How the Credit Crisis Spread

Readers Question: how did the recent financial crisis spread from the US and the EU to the rest of the world.

For more details see also: Financial crisis explained

It is fair to say the crisis started in the US.

  • In the US many people took out mortgages they later couldn’t pay back. These mortgage defaults caused many mortgage companies and banks to lose significant sums of money and go bankrupt.
  • It was also in the US where house prices first started to fall causing a negative wealth effect and fall in consumer spending.

Why were other countries Affected?

1. Foreign banks bought collateralised US debt. Many of these subprime mortgage loans were rebundled into CDOs and sold onto financial institutions around the world. For example, many British and European banks had exposure to these mortgage loans. Therefore, when defaults rose, European banks lost a lot of money.

2. Global Credit Crunch. The banking system is internationally linked. When some banks started to lose money they became reluctant to lend to other. Therefore the international banking system became affected and banks stopped lending to each other and therefore it became difficult for firms and consumers to borrow from banks. This decline in bank lending contributed to a fall in aggregate demand. Even countries which didn’t have any exposure to subprime lending were affected by the global credit crunch.

Credit Default Options – illustrate boom and bust.

3. Global Trade. With the US entering recession, their demand for exports fell. So many countries experienced a decline in exports. This decline in global trade contributed to the global recession.

us-unemployment-05-17-fiscal-stimulus-act

4. Confidence. Problems in the financial and banking sectors adversely affected the confidence of consumers and firms leading to lower growth

5. Global Stock Markets. The financial problems of US and UK banks hit stock markets around the world 2007, and 2008 saw large fall in share prices which led to lower wealth and confidence. Leading to lower growth.

Typically, there is a weak correlation between stock markets and consumer spending. Only 20% of consumers have direct exposure to stock markets, and the wealth in stocks is not directly linked to spending. But, the sheer size of the stock market falls meant it did start to affect consumer spending and business investment.

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3 thoughts on “How the Credit Crisis Spread

  1. The way I see things, I believe that the recent finacial crisis spread fromthe U.S. Within these last few years many people did start buying property they couldn’t afford. Many people I know that I would never think would own a house started purchasing them. I really didn’t understand being so young, but once I got into the upperclassman level of high school, I started to see and understand what was actually happening. They meaning the people started to take out loans from the banks which cause them to go bankrupt. That made our banks go into debt. I know many people feed off of the United States and what they do, so I think the same things spread that way. Just because we are seperate states doesnt mean we are actual seperate. We are still united in some particular way. With time I know this will all come to a end and things will get better even though we spread across the world.

  2. All the writing was on the wall but no one wished to read irt.

    But what is more important and a pointer for our future is HSBC’s chief executive’s permanent move to China which should show to any person now with any intelligence at all, that the UK’s financial services are increasingly in terminal decline. Indeed according to leading economists, the City of London contributed enormously to the collapse in the people’s personal wealth through the financial meltdown and where 40% of all global assets of the people were destroyed. For nearly 15-years now our web-based ‘scientific discovery’ newsletter (http://www.thewif.org.uk/version2/nlett/class/issue.html) has been outlining the great threat of China to the economy of the UK. Therefore if people would not listen then, they certainly should now and where politicians should stop investing in the financial sector immediately and start to invest in a new economic base for Britain. For this new economic base resides as we have also said, in the British people’s innovative thinking, the best in the world according to authoritive reports by the government of Japan in the 1980s and Germany in the 1990s. Indeed, this is the only strategy that will prevent the UK from unparalleled economic decline in the 21st century. For continuously we have told succeeding governments over the past two decades what they have to do and where this is soundly based in high-technology. Indeed in this respect, Britain has the most creative minds in the world, commanding up to 55% of all the thinking that has made the modern world what it is today according to both Japan and Germany. Therefore we have to STOP investing in our declining international banking industry and start a ‘New Britain’ based predominantly upon it’s greatest competitive advantage, the creativity and innovative thinking of the British people. But where unfortunately it also has to be said like all else, politicians are always the last to realise this and where they always invest in things that cost wealth and jobs in the long-term through keeping on with persistent strategies that continually consume wealth and not provide. Time has now come therefore for great strategic and economic change, for if not, the people of the UK will witness an incomparable decline in both living standards, wealth and the nation’s standing in the world-at-large. The threat of China cannot be stressed more and where basically it cannot be ignored any longer by our government who are ultimately charged to look after our long-term social and economic wellbeing! That definitely is not being undertaken presently and with their still predominant interest in our financial sector, will further add nails to the coffin of UK PLC over the next 10-years.

    Dr David Hill
    World Innovation Foundation
    Bern, Switzerland

    UK Contact Deatils
    P O Box A60, Huddersfield, HD1 1XJ
    Tel: 0044 (0)1484 537181

  3. WITH EFFCT THE DEVOLPED NATIONS THE OTHER NATIONS ARE CAUSING DANGOURS BY US RESSION ALL THE WORLD NATIONS HAVE BEEN LOST THEIR ACTUAL GROWTH

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