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2008 crisis
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[THE 2008 WORLD FINANCIAL CRISIS]
Paula Cern
Fabin Lpez
Luis Montero
What features of the global economy, and especially of the US, exposed the world to the major crisis that started in 2008?
A
Federal Fund Rates below the neutral interest rate the fed maintain low rates at
real value of 1%, which creates huge increase on
borrowing and low or negative savings
Financial deregulations which leads to certain freedom and low
government control in banks and financial institutions whom of
course are the base of the model under these type of government
Since the dot com crisis the government took measures to increase
the investment and create certain tax exemption to capital gains
mostly but creating fiscal risk and huge government expenditures
and of course increasing the level of debt.
Exceed liquidity coming from China, fuel the housing market giving strong
incentives to buy property of course through mortgage, without any financial
analysis, because it was given in the base on the price of the land not the
property per se.
I
II
III
IV
What was the chain of events that finally triggered it? B
Dot.com
crisis
2000
US economy started to recover
Lenders were convinced that a housing turndown was remote
2001
Prices of
houses
increase
Housing market
takeoff
2003
Fed lowered funds rates 11 times from 6.5% to 1.75%
Flood of liquidity in the economy
Subprime borrowers get easy acces to mortgages
2004
Prices of
houses
increase
Houses were 70%
overvaluated
2006
The market reached its maximum peak
Americans inrease spending trustin in the high value of their homes
Adjustable rate mortgages increase rates
2006
Prices of
houses
increase 10% of all mortgages
were in foreclosure
Borrowers stop paying because of the increase of the interest rates
House market saturated
Credit crunch
2007
Financial institutions had huge losses because the houses that they received were devaluated
Banks become afraid to lend money to anybody , including other banks
2008
Prices of
houses
increase
Large banks
problems
Lehman Brothers was sent to bankrupcy
Bear Stearns and Merrill Lynch were sold
Goldman Sachs and Morgan Stanley became commercial banks
Houses prices
fall
CDOs and
MBSs
securities issued
This products attracted hungry high risk investors
Over optimistic analysis of the future houses prices
Fed lowered
interest rates
to 1.75%
Wrong undervaluation of the risk of the loans
Houses prices were rising steadiily
Less requirements for a mortgage
Why did this problem propagate into something so big? C The U.S. unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The reduction in their buying power affected all the world
63 percent of all Americans wealth declined in that period. 77 percent of the richest families had a decrease in total wealth, while only 50 percent of those on the bottom of the pyramid suffered a decrease.
U.S. consumption accounted for
more than a third of the growth in global consumption
between 2000 and 2007
the net debt of commercial banks
located in the United States to their
foreign offices increased by $575
billion
The failure of Lehman Brothers was a severe shock to US financial markets, because it undermined the prevailing assumption that no systemically-important financial institution would be allowed to fail, even if it was not a bank
Foreign banks bought collateralized US debt. Many of these subprime mortgage loans were rebounded into CDOs and sold onto financial institutions around the world. For example, many British and European banks had exposure to these mortgage loans. Therefore, when defaults rose, European banks lost a lot of money.
The banking system is internationally linked. When some banks started to lose money they became reluctant to lend to other.
What policies were used to fight it? D
The president of U.S. subsided
700,000 millions to the banks to
provide liquidity to the
economy. 1 New monetary policy in the USA in which the interest rates and loans were highly control. 2
Elimination of one size fits all
rate in the European union. 3 EU and U.S. reduced
economic help to developing
countries. 4
Why did events happening mostly in the US end up affecting the entire world, including your own country? E
Higher prices in import goods
that were use forindustrializa-
tion and technology
Lost of confidence
in the dollar
The decreased price
of the oil
Less exportation
to the USA
Due to the fact that Latin America economy is
aligned to China economy the effect of the crisis
was manageable. The main affected areas were:
How did the global crisis propagate so badly into Europe?? F
Price of euro went down
Fall of the European Stock Market
Freezing credit for the private sector, lost of short
term liquidity
Increased of unemployment and increased
of inflation
Increased in deficit
The most affected countries were PIIGS
(Portugal, Italy, Greece and Spain)
What will be the long-term scars from this crisis? G There will be a recessions the world
consumption would be slow (i.e. China)
therefore the future will be developed
by small consumption as well as small
grow.
Lack of confidence in the market as
well as in the banks, that would take
some time to heel and of course
unemployment rate would decrease
and the interest rates are going to be
higher to stimulate saving.
The pressure and legislation on the
banks and financial institution would be
more extensive the system its going to
be stabilized but might affect the
profitability as well.
According to Moody's: in the way the
crisis is passing the interest rate would
recover their value to positive values in
real terms; the excess liquidity would be
control by the central banks and they will
benefit on financial integration
U.S. Median price of houses sold
Source: U.S. Department of Commerce
Graph 1
Unemployment rate USA
Source: World Bank
Graph 2
U.S. real Interest rates
Source: U.S. Federal Reserve
Graph 3
U.S. properties with foreclosure activity
Source: U.S. Foreclosure Market Report
Graph 4
U.S. Subprime Lending 2004-2006
Source: U.S. Census Bureau, Harvard University State of the Nations Housing Report
Graph 5
GDP % of growth
Source: World Bank
Graph 6
GDP % of growth of U.S. vs. L.A, Ecuador, Colombia and Costa Rica
Source: World Bank
Graph 7
Target federal funds rates
Source: Federal Reserve Board
Graph 8
Central Government Debt %GDP
Source: World Bank
Graph 9
European Stock Market
Source: World Bank
Graph 10
Euro price (2007 2008)
Source: World Bank
Graph 11
2007 2008
UNEMPOYMENT RATE USA vs. European Union
Source: World Bank
Graph 12
BIBLIOGRAPHIC REFERENCES
Bernanke, Ben.Poltica Monetaria y la burbuja inmobiliaria. Annual
Meeting of the American Economic Assosiation. Atlanta Georgia. Enero 3,
2010.
Reye, Gerardo. Moslares, Carlos. La Union Europea en crisis:2008 2009.
Problemas del Desarrollo. Junio 2010, Vol 41, num. 161.
Dooley, Michael.. Etl. Las dos crisis de economa internacional.CEMLA.
National Bureau of economic. Oct-Nov 2009.
Bumachar, Joao. Goldfajn, Ilan. America Latina durante la crisis: el papel
de los fundamentos.Revista Monetaria. enero- junio 2013