In 2007, banks began to panic once they realized they would have to absorb the losses, and they stopped lending to each other. While these are legitimate things to do, the instruments that allowed this to happen helped cause the current problems, too.In essence, what had happened was that banks, hedge funds and others had become over-confident as they all thought they had figured out how to take on risk and make money more effectively. But some investment banks had little in deposits; no secure retail funding, so some collapsed quickly and dramatically.The problem was so large, banks even with large capital reserves ran out, so they had to turn to governments for bail out. As an Alt-A lender, IndyMac's business model was to offer loan products to fit the borrower's needs, using an extensive array of risky option-On May 12, 2008, in the "Capital" section of its last 10-Q, IndyMac revealed that it may not be well capitalized in the future.IndyMac was taking new measures to preserve capital, such as deferring interest payments on some preferred securities. Joseph Stiglitz also adds that these financial institutions have been slow to respond in the past and now:It took the world 15 years and a world war to come together to address the weaknesses in the global financial system that contributed to the Great Depression.
Nobel prize winner for economics, Paul Krugman addresses this noting the difference between private consumption and government stimulus:But [private spending is] not what we’re talking about when we talk about stimulus spending: we’re not talking about the government buying consumption goods for the public at large. Whether these changes can happen is hard to predict.Some of the ideas considered are quite significant, such as increasing the reserves banks must have. But many, especially people working in the financial markets, pushed a type of The neo-liberal push for deregulation served some interests well. To find out how to price this insurance, economists came up with options, a derivative that gives you the right to buy something in the future at a price agreed now. Meanwhile, banks keep getting bigger and are pushing to minimize or get rid of even this regulation. Instead of spreading risk this provided the ground for fraudulent acts, misjudgments and finally market collapse.Mortgage risks were underestimated by almost all institutions in the chain from originator to investor by underweighting the possibility of falling housing prices based on historical trends of the past 50 years. Dividends on common shares had already been suspended for the first quarter of 2008, after being cut in half the previous quarter. In recent years, the global economic policy environment seems to have become more favorable to fresh thinking about the need for multilateral actions against the negative impacts of large commodity price fluctuations on development and macroeconomic stability in the world economy.Countries in Asia are increasingly worried about what is happening in the West. Those with power and money are less likely to agree to a radical change in economics where their power and influence are going to diminish, and will be able to lobby governments, produce compelling ads and do whatever it takes to maintain options that ensure they benefit.The highly regarded Hazel Henderson has written about What Polanyi offers is a way of understanding not only why the economy and society are part of the same set of processes, but also why we erroneously believe that market and society are separate.
The rich countries didn’t need the BWIs any more, but with more than 60 percent of the vote they called the shots in both institutions.


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