Financial crisis is 'man made catastrophe‘

Financial Crisis

The term financial crisis is applied broadly to a variety of situations in which

some financial institutions or assets suddenly lose a

large part of their value.

Types of Financial Crisis

• Banking crisis

• Currency crisis

• Stock market crash

• Recession

Oil Crisis in 1973

The oil Crisis started in between October 1973.

1973-1974 oil crisis which was led by Arab members of the Organization of Petroleum Exporting Countries (OPEC).

Some fact of Oil Crisis• The crisis also prompted a call for individuals and businesses to

conserve energy, most notably a campaign by the Advertising Council using the tag line "Don't Be Fuelish."

• The 1973 oil crisis was a major factor in Japan's economy shifting from oil-intensive industries, and resulted in huge Japanese investments in industries such as electronics

• The UK, Germany, Italy, Switzerland, and Norway banned flying, driving and boating on Sundays. The Netherlands imposed prison sentences for those who used more than their given ration of electricity.

• To help reduce consumption, in 1974 a national maximum speed limit of 55 mph (about 88 km/h) was imposed through the Emergency Highway Energy Conservation Act.

Germany Hyperinflation 1918-1924

What is Inflation? The rate at which the general level of

prices for goods and services is rising.

GERMANY

Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery.

The Weimar Republic 1919-1933

German’s new democratic government that lasted from 1919 until 1933.

It was weak and unpopular

German people were unhappy with the new system.

The Cause of German Crisis 1923

Cause 1 : The French Invade the Ruhr

Weimar Republic

German workers striking

Treaty of Versailles

The reparations

Deal with the Ruhr Crisis in 1923.

Cause 1 : The French Invade the Ruhr

Reparations were fixed at £6600 million(£6.6 billion)

Missed reparations.

Take direct action

Responded with passive resistance

Crisis 2: Hyperinflation Printed extra banknotes Value of money goes down

Prices rise to compensate Pensions and savings lost

Wages lost all value people blamed new Weimar government

Line would build up filled with people who wanted to buy the few items left in stores.

Stacks of German Marks, which were practically worthless due to

super inflation.The value of money Playing with money

Ruble Crisis, 1998Causes• Declining Productivity.• High fixed exchange rate.

Declines in demand for Crude Oil & Nonferrous metals.

Political Crisis

Coal miners went on strike

The Panic of 1907

What Caused the Panic?

• Retraction of market liquidity by a number of New York City banks

• Loss of confidence among depositors

Effects

• The Connection to the Stock Market

• Panic at the Trust Companies

Euro Crisis• Eurozone - is

the economic and monetary union of  member countries of Europe who have adopted Euro as their common currency.

So who kept to the rules?

Government Borrowing Cost

So what really caused the crisis?

• Total Debt

Effect on GDP Annual GDP growth % change

from previous year

Deficit Government annual

surplus or deficit

UnemploymentUnemployment rate

DebtGovernment debt as a proportion of GDP

Great Recession 2008 National Bureau Of

Economic Research (NBER) is the official agency in charge of declaring that the economy is in the state of recession.

Recession is significant decline in economic activity lasting more than few months, which is normally visible in real GDP, real income, employment, industrial production, & wholesale-retail sales.

Interest Rates

The Fed injected additional reserves and kept interest rates at 2% or less throughout 2002-2004.

House Price Change Housing prices were relatively stable during the

1990s, but they began to rise toward the end of the decade.

From the summer of 2006 home prices started declining.

Bubble that burst…

• In the US nearly 10.8% of total homeowners – had zero or negative equity as of March 2008

• However, as the home prices were falling rapidly, the lending companies found them in a situation where loan amount exceeded the total cost of the house. Eventually, there remained no option but to write off losses on these loans.

• During 2007, nearly 1.3 million U.S. housing properties were subject to foreclosure activity.

• Sales volume (units) of new homes dropped by 26.4% in 2007 as compare to 2006.

Unemployment

Effect on GDP

Sep. 14 Lehman Brothers 4th largest investment bank declared bankrupt

Bank of America agreed to purchase Merrill Lynch

AIG took $82.9 billion to tide over the crisis.

• The lender racked up almost $900 million in losses as home prices tumbled and foreclosures climbed to a record

• Indy Mac shares lost 87 percent of their value in 2007 and another 95 percent in 2008

U.S. housing policies are the root cause of the current

financial crisis. Other players-- “greedy” investment

bankers; foolish investors; imprudent bankers;

incompetent rating agencies; irresponsible housing

speculators; short sighted homeowners; and predatory

mortgage brokers, lenders, and borrowers--all played a

part.

- Peter J. Wallison (lawyer & White House counsel)