Economic Crisis of 2008

A week of wild gyrations on US stock markets, fueled by fears of an impending collapse of the Wall Street investment bank Lehman Brothers and the country’s largest savings and loan bank. It is the product of an economic system that has increasingly based itself on speculation and various forms of economic parasitism, while gutting the productive base of the country—at the cost of millions of jobs and the living standards of the American working class.

The world's financial markets are in deep trouble, after many banks invested heavily in the US mortgage market. Since the housing bubble burst, banks do not know how many of these loans will be paid back. Banks no longer know what their investments are worth, making them difficult to sell. Banks are reluctant to lend to each other as they worry their rivals might get into trouble.

The US government plans to borrow the money from world financial markets.
The legislation gives the Treasury the authority to issue an additional $700bn worth of Treasury securities. The hope is that eventually the Treasury can sell the distressed assets back into financial markets once the housing market has stabilized, hopefully making a profit.

The bill is aimed at taking the bad debts off the books of the banks, thus freeing up credit markets.

On the other hand, according to Bruce Meng (October 2008), the UK Government will spend at least 50 billion pounds ($87.8 billion) buying stakes in UK banks to improve their capital strength. Banks will be able to draw on 25 billion pounds in the form of preference shares or permanent interest bearing shares (PIBS) by the end of the year. The government will also assist in raising ordinary equity if asked to and is ready to provide a minimum of 25 billion pounds of further support. Until markets stabilize, the bank will continue to conduct auctions to lend sterling for three months, and also dollars for one week, against extended collateral.

The Bank of England will make at least 200 billion pounds ($351 billion) in loans available to banks via auctions in order to ensure sufficient liquidity and stability in the banking system. Until markets stabilize, the bank will continue to conduct auctions to lend sterling for three months, and also dollars for one week, against extended collateral.

So that banks can refinance and meet refunding obligations the government will, for an interim period, guarantee what it expects to be about 250 billion pounds ($439 billion) worth of new short and medium-term debt issuance by the banks.

Of course, such economic crisis has a big impact on each and every one of us. Like in the case of US, with higher unemployment, the government would have to pay more benefits and would see its tax revenues reduced at the same time. Also, anyone with an open mortgage with floating interest rates will see rates increase. New mortgages and loans will be at higher rates. In addition, fewer home loans would be granted to mainly to the rich and reliable customers and at higher rates. House prices would collapse significantly. Similarly, UK is expected to lose a great number of jobs if the bailout package fails.


References:
http://www.wsws.org/articles/2008/sep2008/usec-s12.shtml
http://news.alibaba.com/article/detail/finance/100010889-1-uk-bank-bailout%253A-what-it%252C.html
http://news.alibaba.com/article/detail/finance/100011486-1-uk%2527s-brown-seeks-rally-support.html
http://www.iht.com/articles/2008/09/23/business/23paulson.php