What’s the issue?
The ‘global economic crisis’ (GEC) or ‘global financial crisis’ (GFC) is a term that is used to describe the general slowing down of the world economy. This means that there are less people buying and selling to each other. Less people trading with each other means that there is less money circulating, which means less cash in the pockets of individuals. It’s called a crisis because once this cycle of ‘less’ gets started, it’s very difficult to break.
How did it start?
The problems began when borrowing and lending between banks in different countries started to become a little unbalanced. Banks in the United States and Britain began borrowing large sums of money from banks in Asia and Russia. The US and UK used this money to approve home loans that they usually wouldn’t consider.
Typically, before a home loan is approved, the bank checks that the applicant has got a steady income and a clean credit history. In other words, you had to prove you were employed, reliable and good at paying your bills. However, within the last decade, banks began to approve loans to applicants who did not necessarily meet these criteria.
In order to cover the risk of approving these less-than-perfect candidates, the banks charged an inflated interest rate – meaning these applicants had to pay more money back to the banks than the average Joe. This kind of home loan is called a ‘sub-prime mortgage’. In the case of some sub-prime mortgages, the banks didn’t even ask for a deposit – they just lent out 100% of the cost of the home.
In many instances, the people who applied for these sub-prime mortgages defaulted on their loan, or were unable to repay the banks. The banks started losing money and this started making the overseas lenders nervous. The lenders demanded that the banks return what they borrowed, and made the pressure worse by imposing a tight time frame.
At this point, the banks had all their money tied up in home loans that weren’t being repaid, so people who had stored their savings with the bank couldn’t access their cash. Many banks declared bankruptcy and were forced to close down, and people who had savings accounts with those banks were officially screwed.
It’s no surprise that people began to lose confidence in the banking system. Hysterical market analysts started crying “The sky is falling! The sky is falling!” The world became a general panic zone. In this new financial climate people are likely to be earning less and spending less. This cycle is called a
recession and it’s exactly what the government is desperate to avoid.
What’s being done?
Many governments around the world have stepped in to stop their banks from collapsing – using taxpayer money to fund or insure what the banks have lost. This is called nationalising the banks. Others have cut interest rates, meaning regular families have to repay the banks a smaller percentage of their mortgage than normal, giving ordinary people more money to play with.
In Australia, the Rudd government has invented an ‘economic stimulus package’, which includes one-off payments to parts of the community like pensioners, grants for new homebuyers, and a guarantee on bank deposits up to one million dollars for the next three years – this means that is your money is in a bank, it’s safe.
The idea is to give us more cash in our pockets, so we start spending again and kick start the economy.
How will it affect me?
Short term
If you’ve invested big time in sub-prime mortgages, then you probably already know things aren’t looking so great for you. If not, then there are a few possible ups and downs from the present economic climate. For example, if you’re looking for a summer job then you might be in luck – all the chief economists predict that work will become more fluid and casual as the job market moves away from straight nine-to-five positions. However, if you’re looking for a graduate position you might find it a little tough to get full-time work. If you’re planning to go abroad in the near future, you might want to keep an eye on exchange rates. You’ll find the value of your money can rise or fall quite dramatically in other countries. You might also want to prepare for a sleepy summer in, as the price of eating out or going shopping is tipped to rise.
Long term
It’s hard to say for sure how this economic crisis will affect our lives in the long term. Most experts would say that in general, we will be living out our adult lives in a world less affluent than the one our parents experienced. On the other hand, the economy is sometimes like a box of chocolates, you never know what you’re going to get.
How do I know this?
BBC News, 'Timeline: Global credit crunch'
http://news.bbc.co.uk/2/hi/business/7521250.stm
BBC News, 'A guide to the credit crunch'
http://news.bbc.co.uk/2/hi/business/7688308.stm
The Daily Telegraph, 'Kevin Rudd must rise to his rhetoric',
http://www.news.com.au/dailytelegraph/story/0,22049,24622198-5001030,00.html
Financial Times.com, 'In depth coverage of global financial crisis'
http://www.ft.com/indepth/global-financial-crisis
Prime Minister of Australia Media Release, ‘Global Financial Crisis’
http://www.pm.gov.au/media/Release/2008/media_release_0534.cfm
SMH.com, ‘We play a waiting game’,
http://www.smh.com.au/news/opinion/we-play-a-waiting-game/2008/11/01/1224956396751.html
The Herald Sun, SMH.com, ‘Rudd’s plans to bring us back from the brink’,
http://www.smh.com.au/news/national/rudds-plans-to-bring-us-back-from-the-brink/2008/11/01/1224956401420.html
'Wayne Swan warned of meltdown',
http://www.news.com.au/heraldsun/story/0,21985,24622668-661,00.html
