The financial crisis of 2007–2009, began in July 2007 when a loss of confidence by investors in the value of securitized mortgages in the United States resulted in crisis of liquidity (free-flow of money/capital). The perceived credit risk in the general economy rose alarmingly in July 2007, reaching a peak on October 10, 2008. In September 2008 stock markets worldwide crashed and entered a period of large-scale downward trend, and a considerable number of banks, mortgage lenders and insurance companies failed in the following weeks.Although America‘s housing collapse is often cited as having caused the crisis, the financial system was vulnerable because of monetary policies in the US and Europe made the cost of credit negligible therefore encouraging such high levels of unrealistic non-payable loans/debts.
In 2008, the prices of many commodities, notably oil and food, went up so high that it caused severe economic damage, threatening stagnation and inflation. In January 2008, oil prices surpassed $100 a barrel for the first time, peaked at $147.30 in July. These high prices caused a dramatic drop in demand and prices fell below $35 a barrel at the end of 2008. In the second half of 2008, the prices of most commodities fell dramatically on expectations of diminished demand in a world recession.
The apparent cause of the financial crisis is the collapse of the $8 trillion investment in the US housing market. In September 2002, some economists had predicted that the collapse of the housing sector would jeopardize the survival of Fannie Mae and Freddie Mac and numerous other financial institutions engaged in the housing sector. It was commonly claimed during the first weeks of the financial crisis that the problem was simply caused by reckless, sub-prime lending. However, the sub-prime mortgages were only part of a far more extensive problem affecting the entire $20 trillion US housing market: the sub-prime sector was simply the first place that the collapse affecting the housing market showed up.
People who had increased their wealth substantially with the extraordinary run-up of stock prices were spending based on this “increased” (paper) wealth. This led to the consumption boom, with the savings rate out of disposable income falling from 5% in the mid-90s to 2% by 2000. The stock-wealth induced consumption boom led people to buy bigger and/or better homes and other commodities beyond their means, since they sought to spend some of their new stock wealth on housing etc.This high-consumption low-savings bubble began to burst in 2007, as the building boom led to so much over-supply that prices could no longer be supported. Prices nationwide began to fall rapidly, with this process accelerating through the fall of 2007 and into 2008. As mortgage payment became impossible to fulfill, more homeowners faced foreclosure. Voluntary foreclosures took place when people realized that they owe more than the value of their home, and decided that paying off their mortgage is in effect a bad deal. (In cases where a home is valued far lower than the amount of the outstanding mortgage, homeowners may be to able to effectively pocket hundreds of thousands of dollars by simply walking away from their mortgage). This destroyed Fannie Mae and Freddie Mac and the domino effect took the rest of the world under.
The root cause of the current crisis is the same as the great depression of 1929 – the surplus values locked in commodities can not be extracted and circulated.The Great Depression was a worldwide economic devastation starting in 1929 and ending in the early 1940s for different countries. It was the largest and most important economic devastation in modern history of the capitalist system. It started in the USA as the great stock market crash on October 29, 1929, also known as the Black Tuesday. International trading went down by half to two-thirds, as did personal income, tax revenue, prices and profits. Construction sector was virtually halted in many countries. Farming and rural areas suffered as crop prices fell by roughly 60 percent. The majority of countries set up relief programs, and most underwent some sort of political upheaval, pushing them to the left or right. In some states, the desperate citizens turned toward nationalist extremism —the most infamous being fascism in Germany of Adolf Hitler—setting the stage for World War II in 1939.The main cause was the crisis of overproduction, where commodities in large quantities could not be sold thereby locking in the surplus value produced earlier which could not be extracted and circulated for the next round of production. This led to collapse of production with large number of working people losing jobs which led to fewer commodities being sold creating a vicious downward spiral. The collapsing production system led to collapse in the stock market.
Marxist descriptions of political economy emphasizes the tendency of capitalism to create unbalanced accumulations of wealth, leading to over accumulations of capital and a repeating cycle of devaluations through economic crises. Marxism holds that recession and depression as unavoidable under free-market capitalism as there are no restrictions on accumulations of capital other than the market itself. The end of the depression in the U.S is associated with the onset of the war economy of World War II, beginning around 1939.
In the current situation, the commodities have been sold due to the easy and cheap credit which could not be paid back. Now the financial institutes have the possession of commodities (like houses, cars etc) through mortgage foreclosures which they can not sell, instead of shops and factories having unsold commodities during the great depression. That is why the first to collapse are the financial institutions bringing down the stock markets with a delayed collapse of the production system leading to increasing unemployment (in the USA it is approaching 8%). The current crisis will lead to another great depression if the production system collapses – a convenient yardstick is the unemployment percentage (loss of jobs). If it crosses 20%, President Obama of USA will have no option but to admit that the current recession is indeed another great depression!! This is the true picture of the great stable, reliable, benevolent, beautiful, and free-for-all Capitalism.
