The Global Financial Situation and its Impact on the Bioeconomy
DOWNLOADDecember 31, 2009 - William A Knudson
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EmailDue to several factors, the financial system in the U.S. has undergone a serious crisis throughout the late summer and fall of 2008 and has continued into 2009, although some of the fundamental problems took several years to develop. Among the sources of the problems were the subprime mortgage market and the relationships between the housing markets and other financial markets; the credit swap market, and the various policies that created additional financial instruments without regulation and policies that reduced the level of regulation of financial markets.
As a result of these problems several emergency measures have been instituted. Fannie Mae and Freddie Mac received $200 billion in support from the government. The federal government also paid $85 billion to obtain an 80 percent share in the American International Group (AIG) in order to keep that firm in business and preserve savers who had money in insured money market accounts. The Federal Reserve (the Fed) has also increased the money supply and reduced interest rates. However, despite these actions interest rates are relatively high, credit requirements are becoming more stringent, and even credit worthy customers are increasingly finding credit more difficult to obtain. As a result economic activity is declining.
Due to the level of integration of global markets, the problem has spread throughout the world. Despite reductions in interest rates and widespread government intervention in financial markets some countries, such as Iceland, are effectively bankrupt or are facing severe difficulties. As a result international trade has declined. Among some of the countries that asked for aid from the International Monetary Fund are Pakistan, Iceland, Hungary, Serbia and Ukraine (Wikipedia, Financial Crises of 2008). The situation has deteriorated throughout the world, and the recession could last throughout 2009, and there is a strong likelihood that the recovery will be weaker than the typical recovery. This has impacted and will continue to impact the bioeconomy. Commodity prices have already declined from their unsustainable highs of the spring and summer of 2008. One mpact of the global economic slowdown is the decline in the price of oil and oil based products such as gasoline. This in turn has affected the ethanol market which as also adversely impacted the price of corn. Another impact on the bioeconomy is the likely reduction in private sector investment due to the difficulty in obtaining credit and corporate profits decline. As a result, the growth in the bioeconomy will become more dependent on government support.
This paper will analyze the factors that have led to the current global economic situation, with particular attention to the U.S. housing market, and the regulatory environment that fostered the current situation. How this impacts the bioeconomy will then be analyzed as will the impact of the Stimulus Bill on the bioeconomy. Finally some policy prescriptions will be offered
