One year of the global financial crisis

It is a little over a year since the U.S. financial crisis became a global issue. Starting with the home loan sector where American banks and institutions lent recklessly to borrowers who were not creditworthy (the sub-prime borrowers), the crisis has engulfed the whole of the U.S. financial sector and, as a direct consequence of globalisation, spread to the rest of the world.

The financial crisis has pushed the U.S. economy to the brink of a recession. Last week, testifying before the U.S. Congress, Fed Chairman Ben Bernanke said the outlook for the economy was bleak. The U.S. economic slowdown will cause a deceleration in world economic growth, a factor already noted by the World Bank, the IMF and other global institutions. A principal reason for such pessimism has been the fact that there is no sign yet of an end to the financial crisis.

The loss of confidence in the financial markets across the globe was once again dramatically demonstrated last week. In a bid to bolster the capital market and investor confidence in the two giant housing loan companies Fannie Mae and Freddie Mac — which between them hold three fourths of all U. S. home mortgages — the U.S. Treasury has planned to inject capital and also buy a stake, if need be, in the two institutions.

Rescuing troubled institutions has ceased to be an unorthodox strategy even in the U.S. However, committing public money to shore up investor confidence may be the ultimate repudiation of the belief that the markets will punish errant institutions and, because they are self-correcting, there is no need for the government to intervene. For all its boldness, the U.S. strategy failed to enthuse the stock markets. Benchmark indices everywhere, including in India, fell sharply.

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