Chronology of Economic Crisis - The three phased crisis

There was a lot of confusion and divergence of opinion about when the crisis really began.The pursuits claim that it started with the Fed’s attempt to overcome the previous crisis (the dotcom bubble). We will concern ourselves first with the ‘what’ of it- in order to understand all that happened under the broad headings of credit crisis, financial crisis & global economic crisis.

The three phased crisis

There were three phases to the crisis of which is still prevalent in 2011.

The first phase

It was the uncovering of losses in the subprime mortgage market in US.  This was largely a wake up phase. It started in February 2007 & continued till early 2008. During this phase the reactions of most experts were mixed – some believed it to be the harbinger of a larger global crisis while others thought of it as nothing more than a serious setback in a specific sector of the American economy.  However, even for the lenders & investors the extent of the impact was limited to losses in subprime mortgages. This phase started in the US and the spread to the rest of the world through subprime mortgage investments.

The second phase

The second phase was the wider credit crisis across the US and Europe brought about by the impact of the first phase, as well as other factors at work. This phase started in early 2008 with the collapse of Bear Stearns and continued till September 2008. This phase covered a larger section of the financial services industry. As mentioned in the first phase quite a few of American subprime lenders failed & many large American investment banks lost heavily on their investments in the subprime mortgages. If the problem was subprime credit alone, the crisis would have been contained at this stage. The second phase would have never come about.

The third phase

The third phase was the global economic crisis. The substitution of ‘economic’ for’ financial’ in the descriptor, has significant & dark connotations, It was in the phase that the crisis engulfed the wide economy began affecting the lives of people outside the financial services industry. This phase started in October 2008 – after series of big tickets bank failures on wall street & continued through 2009 & 200. In the first two phases, much of the brunt of the crisis was borne by the financial services industry in US & Europe. Banks and financial institutions lost close to $1500bn during the time according to IMF. However, the rest of the global economy was still chugging along. There were predictions of a slowdown no doubt; however, the real impact was not felt till September 2008.

It is important to understand however that these three phases unfolded not as an unhappy accident of the first leading to the second and that in turn leading to the third. It was not a disease that began in a section of the economy & then spread to the other sections.

So was there more to it? What were the main driving forces that lead to the global economic crisis?

Source : Anatomy of Froth by Swapnil Pawar