The Financial Crisis One Year After

The global economic crisis can yet be an opportunity to turn from a path of financial bubbles and excessive consumption to a path of sustainable development. In fact, with the practical limits of short-term stimulus spending quickly being reached, seizing this opportunity is the only recipe for genuine growth that we have left.

NEW YORK – It is now almost a year since the world economy teetered on the edge of calamity. In the span of three days, September 15-17, 2008, Lehman Brothers filed for bankruptcy, the mega-insurance company AIG was taken over by the United States government, and the failing Wall Street icon Merrill Lynch was absorbed by Bank of America in a deal brokered and financed by the US government. Panic ensued and credit stopped circulating. Non-financial companies could not get working capital, much less funding for long-term investments. A depression seemed possible. 

Today, the storm has broken. Months of emergency action by the world’s leading central banks prevented financial markets from crashing. When banks stopped providing short-term liquidity to other banks and industrial companies, central banks filled the gap. As a result, the major economies avoided a collapse of credit and production. The sense of panic has subsided. Banks are once again lending to each other.

Although the worst was avoided, much pain remains. The crisis culminated in a collapse of asset prices at the end of 2008. Middle-class and wealthy households around the world felt poorer and therefore cut their spending sharply. Sky-high oil and food prices added to the pain, and thus to the downturn. Enterprises could not sell their output, leading to production cuts and layoffs. Rising unemployment compounded the loss of household wealth, throwing families into deep economic peril and leading to further cutbacks in consumer spending.

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