Economic Global crisis

By Gerry Octaviano, S.Soc

May, 2010

The root of the economic global crisis is subprime mortgage crisis (2005-2008) in the US. The impacts were the collapse of RBS and Northern Rock in UK, collapse of Merryl Lync, Pimco, BOA, HP AIG AND Merryls Lynch and Lehman brothers in US, and all financial institutions around the world got affected due to globalization made them interrelated and created cascading effect to non financial institutions.

It started from the US president Bush from republic party (capitalism) replaced Clinton from democrat party (socialism) in the end of 2000. Bush was emphasis on the free market and deregulation by reducing the interest rate, reduce the credit requirement and enable the low income and no credit history to borrow money to get own house, it called “subprime mortgage”. It is really risky and those shifted the risk to all people by shifting the subprime mortgage to Mortgage Backed Security (MBS), sold to the secondary market and foreign and local investors bought it since it is guaranteed by Fannie Mae and Freddie Mac which are established by US Government. The problem came when the interest increased (in 2005-2006) and the subprime borrowers default and it leaded to increase in house price since low demand and many supply (no liquidation) and it harmed all the investors (local and foreign financial institutions) all around the world until right now since US does not have regulation system to control the subprime mortgage crisis. US’s citizen is the most consumptive and the least saving in the world and it led to high rate in borrowing (same habit like other countries).

At the glance, it seemed the failure of capitalism but it was not since the subprime mortgage was to create distribution of wealth (humanism) and the existence of central bank and Fannie Mae and Freddie Mac also the evidence of the socialism. One of the solution is to implement shari’ah economy system (investment in real sectors , sharing profit and loss) which prohibited interest and create a society of investor and entrepreneurs even Jewish also prohibited impose interest among them and also Christian prohibited to shift your risk to other (interest in bank).