Global Financial Meltdown

The seeds of the recent global financial meltdown were planted innocuously enough, in the United States about three years ago when major financial institutions decided to cater to the ‘subprime’ market - that is, individuals who were not good credit risks, were encouraged to invest in the housing by citing the boom in real estate.

This resulted in a rash of loans being given to first-time and second-time home owners overlooking the current credit history, and future credit-worthiness. All major financial institutions in the US were guilty of this practice. A majority of the people availing the financing were second-time home owners who bought a second home on credit even as the mortgages on their first homes were current solely as an investment that would ostensibly payoff due to the escalating real estate rates.

Predictably, the real estate bubble did not last long. Among the first casualties of the subprime lending crisis were top executives from Merrill Lynch and Citigroup, who were sacked following the declaration of losses amounting to billions of dollars as a result of investment in mortgage and loan-backed securities.

After that the crisis has mushroomed, affecting almost all the financial and banking institutions in the US.The collapse of some financial institutions has left a large number of people unemployed. Coupled with an economy in doldrums and major cutbacks in the social security and public health system, the clouds over the average working American are very dark, indeed.It is not just the average American that is affected by the meltdown, economies all around the globe are reeling with the effects of the meltdown in the US markets.

The last few months have seen wild fluctuations in the economic indices of all major Asian economies. Companies all around the globe that provided outsourced services to these financial institutions have also been affected. The resultant freeze in salaries, hiring and welfare measures for employees is very bad news. Even hitherto insulated economies like the Indian and Chinese economies have taken major blows with inflationary pressures threatening to destabilize these fledgling market economies.

The result is a global liquidity crisis staring financial institutions in the face that has various economic powers scrambling to counter the effects of the meltdown and to improve the state of the economies in question.

Now the question in the average investor’s mind is - Are we heading for a global depression? If so, how long will it last? Can I ride out the storm? The trouble is, there are no concrete measures being suggested to tide over this crisis. Though most policy makers have been attempting to tweak the economy and avert a crisis, their efforts seem like sand castles with the tide coming in. So for now, all we can do is wait and watch how things pan out and hope that it doesn’t get any worse.