The wreckage from the financial crisis in the developed world continues to be a fountainhead of troubles. The collapse of the housing market in the U.S. that unraveled in 2008 produced an enormous cache of foreclosed homes. Hundreds of thousands of American families, who had previously taken out mortgages and bought homes in the housing market boom of 2002-2008, had to give up on their homes and move out when they defaulted on their mortgage payments.
These mortgage holders had hoped to be able to able to finance their mortgage payments through their home equities i.e. the appreciation in the price of their houses. When the housing market collapsed, the prices plummeted and the result was hundreds of thousands of home owners bankrupt. Banks and mortgage companies were quick to foreclose on these homes and evict these families. Homelessness soared sharply. Hundreds of thousands of families ended up on the streets.
The scene of these millions of people on the streets of American cities and towns was an unbelievable sight of misery in a country that has been one of the most affluent in the world. For these families it was utter economic and financial devastation.
More than five hundred thousand houses have already been put on sale by these banks and major financial corporations. The buyers would be other large financial corporations such as hedge funds who would be buying houses in lots of 50,000 or more. The injection of even a fraction of this volume of houses into the housing market would be devastating.
At a time when the health of the housing market and firming prices are important to the health of the American economy in general, dumping more houses would be very bad for this market. The result would be that the housing market and the prices would trend lower. The health of the American economy is very significant for the global economy. The U.S. is a major consumption market for such export-oriented countries as China, India and many other developing countries.
At present, the global economy's growth rate continues to be sluggish. This is in part due to the ongoing crisis in the Eurozone that has kept the world and the developed economies on the tenterhooks for quite long time now. The American economy continues to be heavily dependent on its sprawling finance sector. The Wall Street and the country's money managers have enormous power, influence and clout.
The entire economy is dependent on the performance of the financial sector. This is certainly one strong negative point about the developed economies. The financial sector has grown to such an extent that the entire economies are being held hostage.
It is all about "a too big to fail" problem with banks on whose health and functioning the health of the entire economy depends. We had hoped that the American president, Barack Obama, upon coming to office in 2009, would introduce wide-ranging reforms in the country's financial industry that would restrict this insidious influence.
After all, it has proved to be very bad for the economy of not only the U.S. but also the entire world. The freefall of 2008-09 was a direct result of a predatory financial system that did not and could not act in the interest of the economy and people at large but was guided by self-interested corruption.
The underlying mistake was that the entire financial system was allowed to grow so large, influential and powerful that a failure in one key of this large chain resulted into a systemic failure that almost brought down major economies in the West. The failure of the Lehman Brothers was the trigger for one of the worst cases of financial bankruptcy in the world since the bankruptcies of 1920s and 30s.
The bitter fact is that the crisis that started in 2008 is by no means over. It has led to a very significant social and economic dislocation in terms of the middle class in the west ending up with declining or, at best, stagnant incomes. The median US household income in the U.S., for example, has been stagnant for the past one decade and more. In the words of Francis Fukuyama, the decline of the middle class in the West is a real issue and a grave concern. This decline is leading to gradual impoverishment of the middle class. This decline is fueling an economic crisis that has been unprecedented in the history.
Never before in history has the distribution of national and global wealth been so skewed in favor of a small class of people. The economic crisis is certain to become yet more global and engulf even those societies and countries where economies have tended to be stable and prospering.
The disparities in global wealth distribution have been flagrant. From now on what we are going to witness and experience will be increasing wealth and income disparities inside economies and countries. In North America and the U.K., where countries are dependent on financial services, the situation would deteriorate further.
This is a major reason to worry about. From all indications, these economic upheavals will not leave politics and political organization of these societies intact. Sooner or later, we have to encounter political repercussions of the deteriorating economic situation in many of developed countries. Political populism and far right tendencies would increase.
The rise of Hitler and fascism in Germany of 1930s was directly linked to the economic upheavals that Germany went through. This time, it might not get that bad but the political repercussions will manifest themselves soon.
What is the ultimate cause for worry is the creation of endless money and credit that has kept the system afloat for now. The Long Term Refinancing Operation (LTRO) run by the European Central Bank has enabled banks and financial corporations in Europe to continue operations and remain in business when, in actuality, a significant section of them have severe liquidity problems.
The LTRO was made possible by a generous $1 trillion swap between the American Federal Reserve and the ECB. This LTRO has given the banks necessary liquidity to weather the storms over the next 1.5 to 2 years. The fact is that the system cannot be made addicted to cheap credit and money created out of thin air by the Federal Reserve and channeled to its beneficiaries namely the ECB and hundreds of small to medium-sized European banks.