Bank Crisis

The last months of 2008 witnessed what is being called the worst financial crisis since the Great Depression. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.

Much of the American economy is built on credit with firms borrowing money from other firms and the general consumer borrowing money for homes and cars. Many people were taking advantage of the housing boom in the US when it ended, leaving both investors and mortgage companies in trouble. Many banks were taking on huge risks increasing their exposure to problems.

The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. New capital was put into banks to, in effect, allow them to lose more money without going bust. That still wasn’t enough and confidence was not restored.

On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world.

When people did eventually start to see problems, confidence fell quickly. Lending slowed, in some cases ceased for a while and even now, there is a crisis of confidence. Some investment banks were sitting on the riskiest loans that other investors did not want. Assets were plummeting in value so lenders wanted to take their money back. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically.