A Reminder: The GFC…not “just another day”

Like many Australians, I’ve killed more than a few brain cells over the years in the pursuit of pleasure, due to self-medicating & easing stress.  However, my memory is still in pretty good working order. And I recall clearly the panic that shook Australia & many other countries in those first couple of years of the GFC (Global Financial Crisis). But it has become apparent to me that many voters, media analysts, and those on the opposite side of parliament from the Labor Party have significant memory loss.

In 2008 such comments as the following were widely cited: “Market conditions are the worst anyone in this industry can ever remember. I don’t think anyone has a recollection of a total disappearance in liquidity…There are billion of dollars worth of assets out there for which there is just no market.” Alain Grisay, chief executive officer of London-based F&C Asset Management Plc; Bloomberg News

In early 2009 the bad news continued:

 Friday, 27 Feb 2009

Dow Down 50% Since Peak, Major Indices Approach New Lows

http://www.cnbc.com/id/29428424/site/14081545

Tue Mar 10, 2009

45 percent of world’s wealth destroyed: Blackstone CEO

(Reuters) – Private equity company Blackstone Group LP (BX.N) CEO Stephen Schwarzman said on Tuesday that up to 45 percent of the world’s wealth has been destroyed by the global credit crisis.

http://www.reuters.com/article/idUSTRE52966Z20090310

It’s all about investor & consumer perception. Optimistic perceptions  of economic stability and endless prosperity can suddenly shift to outright panic. We shifted from irrational exuberance to doom & gloom in a historical timeline heartbeat or two.

In the case of this household, like many others, we curbed retail spending and focused on debt reduction. Due to fears that teacher wages & conditions would be eaten into we prepared to reduce spending on PayTV, the Internet, mobile phone, birthdays, Xmas, restaurants and other areas that did not seem essential.

As unemployment grew across the globe…and bankruptcies…and the sense we were heading for a really rough road…I can recall the Labor Party’s push in early 09 to pass an economic stimulus plan feeling like the cavalry coming to the rescue.

The following is an example of the general sense of  negativity prior to the first stages of the economic stimulus…and the sense of hope that came with its introduction:

In the wake of a global recession, Australian tax payers will be getting a tax bonus payment from the government to help struggling low to middle income earners as well as encourage spending to get the economy flowing again. It is no surprise that everyone has decreased if not stopped spending with massive retrenchments happening globally and nationwide. Job uncertainty is definitely in the fore front of our minds.

New businesses are slow to come by and even managers have strict budgets to follow and are reluctant on committing to long term spending. This downward spiral is expected to continue throughout 2009 and many fear the worst is yet to come.

(Australia’s Economic Stimulus Package – Tax Bonus Payment

Posted by Danny  on dannytalk .com March – 5 – 2009)

And this from business group leaders:.

The Australian Industry Group chief executive, Heather Ridout, said the package would help boost consumer and business confidence and spending

Ridout “Senators have today done the right thing,” she said. “Confidence is at very low levels and the package will be important in addressing this, and in providing practical and sustained support for economic activity.”

The Australian Chamber of Commerce and Industry chief executive, Peter Anderson, said the package would unlock infrastructure spending, provide incentives for business to invest in new plant and equipment and add a stimulus to household incomes.

“While there is always a risk to the budget in a package of this type, and while legitimate scope existed to debate the mix of measures, today’s decision is the right one for these extraordinary times. Even though there can be no guarantees we will not fall into recession, it will help steer the Australian economy through an unprecedented economic buffeting and, together with interest rate reductions, gives us the best prospect of not doing so,” he said.

($42b stimulus package: Rudd cuts a deal with Xenophon , PHILLIP HUDSON

February 13, 2009…SMH .com)

 As of March 2010 the unemployment levels were 5.3 percent going by The Australian Bureau of Statistics official statistics.

MORE FROM WIKIPEDIA:

 http://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932010

Financial crisis of 2007–2010

Rapid increases in a number of commodity prices followed the collapse in the housing bubble. The price of oil nearly tripled from $50 to $147 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008

An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states.

In testimony before the Senate Committee on Commerce, Science, and Transportation on June 3, 2008, former director of the CFTC Division of Trading & Markets (responsible for enforcement) Michael Greenberger specifically named the Atlanta-based IntercontinentalExchange, founded by Goldman Sachs, Morgan Stanley and British Petroleum as playing a key role in speculative run-up of oil futures prices traded off the regulated futures exchanges in London and New York.

then the price of nickel imploded from around $51,000 /£36,700 per metric ton in the May of 2007 to about $11,550/£8,300 per metric ton in the January of 2009. Prices were only just starting to recover as of January 2010, but most of Australia’s nickel mines had gone bankrupt by then.

The International Monetary Fund estimated that large U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009. These losses are expected to top $2.8 trillion from 2007-10. U.S. banks losses were forecast to hit $1 trillion and European bank losses will reach $1.6 trillion. The IMF estimated that U.S. banks were about 60 percent through their losses, but British and eurozone banks only 40 percent.

One of the first victims was Northern Rock, a medium-sized British bank. The highly leveraged nature of its business led the bank to request security from the Bank of England. This in turn led to investor panic and a bank run in mid-September 2007.

Initially the companies affected were those directly involved in home construction and mortgage lending such as Northern Rock and Countrywide Financial, as they could no longer obtain financing through the credit markets.

Over 100 mortgage lenders went bankrupt during 2007 and 2008. Concerns that investment bank Bear Stearns would collapse in March 2008 resulted in its fire-sale to JP Morgan Chase. The crisis hit its peak in September and October 2008.

Several major institutions either failed, were acquired under duress, or were subject to government takeover. These included Lehman Brothers, Merrill Lynch, Fannie Mae, Freddie Mac, Washington Mutual, Wachovia, and AIG.

During September 2008, the crisis hit its most critical stage. There was the equivalent of a bank run on the money market mutual funds, which frequently invest in commercial paper issued by corporations to fund their operations and payrolls. Withdrawal from money markets were $144.5 billion during one week, versus $7.1 billion the week prior. This interrupted the ability of corporations to rollover (replace) their short-term debt.

In a dramatic meeting on September 18, 2008, Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke met with key legislators to propose a $700 billion emergency bailout. Bernanke reportedly told them: “If we don’t do this, we may not have an economy on Monday.” The Emergency Economic Stabilization Act, which implemented the Troubled Asset Relief Program (TARP), was signed into law on October 3, 2008.

Economist Paul Krugman and U.S. Treasury Secretary Timothy Geithner explain the credit crisis via the implosion of the shadow banking system, which had grown to nearly equal the importance of the traditional commercial banking sector as described above. Without the ability to obtain investor funds in exchange for most types of mortgage-backed securities or asset-backed commercial paper, investment banks and other entities in the shadow banking system could not provide funds to mortgage firms and other corporations.

This meant that nearly one-third of the U.S. lending mechanism was frozen and continued to be frozen into June 2009. According to the Brookings Institution, the traditional banking system does not have the capital to close this gap as of June 2009: “It would take a number of years of strong profits to generate sufficient capital to support that additional lending volume.” The authors also indicate that some forms of securitization are “likely to vanish forever, having been an artifact of excessively loose credit conditions.” While traditional banks have raised their lending standards, it was the collapse of the shadow banking system that is the primary cause of the reduction in funds available for borrowing

There is a direct relationship between declines in wealth, and declines in consumption and business investment, which along with government spending represent the economic engine.

Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth.

By early November 2008, a broad U.S. stock index the S&P 500, was down 45 percent from its 2007 high.

Housing prices had dropped 20% from their 2006 peak, with futures markets signaling a 30-35% potential drop.

Total home equity in the United States, which was valued at $13 trillion at its peak in 2006, had dropped to $8.8 trillion by mid-2008 and was still falling in late 2008.

Total retirement assets, Americans’ second-largest household asset, dropped by 22 percent, from $10.3 trillion in 2006 to $8 trillion in mid-2008.

During the same period, savings and investment assets (apart from retirement savings) lost $1.2 trillion and pension assets lost $1.3 trillion.

Taken together, these losses total a staggering $8.3 trillion.

Since peaking in the second quarter of 2007, household wealth is down $14 trillion.

European contagion
The crisis rapidly developed and spread into a global economic shock, resulting in a number of European bank failures, declines in various stock indexes, and large reductions in the market value of equities and commodities.

Both MBS and CDO were purchased by corporate and institutional investors globally. Derivatives such as credit default swaps also increased the linkage between large financial institutions. Moreover, the de-leveraging of financial institutions, as assets were sold to pay back obligations that could not be refinanced in frozen credit markets, further accelerated the solvency 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 2008 a currency crisis developed, with investors transferring vast capital resources into stronger currencies such as the yen, the dollar and the Swiss franc, leading many emergent economies to seek aid from the International Monetary Fund

The economic crisis in Iceland involved all three of the country’s major banks. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.

By March 2009, the Arab world had lost $3 trillion due to the crisis.

In April 2009, unemployment in the Arab world is said to be a ‘time bomb’.

In May 2009, the United Nations reported a drop in foreign investment in Middle-Eastern economies due to a slower rise in demand for oil.

In June 2009, the World Bank predicted a tough year for Arab states. In September 2009, Arab banks reported losses of nearly $4 billion since the onset of the global financial crisis.

U.S. economic effects

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of approximately 6 percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods.

The U.S. unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate.

The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.

This credit freeze brought the global financial system to the brink of collapse.

The response of the U.S. Federal Reserve, the European Central Bank, and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased US$2.5 trillion of government debt and troubled private assets from banks.

This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history.

The governments of European nations and the USA also raised the capital of their national banking systems by $1.5 trillion, by purchasing newly issued preferred stock in their major banks

(wikipedia)
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Just another day for some.

Some enjoy rewriting history. And believe that “global warming” is crap. And that Saddam had WMDs.

Dark Ages anyone?

N’… (A reworking of my post ‘What would they have done?’)