The financial crisis in the united states in the period 2007 2009

FINAL ASSIGNMENTINTERMEDIATE MICROECONOMICSBài tập lớn môn kinh tế vĩ mô: Khủng hoảng tài chính tại Mỹ giai đoạn 2007-2009. A country''s economy always has an economic cycle with three basic stages: recession, recovery, and development. The change in gross domestic product, calculated as the sum of final goods and services for the period under study, constitutes the three phases of an economy. People will rely on prominent indicators such as real GDP, employment rate, unemployment rate, consumption, interest rates ... to determine which stage of the cycle a countrys economy is in. The economic crisis is related to the period of economic recession, when the growth rate of the economy is a slowdown, the indicators of the economy also decrease, even if the growth is negative.

VIETNAM NATIONAL UNIVERSITY, HANOI VNU-UNIVERSITY OF ECONOMICS AND BUSINESS

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FINAL ASSIGNMENT INTERMEDIATE MICROECONOMICS

Topic: The financial crisis in the United States in the period

2007-2009

Student: Nguyen Xuan Mai Student code: 19050169 Date of birth: 11/10/2001 Class: QH-2019-E Kinh Te CLC 6 Lecturers: Ph D Le Van Son

Ha Noi, 07/2020

Chapter 2: Situation of the financial crisis in the US in the period 2007-2009 4

Chapter 3: Solutions to the crises in the United States in the period 2007-2009 14

3.4 Challenges and shortcomings of the government when implementing policies.

15

13 TALF Term Asset-Backed Securities Loan Facility

List of tables, figures

Figure 2.1: Real estate price fluctuations from 2000 to 2011 (source:

Figure 2.5: Issuance of Securitized Products (Billions of U.S dollars) 8Figure 2.6: Financial Assets – U.S Household and Non-Profit Organization

Figure 2.6: Dow-Jones Industrial Average (Source: Internet) 10Figure 2.7: GDP per capita growth of United States (2005-2020) (annual %)

11Figure 2.8: Exports of goods and services of United States (2004-2019) 12

Figure 2.9: Oil price (USD/barrel) (Source: Internet) 13Figure 2.10: Public debt to GDP ratio for selected European countries – 2008

1 Exordium

A country's economy always has an economic cycle with three basic stages: recession,recovery, and development The change in gross domestic product, calculated as thesum of final goods and services for the period under study, constitutes the three phases

of an economy People will rely on prominent indicators such as real GDP,employment rate, unemployment rate, consumption, interest rates to determinewhich stage of the cycle a country's economy is in The economic crisis is related tothe period of economic recession, when the growth rate of the economy is aslowdown, the indicators of the economy also decrease, even the growth is negative.Understanding the causes, effects, and government interventions are essential to therecovery of the economy Since ancient times, in the world, there have been manycrises and economic recessions with different characteristics, big and small, affectingthe economy of a country or the world, which is inevitable The US is a country withthe leading developed economy, but, inevitably, the US is also a country with manyeconomic recessions, including the great recession, the great crisis that spread to otherareas of the world In previous recessions, it is impossible not to mention the 2007-

2009 crisis, which involved many financial sectors, had many impacts on the USeconomy Although it happened more than ten years ago, when it comes to people,people will still be afraid because of its impact, which is considered a disaster tohumanity, on the global economy To better understand the causes and effects of thefinancial crisis, the government's intervention to regulate the catastrophe and recoverthe economy, I have chosen this topic to learn and dissociate, to have a comprehensiveoverview of the US economic crisis in 2007-2009

2 Overview document

The 2007-2009 crisis in the United States was a topic of great interest as soon as ithappened, and there were many research articles on this issue later It can say thatresearch and analysis related to economic issues, especially the recession crisis,always attract everyone's attention: like Brian Duignan's (2019) study - talking aboutthe crisis in the United States In the 2007-2008 period, this was a crisis caused bymany factors that accumulated, in which the main reason was the subprime mortgagelending of banks The root cause of a change in the policies of reducing lending ratesfrom around the beginning of 2001, and other monetary policies in 2004 Thefinancial changes that led to the crisis and caused severe consequences for the USeconomy, affecting the following years The financial fluctuations led to the crisis andcaused severe consequences for the US economy, affecting not only at that time butalso in the sequent years One of the causes of the financial crisis in the United Statesfrom 2007 to 2009 was an investment in the U.S home market (Duca, J V.,Muellbauer, J., & Murphy, A., 2009, in "Housing markets and the financial crisis of

2007–2009: Lessons for the future" Through analyzing the housing market and thecrisis, we saw the unsustainability of credit standards and the "housing bubble"phenomenon in the United States The impact of changing mortgage and interest ratepolicies affects prices in the home-buying market From there, learn the lessons of theimportance of changing fiscal policies, housing policy regulations, house prices, andglobal financial balance Vuk Vukovic (2010) focused on the political economy of thefinancial crisis caused by sub-standard mortgage lending in the United States andtalked about the measures that policymakers adopted, combining the still-action of thefinancial lobby Besides analyzing the causes of the "Great Recession" 2007-2009,Edward J Schoen (2016) studied five factors during the financial crisis: the impact,causes, measures of the Government, behavior, and two laws enacted The "AmericanRecovery and Reinvestment Act" is one of the Government measures (Levy, M., 2017,April 27) on United States reinvestment and reinvestment laws in 2009, when the U.Swas suffering as a result of the financial crisis The unemployment rate in the USincreased rapidly, the U.S Congress passed a measure to stimulate the economycreate more jobs and reduce the unemployment rate signed by President Black Obamawhen he took office as United States President period 2009 Passed on February 13,

2009, it will offer a $787 billion package for economic recovery Although it wasadopted, the policy was criticized by Republicans, who argued that the policy was notreasonable and would not work Although there were many difficulties in the realprocess, by the end of the third quarter of 2009, the situation had shown positive signs,

in the years 2010 the unemployment rate had decreased slightly In general, the crisisaffected not only the United States but also other countries in the world

3 Research objectives and subjects

3.1 Research objectivesAnalyze the period of economic crisis 2007-2009 in the US, find out the causes of thecrisis The crisis had a severe impact on the United States and the world economy Inthe face of that difficulty, the US government took measures to prevent the recessionand restore the economy These are my goals in writing this essay

3.2 Research subjectsTarget: Any country in the world at the time an economic crisis occurred - the UnitedStates during the 2007-2009 crisis These issues will be explored and clarified throughthe following chapters:

Chapter 1: Theory of economic recession

Chapter 2: Situation of the economic crisis in the US in the period 2007-2009

Chapter 3: The Government's Solution

4 Methodology to achieve research objectives.

Synthetic method: is a method of collecting, reading documents, researching fromprevious research articles, distilling information on the economic crisis, recessionissues in the economy

Statistical and analytical methods: data statistics, table analysis, data reference, datainheritance for the analysis of economic recession, causes of recession and crisis, thecurrent state of the problem in the United States, and its impact

Discussion

Chapter 1: The Theory of recession

The recession will be associated with a lot of problems in the economy, it causesnegative economic growth, affecting both national debts, import and exportactivities so it is necessary to understand the indicators consumption, factors related

to the economy to be able to analyze, better understand the economic recession andcrisis

The concept of crisis, widely used in various industries and daily languages, is derivedfrom the Greek word "krisis" Economic crises are prolonged economic instability thatcannot be regulated by the reproduction process in the economy, causing wide-scale

or narrow-scale effects and consequences It can happen in any sector of the economy,

a spike in inflation or unemployment, it could be a stock market crash, or a series ofbank failures Economic crises experienced in national economies are often theproduct of negative declines in economic and political cycles and structures But it cansay that the economic crisis is a general result of macroeconomic instability

According to IGI Global “Economic crisis can be defined as the wild fluctuations, outside the acceptable limits of change, in the prices or supplies in any markets of commodity or services, or factors of production” “Financial crisis refers to particular extreme shock in the financial system which leads to disruption of the financial system's function Financial crises are such as banking crisis, currency crisis, debt crisis, stock market crash, and speculative bubble and burst”- IGI Global.

A financial crisis is a financial market disruption, typically associated with fallingasset prices and bankruptcy between debtors and intermediaries, spreading across thefinancial system, and changing the ability of markets to allocate capital

A recession is a period when the economy of a country is inefficient, production andbusiness are at a low level, decrease, and the unemployment rate increases Arecession can be a mild decline in economic activity in a single country that lastsmonths, a long-lasting downturn with global ramifications that last years, or anything

in between According to the subject of macroeconomics, the causes leading torecessions and economic crises are always controversial among economists as it hasinternal and external factors of the economy

Recessions occur when the balance between supply and demand is negativelydisrupted There is a mismatch between the number of goods people want to buy, thenumber of products and services manufacturers can offer, and the price of goods andservices sold, resulting in an economic slowdown The supply-demand relationship isrepresented by inflation and interest rates Inflation occurs while the value of cashdecreases In fact, a low inflation fee is a concept to inspire financial activity Still,inflation is not always a horrific thing But excessive inflation can each motivateissues for a financial system and subsequently cause a recession The interest ratesreflect the cost of borrowing for individuals and businesses; an annual percentage ofloan borrowers pay to their creditors until the loan is repay Low-interest rates meancompanies can borrow more money to invest in more projects, high-interest rates,increase costs, diminish economic activity Fluctuations of inflation and interest ratesare influenced by factors: such as natural disasters, war, and geopolitics Economiccrisis, economic recession, and financial crisis are all related and interact with eachother, causing the economy to fall into a crisis.

Besides, economic development can still cause a recession, wrong thinking, andbehavior, or when people rely heavily on low-interest debt, government support willeasily cause a recession Obviously, to recover the economy, the government must useappropriate macro policies Fiscal policy determines the level of taxes and publicspending that directs the economy to productive output and employment, helping tobring the economy into equilibrium Monetary policy is attached to the bankingsystem: helping to regulate circulation, manage growth, control inflation, maintainstable market prices and exchange rates, and create jobs Price and income policycontrols inflation directly, in addition to trade policy and exchange rate policy

Chapter 2: Situation of the financial crisis in the US in the period 2009

2007-The United States has the world's leading developed economy but also a country withmany crises and recessions The 2007–2009 financial crisis was the largest after theGreat Recession of 1929–1939 The cause is considered the next "Great Recession" - ahuman disaster because it involves many financial sectors, seriously affecting theeconomy, spreading globally

2.1 Reasons

According to Professor Alan S Blinder, seven key factors contributed to the financial

crisis of 2007-2009: “Inflated asset prices, especially of houses (the housing bubble) but also of certain securities (the bond bubble); Excessive leverage (heavy borrowing) throughout the financial system and the economy; Lax financial regulation, both in terms of what the law left unregulated and how poorly the various regulators performed their duties; Disgraceful banking practices in subprime and another mortgage lending; The crazy-quilt of unregulated securities and derivatives that were

built on these bad mortgages; The abysmal performance of the statistical rating agencies, which helped the crazy-quilt get stitched together; and The perverse compensation systems in many financial institutions that created powerful incentives

to go for broke (Blinder 2013, pp 27–28)” The causes of the crisis are different I

will analyze a few main reasons

2.1.1 Crisis caused by subprime lending

A subprime loan is a form of mortgage loan where the borrower is someone who doesnot have the necessary conditions to get a normal loan This form is usually forsubjects with low reputation: unstable job, poor, have a history of the bad debt orsubstandard payments This type of loan is characterized by high risk, wide riskspread, and high liquidity

Between mid-2000 and late 2001, the Federal Reserve and the U.S Central Bankreduced the Federal funds rate 11 times from 6.5% to 1.75%, causing banks to expandwith low-interest, high-risk mortgage loans for those who do not qualify for basicloans Leading to a significant increase in the number of transactions and purchases ofconsumers, especially for housing, the "Housing Bubble" appeared To prop up theeconomy, the Federal Reserve System kept short-term interest rates unusually low in

2003 and 2004, resulting in home mortgage rates at historically low levels Risinghouse prices have facilitated home refinancing Banks have expanded with adjustable-rate mortgages (ARM), starting to replace the standard 30-year, fixed-rate, 20% offthe mortgage loan, and provide borrowers with attractively low-interest rates that arekept relatively low for a period of time and floats, if home prices continue to risesubprime borrowers can protect themselves against payments high mortgage payments

by refinancing, taking out a home equity loan, or selling the home at a profit andpaying off their mortgages Mortgage loans are on the rise, attracting low-incomepeople

2.1.2 Housing bubble phenomenon

It can be understood that the phenomenon of the Housing Bubble is when the price of

a house exceeds its true value at present For some reason, housing prices are pushedmuch higher, which means that at any point in time housing liquidity is no longeravailable and will lead to a housing market crash, crisis panic

The phenomenon of "bubbles" in the market is not new in the US, the Dot-com bubble(stock market bubble) soon appeared and collapsed in 2001 causing the economy to

go into recession slight, due to the monetary policies introduced to restore theeconomy stimulated the demand of the real estate market At the same time, financialinstitutions and banks have more subprime loans, high-risk loans This leads to ahousing bubble, speculation in the housing market The phenomenon is starting tolook like a normal classic real estate bubble, so people don't seem to worry about it

Figure 2.1: Real estate price fluctuations from 2000 to 2011 (source: Internet)

Housing prices have been doubled in the United States, 2.5 times in France, threetimes in Spain and the UK, and four times in Ireland At the same time, the amount ofdebt of households also skyrocketed The signal explosion for households and themiscellaneous property appreciation escalated without a deterrent effect: the rise indebt was "solved" by the rise in prices heritage one can earn And the rise in realestate prices, which do not soften the situation of buyers as is the case in a "classic"goods market, on the contrary, attract more and more buyers

Figure 2.2: Household debt status from 2000 to 2012 (% of GDP, source: Internet)

By 2005, interest rates began to gradually increase, and qualified borrowersunderstood that price reductions led to lower home prices Due in part to higherinterest rates, most subprime borrowers most of whom hold adjustable-rate mortgages(ARMs), cannot pay off their accounts They are also unable to save on their own,they were previously able to profit from borrowing money based on the added value

of their home or by selling their home As the number of foreclosures increased, banksstopped making standard mortgages, which further reduced demand and prices As thesubprime mortgage market was about to explode, many banks found it hard to puttheir assets in the form of subprime loans or bonds created from subprime loans alongwith other forms of mortgage Another consumer debt is less risky, other reasons areMBS subprime loans, difficult to track, disputes between banks, and bank-related

credit freeze Leading to many important consequences related to both costs andinvestments of businesses and the real estate market

2.1.3 Securitization

Figure 2.3: U.S Securitization Issuance: Agency and Nonagency (In billions of U.S

dollars)Securitization is the process of combining and restructuring illiquid assets with highfuture cash income such as receivables, debts converted into bonds and offeringtransactions on the market In other words, securitization is the transformation ofcredit facilities into securities, issued to the public, creating favorable conditions forinvestors to buy and sell Securitization is usually conducting in two groups of assets:financial assets that are not mortgaged by real estate and loans that are mortgaged byreal estate There are corresponding types: Mortgage-backed securities – MBS, Asset-Backed Securities – ABS, CDOs Securitization began to appear in the early 1970s inthe United States This technique evolved from the securitization of residentialmortgages by two government-guaranteed institutions, Fannie Mae, and Freddie Mac,

to gradually expanding and evolving into credit card receipts and auto loans.According to Vietnam banking magazine: “If in some countries, securitization isconsidered as one of the solutions to deal with bad debts for the commercial bankingsystem, in the US, securitization is the cause of bad debt bad debt and led to a crisisfor the country's banking system"

Figure 2.4:Securitization (Source: Science Direct) (Sources: IMF staff estimates; and the Securities Industry and Financial Markets Association.)