Financial crisis is a hot served dish

Well, today we in out Internet kitchen will try to understand what will be if we put into a big pot of a virtual economy a mortgage crisis in the USA, add a pinch of the stock indices and a crisis of liquidity and macerate everything in a wave of the bankruptcies that broke throughout the world. Tempting, isn’t it? Not only for the financial analysts but for the common Internet users as well. The dish cooked by us is cooked on the fire built by mass media on the Internet. In view of uncontrollability and freedom of the press, Internet serves a ready product hot as here nobody limits the stirring of the facts that happen in world economic and financial system. While TV calmly assures us in stability guaranteed by the authorities of our country the Internet doesn’t spare our nerves and provides new and new facts. So, for example, in the end of September “Vedomosty” wrote that some banks started to delay the interest on deposit. Why do they need this? Ask this question from the Internet mass media that stir up interest to this subject. It’s doubtless that people working with the finances on the Internet understand the situation pretty well and know how to behave to avoid a mass panic, scaled liquidity crisis and other consequences of mass psychosis.

However, we are not going to speak about the management of people as a method to control the crisis. Today every person working with the electronic money is interested in one question: how will the crisis affect my business and purse.

What did we have?

First of all let’s analyze what has happened in world financial system and what may threaten us. Everything began from the boom of the mortgage lending in the USA and the boom on the house-building market. Numerous loan instruments of the financial system of the United States that time could enable almost every citizen to take out a mortgage. Bank managers that time were offering the contracts that seemed to be very favorable. However in in the most unnoticeable places of those contracts the lawyers of the banks put small print the information that the credit interest rate is a floating one and depended on the refinancing rate of the FRS. And as the refinancing rate was changing frequently the borrowers paid different interest. The inflation of dollar and floating interest rate in 2006 has laid the groundwork for a developing disaster. Very soon such perms have resulted in problem of the different payments that varied every month. As soon as the number of non repayments has reached the critical point, the mortgage crisis began. The first victim of this crisis was the American mortgage bank New Century Financial Corp. And only then everybody started to beat an alarm.

The tragedy was not that many Americans were not able to pay for their houses but that the mortgage bonds were used as the basis of derivatives. These securities were freely circulating on the stock exchanges and were used as a settlement tool among many banks.

What do we have?

What happens to derivative if its basis loses its value, or it is better to say that the debenture bond turns into a loan default? I think there is no necessity to reply: the derivative loses its value as well. And now imagine what will happen if the business world will recognize that the whole financial system of the USA loses its value… Properly speaking, the rules which are followed by any investor during the unstable situation on the market are the same for everyone: withdraw your funds until everything crushes. This principle was followed by all the speculators a year before. Certainly, firstly the money was enough to pay everybody. But later some problems appeared. The world has felt the lack of money that is called by a simple economic term – a liquidity crisis.

A drop in derivative prices, a high volatility on the markets and the liquidity crisis have dropped the company values as well, in other words he world has turned into a bearish trend. At the beginning of the year many companies begin to cheapen and the total sale of the assets began. For information: this year only the index of RTS has dropped from 2300 in winter to 1100 in summer. Here we can also add the decrease of the indices on all world marketplaces, bankruptcy of Lehman Brothers, the actual nationalization of world insurance carrier AIG to save from bankruptcy, and many other events were the key words were bankruptcy, banks, nationalization, crisis…

What’ll happen?

The most interesting question is: what will be next?
First of all we should say that we will surely see the growth of inflation due to the interference of the government in the economy and cash infusion. It is beyond any doubt that this infusion is balanced by the capital flight from the national markets, however it is not sufficient and as a result we face the boost in commodity prices and in industrial sector. As we know the inflation covers all the sectors of economics and hence its virtual sector as well. So, we can expect the increase of prices for the services on the Internet.

The liquidity crisis will touch e-finances as well. We can also expect the capital flight from the offshore banks that will sooner or later result in bankruptcy for some of them. We face the situation when any bank may collapse anytime that will lead to some panic on the Internet and will made people to encash their funds or transfer them to the more reliable banks. And this may result in lack of money and hence in loss of liquidity of the payment systems as such. The readers may imagine themselves that if WebMoney, PayPal, Perfect Money or Liberty Reserve will decide to play safe and will withdraw a part of their assets from their offshore banks, then they can face some problems if their users decide to withdraw the funds. So, it is necessary to stay composed and not to rush to withdraw the fund in order not to put your processor under the riffle named as the liquidity crisis.

Those who combine online and offline businesses and takes the loans in banks can be sure that the value of the credit loans will increase and will result in increase of prices for the goods in Internet shops.

What’s at the bottom line?

At the bottom line we have a dish the recipe of which we have given above: world economy growth retardation, growth of unemployment, and a risk that one day the bank where you keep all your money will send you a bankruptcy notice. Maybe everything sounds too dramatic and cannot refer to your personality however we shouldn’t forget that if even a small bank goes into bankruptcy, the dozens of prgrammers will go home and will take the freelancers with them, and soon.

Or imagine that somebody will not take out a loan due to the high interest and will not open his or her Internet shop, hence nobody will get a job including designer, coder, copyrigher, project manager and others. Crisis is a very serious thing is to treat it as coolly as it possible. Crisis is a dish which is served hot but we should wait and let cool…

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