A fiscal crisis has happened with regular intervals over the past century, it happens again in the year 2008, and in all likelihood will happen later on in similarily. There's no fundamental differences between such crises in our time and former crises, except perhaps that they occur faster, occur more often, but fortunately also heal faster.
THE TYPICAL SITUATION BEFORE THE CRISIS
The crisis often occurs after having a any period of time of economic growth, high employment and high activity. The situation for companies and people are generally as follows:
- The cost-effective activity within the whole society is very high following a any period of time of growth, but starts to decline.
- Stocks are traded for historically high quotes after having a long time of rise of 300% or even more, they have reached a record high level, however they are beginning to decline again.
- The prizes of real estate properties are also high after having a long time of growth, 300% or more, but they also start to decline after an all-time high level.
- Companies tend to be overestablished after aggressive investments for borrowed money. The investments never have yet shown profitable, however the companies estimate great profits in the investments simply because they think the general growth continue uninterruptedly.
- Also the average people have high debts after you have invested massively in their homes and in luxury objects. They've some beginning difficulties with payment on the debts, but think these complaints soon will go away having an anticipated further rises of personal income.
THE INITIAL STAGES From the CRISIS
The crisis usually has a slowly developing initial face. With this face the situation can reverse and also the economy recover without great damages. In this initial period it's possible to notice the following process:
- Steadily more companies recognize that their massive investments do not pay back with all the expected revenues and the've problems paying on their loans. They abruptly reduce further investments and start selling off assets.
- Steadily more individuals also realize they have a too great debt to deal with with their private income. They reduce their consume then sell off properties and luxury objects.
- Companies are receiving steadily less orders, can sell less and possess less to accomplish due to reduced consume and investments.
- Earnings of companies and people are declining and several are downright loosing money.
- Trading stocks values are sharply declining, often 20-30%.
- The home prizes are sharply declining, often 20-30%.
THE FURTHER STAGES LEADING TO A FULL-BLOWN CRISIS
At some point there may be a crucial level leading to the progression of an entire blown crisis that it's impossible to recover from in a easy way. This turning point occurs a certain persentage, for example 10%, of people and firms understand that they don't have enough income to take care of their dept, which selloff of properiies and stocks is not going to nullify the debt. The full-blown crisis has these properties:
- The experience and earnings of companies are abruptly declining.
- A lot of companies experience massive losses.
- The number of companies and people with debt trouble is abruptly rising.
- The amount of bakrupsies is abruptly rising.
- The unemployment level rises abruptly.
- Banks enter serious squeeze as a result of customers unable to pay on their debts and due to the decline within the value of properties in the role of to safeguard the loans.
- The troubled banks have to rise a person's eye rates by many people percent to counteract the losses. But this act only boosts the difficulties for other banks, individuals and firms and accelerates the crisis.
- A higher percentage of banks get unfunctional and bankrupt
- There will probably be massive selloffs of properties and stocks. The selloffs are exerted by individuals attempting to free themselves from some of their debts by banks wanting to stop losses on loans.
- The stock exchange cracks down by an new 50% or more driven through the massive selloffs.
- Real estate market also cracks down a new 50% or more as a result of massive selloffs, but usually somewhat slower than the stock exchange.
THE CHARACTERISTICS OF AN ULTIMATE CRISIS
The best stage with the crisis is seldom reached, as the governments will at some time take control of the economic climates and secure the absolute minimum functionality.
Within the ultimate crisis producing goods and services in the society has fallen 30% or maybe more and attempt to fall. Investments or building activities have totally halted. There is certainly mass unemployment, 30% or even more.
The financial system has nearly totally collapsed, and is also only able to support the daily payment for food, energy and other necessities. The development facilities and organizations of the society have fallen apart 30% or even more as a result of insufficient maintainance, meaning the society struggles to recover very quickly.
THE END OF THE CRISIS
Prior to the crisis can end, all selloffs to repay on loans should be fulfilled. Then every actor within the society must accept their losses. Debts that actors are not able to pay back must in some manner be nullified. Then all of the pieces remaining with the former companies must be fixed back together again into new functional units. Then the society can slowly rebuild its strength.
THE CAUSES OF THE CRISIS
An important reason for the crisis are over-optimistic companies and individuals through the foregoing duration of economic growth. They have a tendency to think the general growth continue forever without interrupting periods of economic decline. In addition they often overestimate themselves and think they shall be a success in the competition against other programs or persons, not a looser, no average performer, however the winner.
This optimism, the industry general human property, make all actors borrow massive quantities of capital and invest them in homes, luxury objects and increase of their business. This expansive behaviour tend to accelerate for quite a long time untill in meets the wall.
Another cause are executives in banks tempted to lend out as much money as you can for the borrowers, no matter the consequences for your bank and the borrowers, because this behaviour provides the executives a massive short-term personal gain.
How to prevent ECONOMICAL CRISES
Future crises can only be prevented by hindering lender lending out additional money to anybody that the borrowers will pay in a snug way. This may just be created by governmental regulations that set clear criteria that really must be fulfilled each time a specific amount of income is lent out.
Also banks has to be forbidden to establish employment contracts for his or her executives that give them a break directly for your amount of mortgages they establish.