Special Report: Global Financial Crisis

Mario Neria, an employee of Republic Windows & Doors for eight years, stands outside the company's warehouse in Chicago, Illinois December 8, 2008. Invoking Main Street resentment of Wall Street's federal bailout, some 200 workers entered their third day of occupying a shuttered Chicago window and door factory on Sunday, demanding that Bank of America agree to pay them severance plus vacation pay. (Xinhua/Reuters Photo) Photo Gallery>>>

    by Hu Fang

    WASHINGTON, Dec. 11 (Xinhua) -- Prospects for global growth have been deteriorating while the United States, the world's largest economy, has been in recession due to the worst financial crisis since the Great Depression in the 1930s.

    FINANCIAL CRISIS DEEPENING

    The ongoing financial crisis, initially referred to as a "credit crunch" or "credit crisis," began in July last year, when investors lost confidence in the value of securitized mortgages in the United States, which resulted in a liquidity problem.

    By September 2008 the crisis became prominently visible with the failure, merger or conservatorship of several large U.S. financial firms such as investment banks Lehman Brothers and Merrill Lynch, and insurance giant American International Group.

    The crisis evolved rapidly into a global disaster resulting in a number of European bank failures, sharp declines in global stock markets, and large reductions in the market value of equities and commodities worldwide.

    Since then nervous investors have fled from stocks, corporate bonds and municipal bonds, run to the safety of the U.S. Treasury bonds, and transferred vast capital resources into stronger currencies such as the Japanese yen, the U.S. dollar and the Swissfranc.

    Despite aggressive, unprecedented steps taken by major central banks and governments to boost liquidity and stabilize markets, banks and other lenders, for fear of more risks, have been reluctant to grant loans to each other and to consumers and businesses as well.

    With the crisis deepening, Alan Greenspan, former chairman of the U.S. Federal Reserve, said in October 2008 that the financial markets were engulfed in a "once-in-a-century credit tsunami."

    Their recovery, which Greenspan predicted to be "still many months in the future," depends on home prices stabilizing, he said.

    FINANCIAL CRISIS SPILLS OVER TO REAL ECONOMY

    The financial crisis has not only crippled the financial sector, but also seriously affected real economy with its spillovers.

    In the United States, the epicenter of the crisis, consumers and businesses have cut their spending and investment as banks stung by great losses are keeping a tighter grip on the purse strings.

    Moreover, fear of a long and deep recession makes people reluctant to borrow and spend money.

    Consumer spending, which accounts for two-thirds of the U.S. overall economic activity, plunged by 3.7 percent in the third quarter, the biggest drop since the second quarter of 1980 and the first decline since late 1991.

    U.S. businesses have also slashed their investment in equipment and software by the largest margin since the first quarter of 2002.

    Meanwhile, residential investment plummeted for the 11th quarter in a row, indicating that the worst housing slump in decades, which started in late 2006, is far from reaching its end.

    Exports of goods and services, a major driving force for the U.S. economy in the past quarters, decelerated sharply in the third quarter, indicating shrinking overseas demand caused by global financial crisis.

    Americans are losing their jobs as the economy is sinking. Employment has fallen by 1.9 million since December 2007, with two-thirds of the losses occurred in the past three months. In November, employers axed 533,000 jobs, the biggest cut since December 1974, pushing the jobless rate to 6.7 percent, the highest in 15 years.

    The employment market, considered critical for the economic recovery, has been deteriorating at an alarmingly rapid rate, showed statistics from the U.S. government.

    Analysts feared that embattled by housing collapse, mounting foreclosures and credit tightening, employers could resort to further layoffs.

    "Even with a substantial stimulus package, unemployment is likely to peak close to 9 percent in early 2010," Augustine Faucher at Moody's Economy.com predicted.