Tufta,
It could have been stopped earlier if banks had acted like real banks, with financial responsabilty. They shouldn't have given or granted mortgage loans to people who can't afford it. They shouldn't have taken large shares in other banks or companies, like a 30%, 40% or 50% possession (intrest) of (in) these banks or firms. Their greed and megalomania was so large that they manifactured high risk take overs of other banks and financial institutions. They wanted their part of the North-American, Central- and Eastern-European market, because the Netherlands are a big player in the world of financial institutions, financial markets and the banking sector in general. The Dutch were and are very present in the Financial city of London and in Manhattan in New York. In 2008 I saw a huge skyskraper of the ABN-Amro in the heart of New York, not far from the Museum of Modern Art (New York). They started merging and joint venture operations which were very risky. The same with the largest Dutch supermarket chain,
Albert Hein with it's multi-national
Ahold (Food industry and supermarket products oriented), which was to agressive and to megalomanian on the American market in it's take overs.
hbr.org/product/ahold-a-royal-dutch-disaster/an/IMD235-PDF-ENGpapers.ssrn.com/sol3/papers.cfm?abstract_id=663504pl.wikipedia.org/wiki/Ahold /
en.wikipedia.org/wiki/AholdIt was expansion fever, without looking at the long term health and the financial consequences. In an accounting context, the Shareholders' equity (or stockholders' equity, shareholders' funds, shareholders' capital or similar terms) should have been spread amongst more reliable participants/partners. (Wealhty and good Shareholders) Shareholders' equity represents the remaining interest in assets of a company, spread among individual shareholders of common or preferred stock.
There was a fictive financial bubble due to the fact that the banks gave loans to people who could not afford these loans due to their low income, and lack of future perspective. The banks were infected with the American virus. In the past banks wouldn't loan to people who didn't have enough Equity (finance), to pay their interest on the loans. In the past banks checked people they loaned money to, by investigating their reliability, financial past and achievements. In the late 20th century the banks and financial institutions stared to become large and less solid. They became less strict in controling their clients and in their lack of checks and ballances they created the crisis together with their clients and governments who spend to much on social security, 'Home mortgage interest deduction', and the danger of a combination of inflation and recession emerged.
Negative effects of such an inflation will include an increase in the opportunity cost of holding money, uncertainty over future inflation which may discourage investment and savings (which is partly taking place now), and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. (That may take place soon if the situation doesn't change)
High or unpredictable inflation rates are harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation slows down or minimalizes productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation. Uncertainty about the future purchasing power of money discourages investment and saving. This inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation.
With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation. This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.
The velocity of money is unaffected by monetary policy (at least in the long run), and the real value of output is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money. With exogenous velocity (that is, velocity being determined externally and not being influenced by monetary policy), the money supply determines the value of nominal output (which equals final expenditure) in the short run.
The present Recession in Europe and the USA is the result of a widespread drop in spending (an adverse demand shock). This was triggered by the financial crisis which started as the mortgage crisis and continued or developped itself into a monetarian crisis (in Europe with the Euro), 'state dept crisis' and bank crisis. The largest problem in present Western-Europe is that consumers stop spending, and companies have to minimalize their production or reform their companies in a fast way, to coap with the changing reality.
The present downward trend in the business cycle due to a decline in production and employment, causes the incomes and spending of households to decline. Even though not all households and businesses experience actual declines in income, their expectations about the future became and become less certain during the present recession and caused and causes them to delay making large purchases or investments.
The decline in output can be traced to a reduction in purchases of durable household goods by consumers and of machinery and equipment by businesses, and a reduction in additions of goods to stocks or inventories.
Derivatives/SwapsAnother factor in the creation of the present crisis were
the derivatives. A derivative is a term that refers to a wide variety of financial instruments or "
contract whose value is derived from the performance of underlying market factors, such as market securities or indices, interest rates, currency exchange rates, and commodity, credit, and equity prices. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof." In practice, it is a contract between two parties that specifies conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties. The most common underlying assets include:
commodities,
stocks,
bonds,
interest rates and
currencies.
Swap (finance)In finance, a
swap is a
derivative in which counterparties exchange
cash flows of one party's financial instrument for those of the other party's financial instrument. The benefits in question depend on the type of financial instruments involved. For example, in the case of a swap involving two bonds, the benefits in question can be
the periodic interest (or
coupon)
payments associated with the bonds.
Specifically, the two counterparties agree to exchange one stream of cash flows against another stream. These streams are called the legs of the swap. The swap agreement defines the dates when the cash flows are to be paid and the way they are calculated. Usually at the time when the contract is initiated at least one of these series of cash flows is determined by a random or uncertain variable such as an interest rate, foreign exchange rate, equity price or commodity price.
The cash flows are calculated over a
notional principal amount. Contrary to a future, a forward or an option, the notional amount is usually not exchanged between counterparties. Consequently, swaps can be in cash or collateral.
Swaps can be used to hedge certain risks such as interest rate risk, or to speculate on changes in the expected direction of underlying prices.
Swaps were first introduced to the public in
1981 when
IBM and
the World Bank entered into
a swap agreement. Today,
swaps are among
the most heavily traded financial contracts in the world: the total amount of interest rates and currency swaps outstanding is more thаn
$347 trillion in
2010, according to
Bank for International Settlements (
BIS).
Credit default swapsA
credit default swap (CDS) is a contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if an instrument - typically a bond or loan - goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy or even just having its credit rating downgraded. CDS contracts have been compared with insurance, because the buyer pays a premium and, in return, receives a sum of money if one of the events specified in the contract occur. Unlike an actual insurance contract the buyer is allowed to profit from the contract and may also cover an asset to which the buyer has no direct exposure.
Cheers,
Pieter
Here an interesting arcticle about the consequences of
the Dutch monetary crisis for
the Dutch economywww.government.nl/issues/financial-policy/the-netherlands-and-the-european-debt-crisisSources: Encyclopedia Britannica, Wikipedia, Financial Times and the Economist.
