The end of a cycle?

The subprime crisis which started in the United States during the second semester of 2006 shifted with the passing of months into a financial crisis.

Used with permission from MicrosoftFirst deemed as a crisis of banking liquidity, the subprime was at the origin of the first stock market crash in the summer of 2007. The American banks had, therefore, to depreciate their assets whose amounts reached 500 billion USD.

It was not until the autumn of 2008 that we came to recognize the existence of the crisis. On September 15, 2008, the bankruptcy of Lehman Brothers in the United states underscored the vulnerability of the financial system. The crisis soon spread to all of the large companies, banks, industrial and financial groups.

The state intervention turned out to be necessary. Saved by the FED, the insurance former number one, AIG, has come very close to bankruptcy. To avoid bankruptcy, other institutions made recourse to the State which promised to proceed to the case-per-case nationalizations.

The shock wave has reached Europe. In the spring of 2008, the nationalization of Northern Rock in Great Britain marked the start of the crisis. The snow ball effect has touched the entire European countries with a country like Iceland being on the edge of irreversible collapse. To face the crisis, various national rescue plans have been announced whose cost near 280 billion USD.

In Asia, while subprime has not hit banks hard, the economic downturn is raising concern among economists. In Japan, the export sector came to be affected by the slowdown of worldwide consumption while growing recession is threatening growth.

Africa is not exempt from the economic slump. A number of creeping group subsidiaries have been ceded to other institutions or simply closed down.

The crisis fallout

The losses reported now by all institutions are compounded by a wave of layoffs. In the United States, it was 220 506 jobs that have been suppressed in a few months, just in the finance sector. In Europe, 70 000 jobs went to ashes while in Asia exporting companies have announced their intention to dismiss part of their staff members in the next coming months.

The new economic poles have had their activities reduced or frozen. In Dubai, thousands of jobs are in peril in the real estate field.

In light of the risks of a worldwide recession, the number of the jobless is rising steadily. Lost or suppressed jobs will not be replaced. The decline of the purchasing power and household crisis will trigger a slowdown of the economic activity, further straining the market.

The end of a dream

Used with permission from MicrosoftWhile the repercussions of the crisis affected the vital sectors, they highlighted the limitations of the American Dream. Indeed, resulting from the «real estate bubble» triggered by easy access to property, the crisis which had a purely national character soon turned into an international crisis.

Its devastating effects are affecting banks in the first place while the shock wave is impacting other sectors. Consequently, car manufacturers are appealing to the State for funds. The assets sales of banking and insurance subsidiaries are followed by massive dismissals.

The American authorities are struggling to restore the confidence of individuals and investors in the banking system. At the beginning of December, a new scandal came to darken, once again, the image of finance.

The scandal of Bernard L. Madoff Investment Securities plummeted the market into depression, thus further discrediting bankers, control organisations and rating agencies.

The alternative

The current financial system has unveiled its limitations. The world might as well start looking for new leaders. Wisdom has it that alternative solutions come either from Europe or Asia. China might be the new pole from which the market will take off again. Unfortunately, the threat of a global recession is feared to cause a consistent decline for the Chinese growth and thus the dwindling of this market. According to the IMF, the 9.7% growth rate reported by China in 2008 could go down to 5 or 6% in 2009. As to Europe, it does not seem to be in a position to take over as a driving force.

The generalized recession, therefore, makes it difficult to forecast any market recovery. Though the United States seem to be clearly one of the countries hardest-hit by the crisis, no one can rule out the possibility for the American economy to bounce back. For sure, we have to wait until the end of 2009 to figure out whether we are dealing with an economic cycle or a profound reshape of the international system under the same leadership.

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