The Financial Crisis Usa

A financial crisis is a situation in which the supply of money is outpaced by the demand for money; this means that liquidity is quickly evaporated because available money is withdrawn from banks (called a run) forcing banks either to sell other investments to make up for the shortfall or to collapse.

So what had happen during the last few years and ended up in big financial crisis, probably the worst since the great depression of 1929?

The beginning of this decade was a period of strong global growth, growing capital flows, and prolonged stability which made market participants seek higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence where also there was a weak underwriting standards, and unsound risk management practices.

During the period from 2000 and 2006 there was an upright rise in prices of houses and stocks, so people wanted to invest to make money, and they started borrowing cash from banks and financial institutions to buy homes, shares, and other high risk investments seeking high returns on their investments.

At the end of 2006, beginning of 2007 the real estate bubble got burst in the United States of America pushing the prices of houses to fall down dramatically until 2008 were it reached levels way below the cost of purchase; realizing that, investors start defaulting on their payments to their banks who now start facing a shortage in cash or liquidity disabling them to meet their dues because banks also brow money from depositors and have to pay interest against this money, as well banks need to lend money to make their profits which led them to a shortfall in managing their assets and liabilities.

In order to clause the gap between the demand and supply of money banks had to recall their loans and increase interest rates on borrowers who refused to pay more, so banks had to put their hands on the mortgaged properties and sell them out in order to generate more cash, but the prices were going down and the buyers asking for lower prices so banks had to look for alternative channels to source cash and start liquidating their assets in stocks, shares, commodities, and other tradable bonds causing a dramatic decline in the prices of these asset classes because the quantities offered for selling is much less than the quantities requested by buyers .

In general, the value of houses and tradable assets went down by 70 to 80% between 2006 -2008 drowning the value of US dollars into historical records.

Because the USA is the leading market in the world and because the US dollars is the main currency used in international trade and in foreign reserves for other countries; other countries got affected immediately by the crash in the US market and needed to use more US dollars to buy the same amount of goods and services, which affected negatively on their balance sheets and slowed down the international trade