World Financial Crisis

The impact of sub-prime crisis is really very terrible. The domino theory is applying to the United State's financial institution that one after another one is collapsing. The world may lead to recession if the problem is not solved.

The crisis of the financial risk in United State may happen in next couple of months. There must be something to ignite the crisis and possibly this may be the weakening of US dollars. At the moment, US dollars is firming up and foreign investors are happy about their holding of US government bonds (either short term or long term). But if the scenario changes and US dollars starting to weaken. Foreign investors may rush to liquidate the bonds to mitigate their losses. Assuming these investors only selling 10% of their holding, the financial markets in United State may be in danger. In 1980, this situation was happened and the United State government raised the interest rate to 20% to attract foreigner to keep their holding in bonds. The implication of the high interest rate had caused the inflation rate went up to 15% that damaged the United State economy for many year.

Debt deflation and de-leveraging in the US could further weaken the global financial system. Falling house prices, falling financial institutions and weaker growth could then ensue. Unemployment rate and protectionist pressures could rise and this could cause a backlash to deregulation, liberalisation policies and globalisation.

You may be interested to read an article from professor Robert J. Shiller - Moral Dilemmas for Fannie and Freddie. The website is www.theindependent-bd.com/details.php?nid=97862