Reasons for the economic crisis

Nobel Prize for the Economy winner, Robert A. Mundell, expert in economy politics Arvid Lukauskas and expert in international finance and growth economies, Francisco L. Rivera-Batiz, participated in the conference titled, "The Global Financial Crisis and its Effects on Turkey," organized by Bahçeşehir University and Columbia University. So I had a great opportunity to listen to these gurus who all are faculty at Columbia University.

I will write about the reasons of this crisis today and will focus on Professor Batiz’s speech about possible effects of the financial crunch on developing countries.

Today let me analyze the reasons.

Professor Batiz lists the reasons behind the crisis, about which American officials have been trying to earmark $5.1 trillion in the form of funding, direct loans or loan guarantees and about which the International Monetary Fund, or IMF, estimated a loss of $1.5 trillion, as follows:

1) With ever increasing levels of prosperity in the world, net private sector investments of other countries in the United States between 1999 and 2005 increased about 100 percent. In 1999, the United States received $248 billion in foreign investment and that jumped to $482 billion in 2005. Plainly, foreign investment flowed in the United States.

2) China is a good example to what extent the prosperity increased just before the crisis! China had $53.6 billion foreign exchange reserve in 1994 and that jumped up to $1.528 trillion at the end of 2007. (I think approximately $1 trillion of these reserves in the United States Ğ C. Ü) Increase in the amounts of reserves was recorded as roughly 30 times in 13 years.

3) But on the other hand, U.S. investments remained at 19 percent of gross domestic product, or GDP, in the period 1994-2001 and savings dropped from 17 percent to 14.3 percent. The United States spent more money at that time, saved less, but did not limit investments. The United States met the difference which amounted to 4.9 percent from 2.6 percent by foreign financing.

Figures Professor Batiz gave clearly show that the United States before the crisis was going through a borrowing mania over the last decade. A foreign exchange influx was consumed irresponsibly. And that some part of this money was channeled into the real estate sector which was growing independently from costs, population increase and other income sources. The abundance of resources made less fortunate people buy houses through mortgage credits. Sub-prime credits were met only if the house prices were increasing. Distributing mortgage credits non-stop finally hit a dead-end and banks could not sell more houses. This time the houses prices took an opposite turn, downwards. With that, even safe debtors turned into risky ones.

Credits that were collected from other countries and that were financed through various financial instruments toxic papers sped up the financial crisis globally.

Tomorrow, I will analyze the effects of this crisis on Turkey.