"Great Depression.....Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.
By 1933, depositors saw $140 billion of their deposits disappear due to uninsured bank failures. Bank failures snowballed as desperate bankers tried calling in loans which the borrowers did not have time or money to repay. With future profits looking poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves, which intensified deflationary pressures. The vicious cycle developed and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 great depression.
There are frightening similarities in the current situation in the US and in Britain. Once again, a banking crisis is threatening to undermine a global economy. Banks are too late in tightening the credit purse strings. There will be no more easy money, on the contrary, there will be very little money at all – and even the regular credit cards, bank overdrafts and small loans will be harder to get hold of as there simply is no money to lend out.
In addition to making it much harder to secure a mortgage or loan, such a dramatic decline in lending would hamper the ability of consumers to borrow money to finance smaller purchases such as cars, televisions and washing machines.
Since two-thirds of the US economy is driven by consumer spending, this will hit retailers and other companies particularly hard. Businesses will also be deterred from borrowing money to invest and will be less able to stave off looming redundancies, putting further pressure on the US economy.
Goldman’s prediction comes after Wall Street firms such as Citigroup, Merrill Lynch and Morgan Stanley have collectively reported more than $50 billion in losses on investments related to sub-prime mortgages.
It follows the US Federal Reserve’s second cash infusion of the month on Thursday, when it injected $47.25 billion into the financial system, the largest since the terrorist attacks of September 11, 2001.
The latest injection was administered two weeks after the Fed injected $41 billion, as the fallout from the housing crisis gathered momentum.
There is no end in sight and with other countries economies clearly suffering in tandem with the US, there is growing fear that this could be the mother of all recessions." |
