Based on the assumption that sub-prime lending precipitated the crisis, some have argued that the Clinton Administration may be partially to blame, while others have pointed to the passage of the Gramm-Leach-Bliley Act by the 106th Congress, and over-leveraging by banks and investors eager to achieve high returns on capital.

Some believe the roots of the crisis can be traced directly to sub-prime lending by Fannie Mae and Freddie Mac, which are government sponsored entities. The New York Times published an article that reported the Clinton Administration pushed for Sub-prime Lending: "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people" (NYT, 30 September 1999).

In 1995, the administration also tinkered with the Carter's Community Reinvestment Act of 1977 by regulating and strengthening the anti-redlining procedures. It is felt by many that this was done to help a stagnated home ownership figure that had hovered around 65% for many years. The result was a push by the administration for greater investment, by financial institutions, into riskier loans. In a 2000 United States Department of the Treasury study of lending trends for 305 cities from 1993 to 1998 it was shown that $467 billion of mortgage credit poured out of CRA-covered lenders into low and mid level income borrowers and neighborhoods. (See "The Community Reinvestment Act After Financial Modernization, April 2000).

On September 30, 1999 The New York Times said, referring to the Fannie Mae Corporation easing credit requirements on loans purchased from lenders: "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's."^[1]

References

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The "Big Three" U.S. market share has declined from 70% in 1998 to 53% in 2008. They have lost market share to imports and "transplants" (cars made in U.S. factories owned by foreign makers).

Facing steady financial losses, the Big Three have closed many factories and drastically cut employment, especially in Michigan. GM spun off many of its employees in certain divisions into independent companies, including American Axle in 1994 and Delphi in 1999. Ford spun off Visteon in 2000. The spin-offs and other parts makers have shared Detroit's downturns, as have the U.S.-owned plants in Canada. Altogether the parts makers employ 416,000 people in the U.S. and Canada. General Motors alone is estimated to have lost $51 billion in the three years before the 2008 financial crisis began.

The Big Three are distinguished not just by their size and geography, but also by their business model. The majority of their operations are unionized (United Auto Workers and Canadian Auto Workers), resulting in higher labor costs than other multinational automakers, including those with plants in North America, which have managed to keep out unions. The 2005 Harbour Report estimated that Toyota's lead in labor productivity amounted to a cost advantage of $350 US to $500 US per vehicle over North American manufacturers. The UAW agreed to a two-tier wage in recent 2007 negotiations, something which the CAW has so far refused. Delphi, which was spun off from GM in 1999, filed for Chapter 11 bankruptcy after the UAW refused to cut their wages and GM is expected to be liable for a $7 billion shortfall.

In order to improve profits, the Detroit automakers made deals with unions to reduce wages while making pension and health care commitments. GM, for instance, at one time picked up the entire cost of funding health insurance premiums of its employees, their survivors and GM retirees, as the US did not have a universal health care system. With most of these plans chronically underfunded in the late 1990s, the companies have tried to provide retirement packages to older workers, and made agreements with the UAW to transfer pension obligations to an independent trust. Nonetheless, non-unionized Japanese automakers, with their younger American workforces (and far fewer American retirees) will continue to enjoy a cost advantage.

Despite the history of their marques, many long running cars have been discontinued or relegated to fleet sales, as the Big Three shifted away resources from midsize and compact cars to lead the "SUV Craze". Since the late 1990s, over half of their profits have come from light trucks and SUVs, while they often could not break even on compact cars unless the buyer chose options. Ron Harbour, in releasing the Oliver Wyman’s 2008 Harbour Report, stated that many small “econoboxes” of the past acted as loss leaders, but were designed to bring customers to the brand in the hopes they would stay loyal and move up to more profitable models. The report estimated that an automaker needed to sell ten small cars to make the same profit as one big vehicle, and that they had to produce small and mid-size cars profitably to succeed, something that the Detroit three have not yet done. SUV sales peaked in 1999 but have not returned to that level ever since, due to high gas prices. The Big Three have suffered from perceived inferior initial quality and reliability compared to their Japanese counterparts, which has been difficult to overcome. They have also been slow to bring new vehicles to the market, while the Japanese are also considered the leader at producing smaller, fuel-efficient cars.

Falling sales and market share have resulted in the Big Three's plants operating below capacity (GM's plants were at 85% in November 2005, well below the plants of its Asian competitors), leading to production cuts, plant closures and layoffs. They have been relying heavily on considerable incentives and subsidized leases to sell vehicles. which was crucial to keeping the plants running, which in turn drove a significant portion of the Michigan economy. These promotional strategies, including rebates, employee pricing and 0% financing, have boosted sales but have also cut into profits. More importantly such promotions drain the automaker's cash reserves in the near term while in the long run the company suffers the stigma of selling vehicles because of low price instead of technical merit. Automakers have since been trying to scale back on incentives and raise prices, while cutting production. The subprime mortgage crisis and high oil prices in 2008 resulting in the plummeting popularity of best-selling trucks and SUVs, perhaps forcing automakers to continue offering heavy incentives to help clear excess inventory.

In 2008, with high oil prices and a declining US economy due to the subprime mortgage crisis, the Big Three are rethinking their strategy, idling or converting light truck plants to make small cars. Due to the declining residual value of their vehicles, Chrysler and GM have stopped offering leases on the majority of their vehicles.

On September 30, 2008, the first automaker loan package, for $25 billion, was signed into law. The bill sets aside $7.5 billion in taxpayer funds needed to guarantee $25 billion in low-interest loans to help US automakers produce more fuel-efficient cars and trucks.

The crisis has led to warnings of massive unemployment and economic recession if not contained, and Democrats in Congress, supported by President-Elect Barack Obama have called for a "bridge loan" to assist the Big Three. On October 13, 2008, Obama said that he wanted Congress to double its guaranteed loans to the U.S. automobile industry from $25 billion to $50 billion.

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Video: Josu Ortuondo Larrea on the car industry

Commodity boom

Brent barrel petroleum spot prices, May 1987 – Oct. 2008. The red dot indicates the price as of 24 December 2008

The decade of the 2000s saw a global explosion in prices, focused especially in commodities and housing, marking an end to the commodities recession of 1980-2000. 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.^[1]

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.^[2] In July, oil peaked at $147.30 ^[3] a barrel and a gallon of gasoline was more than $4 across most of the U.S.A. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008.^[3]

The food and fuel crises were both discussed at the 34th G8 summit in July.^[4]

Sulfuric acid (an important chemical commodity used in processes such as steel processing, copper production and bioethanol production) increased in price 3.5-fold in less than 1 year while producers of sodium hydroxide have declared force majeur due to flooding, precipitating similarly steep price increases.^[5][6]

In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.^[7]

Housing bubble

UK house prices between 1975 and 2006.

By 2007, real estate bubbles existed in the recent past were still under way in many parts of the world, especially in the United States, Argentina, Britain, Netherlands, Italy, Australia, New Zealand, Ireland, Spain, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Canada, Norway, Singapore, South Korea , Sweden, Baltic states, India, Romania, Russia, Ukraine and China.[citation needed] U.S. Federal Reserve Chairman Alan Greenspan said in mid-2005 that "at a minimum, there's a little 'froth' (in the U.S. housing market) … it's hard not to see that there are a lot of local bubbles" ^[8]. The Economist magazine, writing at the same time, went further, saying "the worldwide rise in house prices is the biggest bubble in history".^[9] Real estate bubbles are invariably followed by severe price decreases (also known as a house price crash) that can result in many owners holding negative equity (a mortgage debt higher than the current value of the property).

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.^[10] "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.^[11]

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 country´s 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.^[12]

Inflation was also increasing in the developed countries,^[13][14] but remained low compared to the developing world.

References

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Causes of the actual recession

While beginning in the United States the late 2000s recession spread to Asia rapidly and has affected much of the region.

In Australia, Hans Redeker, currency chief at BNP Paribas has said Australia would have to generate 4 percent of its GDP to meet payments to foreign holders of its assets. National Australia Bank on July 29, 2008 cut a A$850 million bond sale by two thirds following investor flight and opted for a 100 percent write-off on a clutch of "senior strips" of AAA-rated collateralized debt obligations (CDO) worth A$900 million.^[1][2][3] Banks had been avoiding lending for land as early as July, to focus on refinancing existing clients, and small developers held on to their properties as second-tier loan costs (up to $15 million) were, reportedly, unaffordable since February.^[4] Housing prices consequently fell in the second quarter for the first time in about three years, restricting consumer confidence to its lowest level in 16-years.^[5] High profile casualties of the credit crunch include Allco Finance, MFS, ABC Learning, Babcock & Brown and Centro while numerous other institutions have lost a significant part of their value.^[6]

Sources such as the IMF and the Reserve Bank of Australia predict Australia is well positioned to weather the crisis with minimal disruption, sustaining more than 2% GDP growth in 2009 (while many Western nations go into recession). The World Economic Forum recently ranked Australia's banking system the fourth best in the world, while the Australian dollar's 30% drop is seen as a boom for trade, shielding from the crisis, and for helping to slow growth and consumption.^[7][8]

Some analysts have predicted the continuing decline of trade in 2009 could put the economy into recession for the first time in 17 years.^[9] Unemployment will increase because of slower growth, declining profits and government revenues.^[10]

In March 2009, Canberra announced that the Australian economy contracted by 0.5% in the last quarter of 2008, leading to fresh worries of recession.^[11]

References

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Video: Australian Market Report of March 11: Remarkable Rally on Wall Street

While beginning in the United States the late 2000s recession spread to Europe rapidly and has affected much of the region which several countries already in recession as of February 2009, and most others suffering marked economic set backs.

New Zealand Institute of Economic Research's quarterly survey showing New Zealand's economy contracted 0.3 percent in the first quarter and Treasury figures suggested the economy also contracted in the June quarter putting New Zealand in a technical recession. The Treasury says the economy could recover in the second half of the year under the impact of high dairy prices boosting farmer incomes and cuts to personal tax rates, which come into effect on Oct. 1. About 23 financial companies in New Zealand have filed for bankruptcy in a year. Housing starts in New Zealand fell 20 percent in June, the lowest levels since 1986. Excluding apartments, approvals dropped 13 percent from May. Approvals in the year ended June fell 12 percent from a year earlier. Second-quarter approvals dropped 19 percent. The figures suggest a decrease in construction and economic growth. House sales fell 42 percent in June from a year earlier. The New Zealand Treasury concluded that the country's economy had contracted for a second quarter based on economic indicators, putting New Zealand in a recession. New Zealand's central bank cut rates by half a percent arguing the economy was in recession. New Zealand's GDP declined by 0.2 percent in the second quarter putting the country in its first recession in a decade.

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Video: New Zealand in recession

African economies have been primarily affected by reduced global demand and lower prices of commodities such as oil, platinum, nickel, gold, and copper. South Africa could be the first country to fall in recession in Africa.

South Africa

Moody's Investors Service warned on July 7, 2008 that South Africa could slip into a recession by the turn of the year. Moody's cited electricity shortages, high interest rates, soaring inflation, a slumping housing and vehicle market and lower business and consumer confidence indicators. Growth in South Africa's real gross domestic product for the first quarter of 2008 slowed to 0.39%. CPIX inflation, the monetary-policy inflation target measure, rose 10.9% on a year-on-year basis in May, its highest level since November 2002.^[1] South Africa's National Treasury criticized the statement by Moody's saying, "It's not possible that we'll end up in recession." He added that the government may revise lower its 4 percent growth forecast for the year following growth of 5.1% in 2007. Car sales in South Africa dropped an annual 22 percent in June due to higher interest rates.^[2]

References

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Video: South Africa In Recession?

Number of U.S. household properties subject to foreclosure actions by quarter

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.

Early suggestions of 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.

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.

Recession declared by economists

On December 1, 2008, the National Bureau of Economic Research (NBER) declared that the United States entered a recession in December 2007, citing employment and production figures as well as the third quarter decline in GDP. The Dow Jones Industrial Average lost 679 points that same day. On January 4, 2009, Nobel prize winning economist Paul Krugman wrote that "This looks an awful lot like the beginning of a second Great Depression."

Video: Khor:1 Billion More People into New Poverty Because Of This Crisis. Democracy Now 2/17/09 1 of 2

2007 bank run on a Northern Rock branch in Birmingham, UK.

The subprime mortgage crisis reached a critical stage during the first week of September 2008, characterized by severely contracted liquidity in the global credit markets^[1] and insolvency threats to investment banks and other institutions.

Reserve balances from banks in the Federal Reserve System began increasing over required levels of about $10 billion at the beginning of September 2008, just after the Democratic and Republican national conventions, and just before the stock market crash and presidential debates. Beginning October 6, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Federal Reserve System to pay interest on the excess balances, producing further pressure on international credit markets. Excess on reserve balances topped $870 billion by the end of the second week of January 2009. In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month.

House Representative Paul E. Kanjorski claimed in a January 27, 2009 interview with CSPAN that there was an "electronic run on the banks" during the second week of September, 2008. According to the testimony $550 Billion were withdrawn from money market accounts in the U.S. within a two hour time- span. Policymakers responded by guaranteeing up to $250,000 in money market deposits through the FDIC. Representative Kanjorski claims that if these steps had not been taken, the U.S. would have lost all its wealth within twenty-four hours ^[2].

References

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Video: How the mortgage meltdown happened (Banks, Investors, CDOs, CDW, Leverage)

On the evening of January 18, the Danish Parliament agreed to a financial package worth 100 billion Danish krone (17.6 billion USD).^[1]. In response, markets panicked yet again. On January 22, the editorial board of The Christian Science Monitor wrote that the four largest U.S. banks "have lost half of their value since January 2."^[2]

The two month period from January 1-February 27 represented the worst start to a year in the history of the S&P 500 with a drop in value of 18.62%. By March 2, the Dow Jones Industrial Average Index had dropped more than 50% from its summer 2008 peak.^[3] The decline has been compared to that of the 1929 Great Depression, which was 53% between September 1929 and March 1931. ^[4]

On March 6, the Bank of England announced up to 150 billion pounds of quantitative easing, increasing the risk of inflation.^[5]

In March 2009, Blackstone Group CEO Stephen Schwarzman said that up to 45% of global wealth had been destroyed by the global financial crisis.^[6]

By March 9, 2009, the Dow had fallen to 6440, a percentage decline exceeding the pace of the market's fall during the Great Depression and a level which the index had last seen in 1996. On March 10, 2009, a countertrend Bear Market Rally began, taking the Dow up to 7900 by March 26, 2009. Financial stocks were up more than 60% during this rally.

References

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Video: Our Workplace: Joseph Stiglitz on Global Economic Crisis