A longterm historical synopsis of the major and minor events that contributed to the unprecedented economic crisis facing the world today.
Created by pyeguy on Oct 1, 2008
Last updated: 03/12/10 at 02:12 AM
Tags: Recession deflation stagflation hyperinflation dollar crisis fiat currency Federal Reserve Bailout Monetary Union Credit Derivatives Leverage
European leaders agree to commit government funds in massive bailout packages -- only a week after announcing that there'd be no US-style massive bail-out package.
The German government unveiled a €500 billion ($679 billion) rescue plan to shore up the banking system after an emergency summit of euro zones nations on Sunday, October 12, 2008, at which leaders agreed to guarantee new bank debt and inject capital to unfreeze money markets and restore confidence in the financial system.
http://www.businessweek.com/globalbiz/content/oct2008/gb20081013_547847.htm?chan=globalbiz_europe+index+page_top+stories
The Bush administration will invest about $125 billion in nine of the biggest U.S. banks, including Citigroup Inc. and Goldman Sachs Group Inc., in the government's latest attempt to shore up confidence in the financial system.
The proposed cash injections in exchange for preferred shares are part of a $700 billion rescue approved by Congress and follow similar moves by European leaders to unfreeze global credit markets by helping beleaguered banks. The other companies are Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, State Street Corp. and Bank of New York Mellon Corp., said people briefed on the plan.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a6iAcfnPhVIg&refer=home
Overall effects of said short term ban in favor of investors and financial firms are rendered as questionable...
http://online.wsj.com/article/SB122351280409217645.html?mod=googlenews_wsj
"An IMF intervention in Iceland, which would necessarily involve accepting a series of harsh measures to restore fiscal and monetary stability, would underline the extraordinary reversal in the country's fortunes after a decade-long, debt-fueled binge by the country's banks, businesses and some private citizens. The banks, while avoiding the toxic mortgage securities that have humbled Wall Street, expanded aggressively at home and abroad. When credit tightened and the krona fell this year, they were unable to finance their debts."
Iceland is forced to go to Russia and ask for a $5.5B loan. Answer pending...
http://www.iht.com/articles/2008/10/09/business/icebank.php
The Treasury named Assistant Secretary for International Economics and Development, Neel Kashkari, as head of the $850+ billion government program that will buy soured investments to help restore the financial markets to health.
Kashkari was named as the interim Assistant Secretary of the Treasury for Financial Stability - a role envisioned in the rescue plan that was signed into law by President George W. Bush last week.
Kashkari is a veteran banker from Goldman Sachs and joined the Treasury in July 2006 as a senior advisor to Treasury Secretary Henry Paulson.
http://www.huffingtonpost.com/rob-kall/meet-the-700-billion-bail_b_132221.html
Reversal of the decision from earlier in the week, along with an added $150 billion tacked onto the initial $700 billion figure for bailing out institutions in order to cease the loss of confidence in the markets.
The Emergency Economic Stabilization Act of 2008 (Pub.L. 110-343, Div. A, enacted October 3, 2008), commonly referred to as a bailout of the U.S. financial system, is a law authorizing the United States Secretary of the Treasury to spend up to US$700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. The Act was proposed by U.S. President George W. Bush and Treasury Secretary Henry Paulson during the liquidity crisis of September 2008.
The original proposal was three pages, as submitted to the United States House of Representatives. The purpose of the plan was to purchase bad assets, reduce uncertainty regarding the worth of the remaining assets, and restore confidence in the credit markets. The text of the proposed law was expanded to 110 pages and was put forward as an amendment to H.R. 3997. The amendment was rejected via a vote of the United States House of Representatives on 29 September 2008, by a margin of 228-205.
On October 1, 2008, the Senate debated and voted on an amendment to H.R. 1424, which substituted a newly revised version of the Emergency Economic Stabilization Act of 2008 for the language of H.R. 1424. The Senate accepted the amendment and passed the entire amended bill by a vote of 74-25. Additional unrelated provisions added an estimated $150 billion to the cost of the package and increased the size of the bill to 451 pages. See H.R. 1424 for details on the added provisions. The amended version of H.R. 1424 was sent to the House for consideration, and on October 3, the House voted 263-171 to enact the bill into law. President Bush signed the bill into law within hours of its enactment, creating a $700 billion Troubled Assets Relief Program to purchase failing bank assets.
Proponents of the bailout plan argued that the unprecedented market intervention called for by the plan was vital to prevent further erosion of confidence in the U.S. credit markets and that failure to act could lead to an economic depression. Opponents objected to the massive cost of the sudden plan, pointing to polls that showed little support among the public for bailing out Wall Street investment banks, and claimed that better alternatives were not considered and that the Senate only tried to force the passage of the unpopular but sweetened version of the bailout through the opposing House and was successful in this attempt.
http://www.reuters.com/article/topNews/idUSTRE49267J20081003?feedType=RSS&feedName=topNews
***European Commission*** gives the green light to the British government to rescue Britain's Bradford & Bingley. This is the 2nd UK bank after Northern Rock to be rescued in a year. 41 billion pounds sterling is the taxpayer burden as a result of this bail-out.
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3094014/Bradford-and-Bingley-rescue-will-cost-taxpayer-billions.html
The equities market drops prompt Congress' reversal by the end of the week, which in turn will not mitigate the hemorraging in the markets.
http://useconomy.about.com/b/2008/09/30/bailout-rejected-dow-drops-777-points.htm
Belgium, The Netherlands and Luxembourg invested 11.2 billion euros ($16.3 billion) in Fortis, Belgium's biggest financial-services firm, to restore confidence in the bank after shares fell 35 percent last week.
http://www.reuters.com/article/ousiv/idUSTRE48Q2X320080928
"FDIC says Wachovia didn't fail..." Wachovia's banking operations were bought by an already debt-burdened and derivative-laden Citigroup on 9/29/08, with the FDIC brokering, using some of its own cash.
But hold on! Wells Fargo comes in with a much higher bid and eventually beats out Citigroup for Wachovia.
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article4844146.ece
http://blogs.wsj.com/economics/2008/09/29/fdic-citi-to-buy-wachovias-banking-operations/
The largest bank failure in US history, WaMu's replete failure would have wiped out the FDIC's remaining insurance purse after IndyMac's failure took $8B of it. Instead, JPM took control of the banking operations. JPM was already digesting the Bear Stearns assumption from earlier in the year...
http://seekingalpha.com/article/97647-washington-mutual-the-largest-bank-failure-in-history
Fabled investor Warren Buffett took advantage of the turmoil in the markets last week to make a shrewd $5 billion investment in the beleaguered but best-run major Wall Street securities firm, Goldman Sachs.
Mr. Buffett's Berkshire Hathaway, which owns companies in a variety of industries from insurance to candy making, is purchasing $5 billion of preferred stock with a juicy 10% dividend yield. Berkshire also is getting warrants to buy $5 billion of Goldman common stock at $115 a share, $10 below Goldman's share price when the deal was announced last Tuesday.
http://online.wsj.com/article/SB122256922970483051.html?mod=googlenews_wsj
First naked short selling, then general short selling, is banned 'temporarily' in order to prop up equities in at-risk sectors.
http://ap.google.com/article/ALeqM5j1qYpENSJmaTaTiLWSUFodScpFTwD938R0JO0
Venerable 89 year old insurance firm's stock falls from a 52 week high of $70.13 to just $1.25, and it reports losses of $13.2 billion in just the first six months of 2008 due in large part to the hits it took from its diversified investments into Alt-A and subprime mortgages. Federal Reserve, after failing to arrange a merger, sets up an $85 billion credit facility for AIG.
http://www.iht.com/articles/2008/09/15/business/16aig.php
The venerable 158 year old brokerage was not saved by the Feds. Core question to ponder is: Why save Bear, Merrill and the others, but not Lehman?
http://www.financialexpress.com/news/Lehman-collapses/361823/
Venerable 94 year old brokerage - the largest of its - with a $26 billion market cap and 60,000 employees worldwide, succumbed to the credit crisis and was absorbed by Bank of America, which already assumed Countrywide Home Loans before it.
http://www.cnbc.com/id/26708319
The government sponsored enterprises Fannie Mae and Freddie Mac, founded in 1938 and 1970, respectively, are taken over by the government. They collectively retain $1.6 trillion of debt. Were they to fail, they'd have unwound a $62 trillion credit derivatives tsunami *immediately*. The fact that they were rescued by the government means that said unwinding will take place a bit more gradually, but not by much, considering the rest of the month of September, 2008.
http://www.npr.org/templates/story/story.php?storyId=94424809
The head of Korea Development Bank said Tuesday that the state-owned lender is in discussions about potentially acquiring troubled U.S. investment bank Lehman Brothers as part of a larger investment group, the Associated Press reported. The statement came a little more than a week after reports that the Korean bank was interested in buying Lehman; at the time, a spokesman for the bank told The New York Times such reports were “erroneous.”
http://dealbook.blogs.nytimes.com/2008/09/02/korean-bank-confirms-talks-about-lehman-deal/
Office of Thrift Supervision in Washington seizes this sprawling Pasadena, California-based savings and loan, which carried massive toxic mortgage exposure on its books. $32 billion in assets listed as of 03/08. $10 billion tab for the FDIC exhausts upwards of a fifth of its insolvency reserves. Third largest bank failure in US history up to that point.
http://articles.latimes.com/2008/jul/12/business/fi-indymac12
$147 a barrel, to be exact. Oil's rise again serves to deflect the forces of price deflation resulting from bursting asset bubbles - in this case the housing and mortgage bubbles - just as it did for the burst tech. and equity bubbles a few years earlier by breaking $50 a barrel.
http://abcnews.go.com/Business/PainAtThePump/wireStory?id=5353919
Venerable 85 year old investment bank is the first major Wall Street casualty of the evolving mortgage/credit/solvency crisis. Failure comes less than a year after its two hedge funds collapsed under the weight of traded CDOs worth less than their mark-to-market values. Some observers claim that the bank was made a sacrificial lamb to prevent a wider, more disastrous systemic credit derivatives collapse that would've affected all of Wall Street overnight.
http://www.vanityfair.com/politics/features/2008/08/bear_stearns200808
Breaking the $1,000/troy ounce barrier held both fiscal as well as psychological significance.
The subsequent drop in the price of gold since that upper limit, due in large part to central bank interventions to pull back on its price and 'manage' the dollar as well as the commodities markets, does not preclude future natural adjustments of the gold price to viable, organic supply and demand, thus again broaching $1,000 and beyond.
http://www.economist.com/research/backgrounders/displaystory.cfm?story_id=10855880
In 2008 the Northern Rock bank was nationalised by the British Government, due to financial problems caused by the subprime mortgage crisis in the US.
On September 14th, 2007, the Bank sought and received a liquidity support facility from the Bank of England, following problems in the credit markets, during the financial crisis of 2007–2008.
At 00:01 on February 22nd, 2008 the bank was taken into state ownership. The nationalisation was a result of two unsuccessful bids to take over the bank, neither being able to fully commit to repayment of taxpayers' money. The government-appointed Chairman is Ron Sandler, who assumed the position on Monday 18 February. There are no plans to change the name of the bank.
http://en.wikipedia.org/wiki/Nationalisation_of_Northern_Rock
Partly due to US sanctions and partly due to returned animosities towards the US, Iran, being the world's fourth largest petroleum and second largest natural gas producer, formally moves away from utilizing the dollar for either energy trading or general currency usage.
http://archive.gulfnews.com/articles/07/10/23/10162044.html
The informal kick-off event that commenced the liquidity and credit crunches on Wall Street into 2008.
On June 22, 2007, Bear Stearns pledged a collateralized loan of up to $3.2 billion to "bail out" one of its funds, the Bear Stearns High-Grade Structured Credit Fund, while negotiating with other banks to loan money against collateral to another fund, the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund. The funds were invested in thinly traded collateralized debt obligations (CDOs) found to be worth less than their mark-to-market value. Merrill Lynch seized $850 million worth of the underlying collateral but only was able to auction $100 million of them. The incident sparked concern of contagion as Bear Stearns might be forced to liquidate its CDOs, prompting a mark-down of similar assets in other portfolios.
Richard A. Marin, a senior executive at Bear Stearns Asset Management responsible for the two hedge funds, was replaced on June 29 by Jeffrey B. Lane, a former Vice Chairman of rival investment bank, Lehman Brothers.
During the week of July 16, 2007, Bear Stearns disclosed that the two subprime hedge funds had lost nearly all of their value amid a rapid decline in the market for subprime mortgages.
Co-President Warren Spector was forced to resign on August 5, 2007, as a result of errant trades that led to the collapse of these two hedge funds backed primarily by subprime loans. A September 21 report in the New York Times noted that Bear Stearns posted a 61 percent drop in net profits due to their hedge fund losses.
http://www.investopedia.com/articles/07/bear-stearns-collapse.asp
Russia is third behind China and Japan in overall dollar reserves.
In two short years, China's ownership of US Treasury-issued debt rises from $224.9 billion to $416.2 billion - an 85% hike.
As the dollar continues to drop in value against other global currencies under the weight of US deficits, low personal and corporate savings rates, high federal debts and dissipating manufacturing base, nations such as Sweden, Russia, Kuwait and the UAE begin tactically diversifying away from majority-USD holdings in their state reserves.
http://www.worldproutassembly.org/archives/2006/11/uae_may_cut_dol.html
Amaranth Advisors LLC was an American multistrategy hedge fund managing US$9 billion in assets. In September 2006, it collapsed after losing roughly US$6 billion in a single week on natural gas futures. The failure was the largest hedge fund collapse in history.
By 2004-2005, the firm had shifted much of its capital to energy trading. Amaranth’s energy desk was run by a Canadian trader named Brian Hunter who placed "spread trades" in the natural gas market. Hunter had made enormous profits for the company by placing bullish bets on natural gas prices in 2005, the year Hurricane Katrina had severely impacted natural gas and oil production and refining capacity. Hoping for a repeat performance, Amaranth wagered with 8:1 leverage that the price of the March '07 and March '08 futures contracts would increase relative to the price of the April '07 and April '08 contracts (i.e., they were "long" the March contracts and "short" the April contracts).
Unfortunately for Amaranth, they did not. The spread between the March and April 2007 contracts, for example, went from US$2.49 at the end of August 2006 to US$0.58 by the end of September 2006. The price decline was catastrophic for Amaranth, resulting in a loss of US$6.5 billion. Historically, the spread in future prices for the March and April contracts have not been easily predictable. The spread is dependent on meteorological and sociopolitical events whose uncertainty makes the placing of such large bets a precarious matter.
The fund had over US$9 billion under management and reports indicate "losses may exceed 65 percent." On September 20, 2006, Reuters reported that Amaranth would transfer its energy portfolio to a third party, eventually revealed to be Citadel Investment Group and JPMorgan Chase. The losses were not as threatening to the financial system as were the losses of Long-Term Capital Management, but it led to increased pressure on the SEC to regulate hedge funds. On September 29, 2006 the founder of Amaranth sent a letter to fund investors notifying them of the fund's suspension, and on October 1, 2006, Amaranth hired the Fortress Investment Group to help liquidate its assets.
Subsequent analysis in the press claimed that the fund was "devoured" by its banker, JPMorganChase (see attached).
http://www.gata.org/node/4753
Japan's ownership of US Treasury debt rises from $293 billion in September, 2001.
Attending the annual meetings of the World Bank and International Monetary Fund, Kudrin caused his American hosts discomfort by openly questioning the dollar's pre-eminence as the world's "absolute" reserve currency.
The greenback's recent volatility and the yawning US trade deficit, "are definitely causing concern with regard to its reserve currency status," he said. "The international community can hardly be satisfied with this instability."
A rising trend of exiting from the dollar globally would threaten the petrodollar standard for energy trading and pricing that ultimately allows the US Fed to print money without limits, let alone threatens the dollar's global fiat currency standard of record.
http://www.telegraph.co.uk/finance/2937323/The-threat-to-a-fistful-of-petrodollars.html
The US dollar fell against the euro in European morning trade on Friday as Sweden’s central bank said it had slashed its dollar holdings almost in half.
The Riksbank revealed that it had cut the proportion of dollars in its reserves from 37 to 20 per cent, as well as selling off all its holdings of yen, which previously amounted to 8 per cent of its reserves.
The central bank balanced these disposals by increasing its holdings of euros from 37 to 50 per cent, as well as building a new Norwegian krone position of 10 per cent...
"Today’s announcement will merely add to market fears that the end to the Federal Reserve tightening cycle will encourage more diversification away from the dollar, and into the most liquid alternative of the euro,” said Chris Turner, head of FX strategy research at ING Financial Markets, who reiterated its view that the euro will return to $1.35 by the end of the year.
- Source - Macroblog.typepad.com and FT.com
http://macroblog.typepad.com/macroblog/2006/04/dollar_diversif.html
M3: M2 + large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. This is the broadest measure of money commonly used and is used by economists to estimate the entire supply of money within an economy. although the Bernanke Fed continues to privately monitor M3, many observers argue that the Fed has purposefully hidden M3 from the public in order to obfuscate upcoming uses of the "printing press" (hyper printing of excess liquidity to fight off deflation) Bernanke referenced in his 2002 speech.
http://www.leap2020.eu/March-24,-2006-M3-has-ceased-to-be-published-by-the-US-Federal-Reserve_a119.html
$40 billion in December, 2002 rises to $164.4 billion by early 2006.
Viewing rising deficits in the US and a declining dollar, China worries over large future losses on its foreign exchange reserves. Although China cannot make a drastic switch out of the dollar, it is nonetheless sending concerns to the issuer of its largest currency reserves and largest trading partner.
The consequences of a large move out of the USD by China would be catastrophic for the US and global economies.
http://www.resourceinvestor.com/pebble.asp?relid=15912
http://lib.store.yahoo.net/lib/realityzone/UFNChinaEuros.htm
The rise of oil is not due to supply and demand.
"The Fed would already be faced with its worst nightmare, deflation in the Unites States, had the price of oil not risen above US$50 a barrel following the U.S. invasion of Iraq. Globalization is exerting tremendous downward pressure on the U.S. cost structure that can only intensify in the years ahead as service sector jobs follow manufacturing jobs offshore."
- from THE DOLLAR CRISIS: Causes, Consequences, Cures by Richard Duncan, revised 2005 edition, p. 310.
http://money.cnn.com/2004/09/27/markets/oil/
Saddam Hussein falls from power after four decades of dictatorship. US and UK remove Saddam, capture Iraqi oil fields, restore Iraq's energy monetary reserves and trading platform from euros back to the US $.
http://www.time.com/time/photoessays/iraq2003/saddamfalls/
The Sarbanes-Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly called SOX or Sarbox; is a United States federal law enacted on July 30, 2002 in response to a number of major corporate and accounting scandals including those affecting Enron, Tyco International, Adelphia, Peregrine Systems and WorldCom. These scandals, which cost investors billions of dollars when the share prices of the affected companies collapsed, shook public confidence in the nation's securities markets. Named after sponsors Senator Paul Sarbanes (D-MD) and Representative Michael G. Oxley (R-OH), the Act was approved by the House by a vote of 334-90 and by the Senate 99-0. President George W. Bush signed it into law, stating it included "the most far-reaching reforms of American business practices since the time of Franklin D. Roosevelt."
The legislation establishes new or enhanced standards for all U.S. public company boards, management, and public accounting firms. It does not apply to privately held companies. The Act contains 11 titles, or sections, ranging from additional Corporate Board responsibilities to criminal penalties, and requires the Securities and Exchange Commission (SEC) to implement rulings on requirements to comply with the new law. Debate continues over the perceived benefits and costs of SOX. Supporters contend that the legislation was necessary and has played a useful role in restoring public confidence in the nation's capital markets by, among other things, strengthening corporate accounting controls. Opponents of the bill claim that it has reduced America's international competitive edge against foreign financial service providers, claiming that SOX has introduced an overly complex and regulatory environment into U.S. financial markets.
The Act establishes a new quasi-public agency, the Public Company Accounting Oversight Board, or PCAOB, which is charged with overseeing, regulating, inspecting, and disciplining accounting firms in their roles as auditors of public companies. The Act also covers issues such as auditor independence, corporate governance, internal control assessment, and enhanced financial disclosure.
http://www.soxlaw.com/
Worldcom, Inc. filed the largest U.S. bankruptcy in history after the long-distance telephone and data services company became incapacitated by a $4 billion accounting scandal and $40 billion of junk-rated debt.
WorldCom's collapse, coupled with that of Enron, triggered the accounting and financial oversight regulations of the early 2000s which led to Sarbanes-Oxley and other measures for preventing profligacies that primarily grew during a period of credit expansion in the prior decade.
http://www.livemint.com/2008/03/15003003/Subprime-crisis-parallels-Enro.html
Fearing deflationary forces arising from the bursting of the tech. and equity bubbles of the late 1990s, Greenspan cuts rates in unprecedented fashion, thus triggering the mortgage and real estate bubbles of the new decade (i.e. transferring one bubble to another).
The Fed did cut the federal funds rate, the interest that banks charge on overnight loans, by a half-point at the November 2002 meeting, moving it from 1.75 percent down to 1.25 percent, the lowest level in 41 years. That was the only rate cut the Fed made that year.
The Fed would cut the funds rate one more time the next year, pushing it to a 45-year low of 1 percent on June 25, 2003. The central bank left the funds rate at that level for an entire year until it began a gradual move to raise rates in June 2004. The US mortgage sector, meanwhile, exploded with new activity as property prices rose irrationally.
http://www.usatoday.com/money/economy/2008-04-11-2673288641_x.htm
Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American and European companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
Confrontations between the police and citizens became a common sight, and fires were also set on Buenos Aires avenues. Fernando de la Rúa declared a state of emergency (illegally since it needed confirmation by the Congress) but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.
Amid rioting, President Fernando de la Rua resigns, December 21, 2001.Since De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. Following presidential succession procedures established in the Constitution, the president of the Senate Ramón Puerta took office but quickly resigned, followed by the president of the Chamber of Deputies, Eduardo Camaño. The Legislative Assembly (a body formed by merging both chambers of the Congress) convened with the goal of creating a more legitimate interim government. By law, the candidates were its own members plus the Governors of the Provinces -they finally appointed Adolfo Rodríguez Saá, then governor of San Luis. During the last week of 2001, the interim government led by Rodríguez Saá, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totalling no less than 93 billion.
Politically, the most heated debate involved the time for the following elections -the spectrum ranged from March 2002 to October 2003 (the original date for the ending of De la Rúa's office).
Rodríguez Saá's economy team came up with a project designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash (checks, promisory notes or other instruments could be nominated in pesos or dollars but not in Argentinos) and would be partially guaranteed with federally-managed land -such features were expected to counterbalance inflationary tendencies.
Argentinos having legal currency status would be used to redeem all complementary currency already in circulation -the acceptance of which as a means of payment was quite uneven. It was hoped that preservation of convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) that could ameliorate the crippling recession of economy. Critics called this plan merely a "controlled devaluation"; its advocates countered that since controlling a devaluation is perhaps its thorniest issue, this criticism was a praise in disguise. The "Third Currency" plan had enthusiastic supporters among mainstream economists (the most notorious being perhaps Martín Redrado, current president of the central bank) citing sound technical arguments. However, it could never be implemented because the Rodríguez Saá government lacked the political support required.
Rodríguez Saá, utterly incapable to deal with the crisis and unsupported by his own party, resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde-then a Senator for the Buenos Aires province-to take his place.
The end of convertibility
Monthly inflation in Argentina, 2002 (the peak is 10.4%, in April).After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.
In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.
After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge depreciation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).
The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
Since the volume of pesos didn't fit the demand for cash (not even after the devaluation) huge quantities of a wide spectrum of complementary currency kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value -while the Patacón was frequently accepted at the same value as peso, Entre Ríos's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumors that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless printed paper.
Immediate effects
Many private companies were affected by the crisis: Aerolíneas Argentinas, for example, was one of the most affected Argentine companies, having to stop all international flights for various days in 2002. The airline came close to bankruptcy, but survived.
Depositors protest the freezing of their accounts. Their mostly dollar-denominated accounts were converted to Pesos at less than half their new value.Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.
Several thousand newly homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to eke out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country that at the time suffered from an unemployment rate soaring at nearly 25%.
Agriculture was also affected: Argentine products were rejected in some international markets, in fear that they might come damaged because of the poor conditions in which they grew, and the USDA put restrictions on Argentine food and drugs arriving at the United States.
Producers of television channels were forced to produce more reality shows than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were canceled.
Tourism balance with Chile inverted due to the lowered prices in Argentina.
http://en.wikipedia.org/wiki/Argentine_economic_crisis_(1999-2002)
http://www.washingtonpost.com/wp-dyn/articles/A25624-2002Jan10.html
The attacks closed the stock market from 9/11/01 to 9/16/01. When the stock markets reopened, the Dow Jones Industrial Average (“DJIA”) stock market index fell 684 points, or 7.1%, to 8921, its biggest-ever one-day point decline. By the end of the week, the DJIA had fallen 1,369.7 points (14.3%), its largest one-week point drop in history. U.S. stocks lost $1.4 trillion in value for the week. This is equivalent to $1.7 trillion in present day terms. In New York City, there were approximately 430,000 lost job months and $2.8 billion in lost wages, which occurred in the three months following the 9/11 attacks.
The GDP for New York City was estimated to have declined by $27.3 billion for the last three months of 2001 and all of 2002.
The attacks deepened significantly a recession that was already in progression from the bursting of the tech. and equity bubbles of the late 1990s.
http://en.wikipedia.org/wiki/September_11,_2001_attacks
On November 2000, Saddam made a fateful decision to convert 10 billion U.S. dollars to euros. This was a radical move for an OPEC country. This single decision may have sealed his fate. That single transaction must have sent shock waves through London and New York. The reason for alarm is cast in a story about oil, greed and geopolitics.
http://disinter.wordpress.com/2007/07/31/saddam-hussein-may-get-the-last-laugh/
"Irrational Exuberance", as Alan Greenspan put it so cavalierly in 1996.
http://www.plambeck.org/oldhtml/bio/fallfrompeak.htm
http://noosphere.princeton.edu/nasdaq.html
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