At the time that signs showed a sort of recovery of the world economy, the dollar resumed its rise to major world currencies.
But, while inflation rates in all countries fell, the world woke up on Monday, September 14th with the news of the collapse of the "Lehman Brothers" bank, one of the five largest banks in USA, because of its losses due to mortgages at a high risk "subprime" that hit the world economy during the summer of 2007.
After the U.S. administration has managed to save the two banks of refinancing "Fannie Mae" and "Freddie Mac", by putting them under the supervision of the government, and after the sale of the "Bear Stearns" bank, the bankruptcy of "Lehman brothers" violently shook financial markets in the world as a financial "tsunami". This has rushed central banks to pump billions of dollars on the financial markets to avoid the total collapse of the world economy.
For the first time in the history of the world economy, European Central Bank, the Bank of England, Bank of Japan and the U.S. Federal Reserve Board (FED) pump together some 144 billion dollars to banks to meet the demands of liquidity.
Last Thursday, the Fed announced it will pump 180 billion USD on financial markets through monetary agreements (swap) with the European Central Bank, the Swiss National Bank, the Bank of England, Bank of Japan and Bank of Canada.
These agreements allow central banks to lend to one another for short-term liquidity to ensure financial system stability in the country. This initiative was taken after the financial crisis has hit the sock markets around the world, which indicators have shown unprecedented declines.
What is remarkable is that world has lived through decades the pro-liberal thinking which called on States to cede control of the economy to private funds. But three of the five largest American banks have collapsed causing a jolt to financial markets in the world, which initiated a turnaround in economic thinking on state intervention in the banking sector.
In the United States, and when central banks began to deal with the crisis of "Lehman Brother" bankruptcy, the financial market was surprised that the giant American Insurance Group "AIG" is on the brink of collapse, prompting U.S. authorities to take the historic decision to "nationalize" the group to avoid its bankruptcy.
Analysts at "ING FX strategy" believe that the collapse of major financial firms such as Lehman Brothers and AIG, has upset the market for loans between banks and central banks have been forced to replace the traditional loans providers.
The decision to nationalize "AIG" comes at a time when Bush insisted on the solid foundations of the U.S. economy, and its capacity to confront the instability of financial markets, even in the wake of the announcement of "Lehman Brothers" bankruptcy and the sale of the bankrupt "Merrill Lynch" to "Bank of America" for 50 billion dollars.
The U.S. President was satisfied to say that the officials of The Fed will work on ensuring the health of the entire financial system and that his administration will try to reduce the impact of its recent economic developments.
The Executive Chief of the U.S. stressed that the current recovery of capital markets could be painful for both investors and workers in these institutions. But Bush expressed confidence in the flexibility of capital markets and its ability to deal, in the long term, with the correction.
Bush welcomed the steps taken by the Treasury Department, the Fed and major financial institutions to maintain market stability after the financial crises of "Lehman Brothers", founded in 1850, and Merrill Lynch, founded in 1914.
But, following the nationalization of AIG, "Bush could not avoid to express its concern about the risks posed by the current financial crisis on the U.S. economy. He confirmed that his government would do everything necessary to restore market stability and investors confidence.
In his first statement since the crisis of "Black Monday", Bush said that financial markets are still facing serious challenges. He said that the U.S. administration would continue to act to enhance market stability, thus opening the door to the possibility of further interference from the federal authorities.
Regarding government intervention to save "AIG" at a time when Washington has refused to save "Lehman Brothers", Bush said that the collapse of "AIG" would lead to serious disturbances on the U.S. financial market and threaten other sectors of the economy. Bush, who will stay for four other months in the White House, was subjected to very harsh criticism for its silence facing the most serious financial crises that have hit Wall Street since the Great economic crisis in 1929.
The U.S. government intervention to save "AIG", after having saved "Bear Stearns" in March and the two giant of mortgage refinancing "Fannie Mae" and "Freddie Mac", is a revision of the principle of "free enterprise" which is one of the foundations of the economic policy of Bush.
The U.S. government has not stopped at the point of pumping billions of dollars in capital markets. It also delivered last Saturday, a government plan at a cost of 700 billion dollars to save the banking sector in the United States. Under this plan, which is being negotiated with Congress, Treasury Secretary Henry Paulson will be authorized, in consultation with the Fed chairman Ben Bernanke, to buy banks assets related to mortgage and real estate and other assets published until September 17 to ensure the stability of financial markets.
The plan, which covers two years, entitles the government to fix the date and volume of purchases whose price would be determined by market mechanism in a way to not exceed the budget plan. This also gives Washington a wide margin in the determination of financial institutions that would benefit, without excluding risky investment funds.
According to the plan, those assets will be managed by directors from the private sector under the supervision of the Treasury Department, which must submit a report to Congress after three months, then another one after six months from the first.
Several Democrats in Congress have indicated that they intend to amend the plan by adding clauses that stipulate the procedures for the benefit of owners victims of mortgage crisis, particularly those who could loose their houses.
The U.S. administration, which has always demanded the free market, called on other countries to follow the American approach. But these countries did not need the U.S. call. They have already begun through their central banks to intervene before interfering directly to safeguard their financial entities.
In Russia, which is moving rapidly toward a market economy, the Prime Minister Vladimir Putin said that the Russian economy was strong enough to overcome the current crisis. He said he was confident that security networks established in recent years could complete their work perfectly. Putin also stressed that the government was studying the possibility of using the central bank tools which have a long-term effect.
According to Putin, the Russian Ministry of Finance has injected 150 billion rubles, while the Central Bank of Russia has pumped liquidity of 325 billion rubles. He added that the Ministry of Finance plans to double the amount injected in the market to reach 350 billion rubles.
For its part, the Russian president Dmitri Medvedev said Thursday that the defense of Russian financial system, which faces the worst crisis in a decade, became the top priority of the Russian authorities. Medvedev has instructed officials to take necessary measures, stressing that the Russian financial authorities have a full package of tools to protect the country's financial system. These statements were made after the suspension of both russian stock markets "RTS" and "Misks" following the decline in their indices by more than 6%.
Medvedev added that the situation of Russian banks will be subject to constant attention by Russian officials. The head of Russian state has proposed to "immediately" garanty 500 billion rubles to support the financial market, saying that half of that amount will be taken from the state budget.
The Russian Finance Minister Alexei Kudrin said that the ceiling of the federal budget available to banks for a period of three months rose to 1514 billion rubles. "Most of this sum will be allocated to three major banks: "Spirpennek","VTP" and "Jazibrumbnk" which will be entitled to support small and medium-sized banks and trading in financial markets," he said.
Kudrin added that additional 60 billion rubles will be allocated to the three banks to finance elements of the financial market.
In China, which recorded the highest rate of economic growth in the world, after Chinese shares have plunged amid the crisis of 4,47%, the Chinese government began, through the "Central Huijin Investment Fund", to buy shares in the three largest Chinese banks (Bank of China, Industrial and Commercial Bank of China and China Construction Bank) to support their prices on the stock market.
The Chinese government has also decided to abolish the tax on stock, amounting to 10%, in a procedure to support the capital markets.
In Europe, the President of the European Union companies (Business Europe) Ernest Antoine Siear called to exercise extreme caution while facing the financial crisis which devastated Wall Street.
At a press conference Siear said that the banking system in Europe is not threatened "now" by the financial crisis in the United States, although the risk can not be excluded.
Siear stressed the need for strong coordination in the European Union (EU) to support any large European bank exposure to problems because of its financial transactions abroad: "The fact to leave the state, where is the headquarters of the bank, face the situation alone is unrealistic", he added.
In Great Britain, the Treasury Secretary Alastair Darling said that new laws will be enacted to tighten the rules governing the British banking system. He described as "inevitable" the turmoil which hit the market worldwide.
According to Darling, regulators in countries take appropriate procedures to remedy the situation. He stressed the need for action at the international level through the central banks.
For its part, chief expert at the German Bank "Landesbank", Juergen Pfister, believes that the financial crisis has worsened dramatically. "The crisis will undoubtedly be reflected on the global financial system", he said.
Pfister sees that the intervention of central banks to save the situation is a "difficult balance". "This procedure aims to maintain financial market stability, which is the role of government, but taxes donors do not understand why they should bear the cost of correcting the errors of directors of financial institutions or save shareholders through their own money.
This happens when the governor of the Italian Central Bank Mario Draghi, believes that the current global financial crisis is the "most difficult of modern times". "We must adopt monetary, fiscal and legislative measures in a very organized way to restore fiscal balance at the international level", he said.
The crisis has also affected the race for White House. The Democratic candidate for presidential elections Barack Obama has blamed the financial crisis to policies pursued by the Bush administration. He considered the collapse of Lehman Brothers and Merrill Lynch as the most serious financial crisis facing the country since the Great Depression in the late 20s in the last century.
Obama said that his Republican presidential opponent was not responsible for the financial crisis. "But he believes in the same economic philosophy adopted during the past eight years", he said.
For his part, Senator Joseph Biden, Democratic candidate for the post of vice president, said that economic policies adopted by Republicans in recent years have led to destroy the middle class. In statements made to the TV program "Good Morning America", Biden said that the economic plan proposed by Obama aim to reduce taxes on middle class and increase it for Americans who earn 250 thousand dollars or more per year.
Biden noted that the current U.S. government exempts rich from taxes and leaves the middle class struggle to live. For its part, the Republican candidate in the presidential John McCain calls for a complete reconstruction of the troubled financial sector.
McCain supports the refusal by the U.S. government to intervene to save Lehman Brothers or lend funds to Merrill Lynch. McCain has stressed the importance of maintaining the status of the United States as the largest financial market in the world, confirming that it would be a priority of his administration. McCain said that a major reform of "Wall Street" should be done.
These declarations and reactions raise an important question: Is the world now going towards a return to state control on production and economy?
Jacques Genereux, a professor at the Institute of Economic Studies in Paris, sees that what is happening now is not a return to the role of the state. "The role of the state, even in the United States, has never disappeared, but instead it was up", he said.
According to Genereux, the nature of the role itself has changed. "Instead of the fact that the State assumes the production and distribution, it gave freedom to companies and was satisfied by observing", he said. "But when a crisis occurs on, the state rushes to save the situation".
Hoang Ngoc Liem, a researcher at the Center for Economics at the Sorbonne University, agrees with this view. He confirmed that the United States has never abandoned their role as "policeman of the economy" in the country. "We have already seen in the past the federal government puts its ideology between practices to support banks and enterprises facing problems. This is not the end of liberalism, this intervention is above all pragmatic", he adds.
For his part, Alan Greenspan, former Fed chairman, warned against the failure of other American economic institutions during the coming period. He said he never saw a financial climate such as that prevailing now in the United States. He criticized the way the American government responded to the crisis. "We must not allow the government to protect any American company's bankrupt", he said.
For the European Commissioner for Economic Affairs, Joaquin Almunia, government intervention was necessary because the crisis affects the structure of the financial system and not economic freedom.