However, the track to recovery is unlikely to be straightforward, and the downside risks to growth remain considerable.Lucas Papademos How to deal with the global financial crisis and promote the economys recovery and sustained growth, Brussels, 26 March 2009.The ruggedness and duration of the current economic and financial crisis is partly a aftermath of the reduced confidence in the prospects of the economy and the soundness of the financial system. The recovery of the economy also hinges on the restoration of consumer and business confidence that can contribute to the revival of spending and investment, and the return to normality in financial markets and the banking system. The rebuilding of trust will depend on ability to suitably combine the policy actions needed to speak to the immediate cha llenges with the necessary reforms for establishing an economic, financial and institutional environment that is conducive to sustainable long-term growth.8. Jean-Claude Trichet What lessons can be learned from the economic and financial crisis? Paris, 17 March 2009.The global economy was hit in mid-September 2008 by an unprecedented abrupt loss of confidence. It was possibly the first time in economic history that a whizz negative event was able, within a few days, to have a simultaneous and negative effect on all private economic agents in every economy, industrialized and emerging.Public authorities, executive branches, and central banks must do all they can to regain, preserve and foster confidence among households and corporations to pave the way for sustainable prosperity. This calls for actions to be measured.Confidence of households and corporations today depends essentially on their trust in the capacity of authorities to preserve the soundness and sustainability of fisca l positions in the years to come. Confidence of economic agents today depends equally on their trust in the mark of central banks to preserve price stability.It is essential to achieve this balance between the measured audacity of todays non-conventional decisions and the credible determination to ensure a path that is sustainable in the medium and long term. Exaggerated swings without prospect would delay the return of sustainable prosperity, because they would undermine confidence, which is the most precious ingredient in the present circumstances.9. Lucas Papademos Tackling the financial crisis policies for stability and recovery London, 11 February 2009.To presume better regulation, more effective supervision and longer-term stability-oriented macroeconomic policy would suffice to eliminate the cyclical features of the financial system and the build-up of financial imbalances in the future. Market participants have an important role to play and self-interest in addressing some of the revealed weakness in the financial system, and in modify market discipline. What policy-makers can do, and should aim at, is to ensure that the macroeconomic policies and the regulatory framework designated do not exacerbate cyclical fluctuations, and that, when financial imbalances and market excesses emerge and are identified, the appropriate tools to address them in an effective manner should be used.10. Herv Hannoun Long-term sustainability versus short-term stimulus is there a trade-off? , Kuala Lumpur, 7 February 2009.There are two stylised types of policy response to the global crisis stabilization and stimulation. A measured stabilisation policy accepts the fact that the enrolment is inescapable while it endeavours to mitigate the pain and promote an orderly adjustment. In contrast, stimulation policies, pushed to the extreme, seek a stimulus that would be large enough to, so to speak, eliminate the adjustment period a goal that would obviously be illusory.I t is a legitimate goal of policy to mitigate the macroeconomic recession and slow the spin of the negative feedback loop. However, expansionary policies that fail to take the crisis of confidence sufficiently into account run the risk of becoming ineffective beyond the very short term. To restore confidence in a sustainable way, policy actions should be embedded in a credible longer-term perspective and pay due attention to their effects on the expectations of economic agents. The crucial actions are to develop consistent medium-term policy frameworks, plan sufficiently in advance for how current policies will be unwound when normal conditions return, and develop a consistent approach to macro financial stability. Together, these measures would ensure that short-term policy actions do not sow the seeds of tomorrows boom and bust episodes.11. Philipp Hildebrand The global financial crisis analysis and outlook, Zurich, 5 February 2009.Only a careful investigation of the responsibilit ies is likely to point to ways in which financial system, and ultimately economy, can be made more resilient once this crisis has been overcome. Financial markets react to incentives, and these incentives were lay in the past. It is in power to start lobbying for clearly defined and risk-limiting conditions.12. Jean-Claude Trichet Remarks on the financial turmoilBrussels, 8 December 2008.Measures to address the challenges posed by the current conditions in the financial markets. In addition avoiding the reoccurrence of a similar crisis in the future. However, measures taken by public authorities can only go so far. The banking sector needs to also do its part by committing to reactivating the interbank market, resuming their intermediation role and implementing the necessary reforms aimed at strengthening the resilience of the financial system in the long term.13. Jose Manuel Gonzalez-Paramo The financial market crisis, skepticism and policy responses , Madrid, 21 November 2008.Un certainty translated into a severe under-appreciation of the risks associated with certain classes of financial instruments and institutions. More recently, with the intensification and broadening of the market turmoil, uncertainty has further increased and developed into a pervasive phenomenon affecting a wide range of markets, assets and financial sectors.Systemic uncertainty may potentially undermine the foundations of our financial systems, which are in turn essential for the orderly functioning of economies.14. Christian Noyer Some thoughts on the financial crisisTokyo, 18 November 2008.Economic and financial forces are at play and recent events are the consequences of such forces. Policy makers, have a very critical role to play to try and ensure that such qualitative remain aligned with facts and reality.15. Lars Nyberg Challenges following the current crisisSantiago, 6 November 2008.The crisis will most likely redraw the global financial landscape in various ways. And even i f the recent measures taken by governments and central banks have improve market conditions somewhat, it is far from certain that the crisis will be over any time soon. What will come out at the other end of the crisis is also still much too early to tell.The financial industry and the responsible authorities have to make certain that the costs of the dominant financial turbulence are kept as low as possible.16. Christian Noyer A review of the financial crisisParis, 7 October 2008 (updated 15 October 2008).To address all the questions and challenges that this crisis has raised these include the role of credit ratings agencies, the management of risk, market infrastructures, the scope of financial regulation and the question of remuneration.. Pay structures should not encourage short-termism or, as was the case, excessive risk taking.17. Lorenzo Bini Smaghi Some thoughts on the international financial crisis , Milan, 20 October 2008.There are some time-honoured lines of action whic h relate to the prevention of crises, namely better regulation and supervision, in particular at the international level, and more effective crisis resolution mechanisms.One new point for consideration that has emerged from this crisis relates equally to ethical, social and political aspects. This should be solved both by governments, so that decision-making mechanisms can be adopted which allow the abovementioned problems to be overcome in a crisis, and also by the financial sector itself, which must clearly draw some lessons from recent events.In a market economy, maximizing profits and shareholders interests are a priority for management. They support the efficient allocation of resources within the economy. However, when a sector such as the financial sector is of systemic importance to the functioning of the economy and is devoted to instability, the objective function must be broader. It is a problem of rules, incentives and individual responsibility.