This week economist covered a special report on the world economy, the present crisis have been compared with the crisis of October 1929, which took 3 years for America’s government to launch a series of dramatic efforts to end the Depression, like declaration of 4 day bank holiday in 1933.During that time thousands of Bank failed, devastation deflation tear a part the US economy and the unemployment rose to 25%.
This time again US started with nationalization of the 2 mortgage giants Fannie Mae and Freddie Mac , saved AIG the worlds largest insurance company, temporary banned short selling in over 900 mostly financial stocks and the most dramatic of them all is pledged to take up to $700 billion of the toxic mortgages on its books. Another dramatic incidence which is lately taken by US govt. is ordering Fannie and Freddie to take the toxic mortgage on there balance sheet this is an exception to that $700 billion.
The anatomy of the collapse is that IMF recons that world wide losses on debt originated in America will reach $1.4 trillion which is double from the earlier estimation of $945 billion in April. Globally the credit crunch has already arrived and IMF predicts that credit could shrink by 7.3% in USA, 6.3% in Britain and 4.5% in rest of the Europe.
The action taken by the central banks is from the history that big banking crisis are ultimately solved by throwing in large dollops of public money, and that early and decisive government action, weather to recapitalize banks or take on trouble debts can minimize the cost to tax payer and damage to the economy.
US have proposed a TARP Troubled Asset Relief Programme which is still unclear how it will progress. The trouble is that because of its large current account deficit US is heavily reliant on foreign funding. It has edge that the dollar is the world’s reserve currency and as a financial turmoil has spread the dollar has strengthened. But today’s crisis is testing many of the foundations on which foreigner’s faith in dollar is based.
What will be the long term effect of these decisions, only the time will tell once the world stabilize again to normal.
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