In August, Bear Stearns, an international finance house heavily involved in the sub-prime market, teetered on the verge of bankruptcy. At the same time Lehman Brothers, the fourth largest investment bank in the US, declared bankruptcy.It seemed as if financial meltdown was not only a possibility, it was a certainty unless drastic action was taken. In August 2007, the French bank, BNP Paribas, suspended three investment funds worth €2 billion because of problems in the US sub-prime sector.It was clear that without some assurance on the security of deposits other institutions were at risk.
Fortunately, countries were not constrained by the oppressive stranglehold of the gold standard.Immediately the bank’s shares fell by 32 per cent and queues formed outside branch offices as frantic depositors rushed to withdraw their savings.Such was the pressure that Northern Rock was nationalized in February 2008.In 1931, Keynes observed that the world was then ‘in the middle of the greatest economic catastrophe . Why the crisis began in 1929 is an obvious start, but more important questions are why it was so deep and why it lasted so long?Sustained recovery did not begin in the United States until the spring of 1933, though the UK trough occurred in late 1931 and in Germany during the following year.How effective were national economic policy measures designed to lessen the impact of the depression?Did governments try to coordinate their economic policies? Why did the intensity of the depression and the recovery from it vary so markedly between countries?Meanwhile, the European Central Bank was forced to intervene to restore calm to distressed credit markets which were badly affected by losses from sub-prime hedge funds.On 14 September 2007, the British public became aware that Northern Rock, which had moved into sub-prime lending after concluding a deal with Lehman Brothers, had approached the Bank of England for an emergency loan.Why and how did the depression spread so that it became an international catastrophe?What role did financial crises play in prolonging and transmitting economic shocks?