European Perspectives on the Recession
Edited by David Howden
Chapter 2: A Stock-taking of the Impact of the Crisis
1 Jörg Guido Hülsmann The present crisis of the global economy started with the publication of massive defaults of US subprime mortgage loans in July 2007. During the following 12 months, these initial defaults set in motion a wave of consolidation and contraction in the global financial industries. This wave has been followed by another wave of bankruptcies that swept over financial markets worldwide. The burgeoning financial tsunami has been slowed down, but not stopped, through massive interventions by the world’s major central banks, which greatly expanded the money supply and eased credit conditions. In the summer and fall of 2008, it reached a climax when two of the five largest US investment banks went bankrupt, and the three remaining banks abandoned their status to become commercial banks in order to benefit from public bailout. The defaults within the investment-bank sector were at the point of spilling over to a large US insurance company and to several public and semi-public banks. Within a few weeks or even days it would in all likelihood have entailed a complete meltdown of the financial markets. Few if any banks would have survived; their failures would have set in motion a deflationary spiral. The debt-ridden global financial industries would have been wiped out. Any sort of credit – public or private – would have become unavailable. The meltdown would have swept over the rest of the global economy: With bank credit unavailable or greatly reduced, most companies could not have financed their spending on...
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