United State Financial Crisis 2007 - 2008 ppsx

Macroeconomic Assignment UNITED STATE FINANCIAL CRISIS 2007-2008 Group member Name Student ID 1... Most recently, we cannot help mentioning the worst financial crisis in the US in

Macroeconomic Assignment

UNITED STATE FINANCIAL CRISIS

2007-2008

Group member

Name Student ID

1 Pham Thanh Hai 0851050064

2 Nguyen Quynh Mai 0851050049

3 Nguyen Huong Thuy 0851050059

4 Dao Bich Ngoc 0851050051

5 Duong Thi Minh Thu 0851050057

6 Dang Hong Thai 0851050019

7 Dinh Thi Bich Phuong 0851050054

TABLE OF CONTENT

PREFACE 3

CONTENT 4

I SIGNALS OF FINANCIAL CRISIS IN US ON THE US ECONOMY 4

II IMPACTS OF HOUSING/CREDIT CRISIS IN US ON THE US ECONOMY 7

1 Effects on US Financial Institution 7

2 Effect on Money Supply 10

3 US Trade Deficit Error! Bookmark not defined 4 Impacts on US macro-economy 11

5 Global economics effects 12

III REASON FOR THE CRISIS 14

1 The imbalance of US economy 14

2 Loosened regulation 17

IV SOLUTIONS 18

1 Emergency economic stabilization act of 2008 18

2 Economic stimulus act of 2008 20

3 The American Recovery and Reinvestment Act of 2009 (ARRA) 20

4 Act of Fed 22

5 Development under the Acts: 23

CONCLUSION 25

REFERENCE 25

PREFACE

The global economy has been developing rapidly and gaining many achievements which have a lot

of motivating influences on the wealth of many countries in the recent decades However, there still

remain a number of difficult problems that need proper solutions brought in by the governments

Financial crisis is not out of the case For many years now, financial crisis is deemed to offend so

many countries and people including economists, brokers, bankers, policy makers, and so on Most

recently, we cannot help mentioning the worst financial crisis in the US in 2007 – 2009 ever seen not

only severely damaging the US economy itself but the global economy The financial crisis in US

was directly the main reason for the following Great Financial Crisis which proceeded globally in a

very complicated way and caused the worldwide destruction to quite a few giant established

economies such as United States, United Kingdom, EU and so on Therefore, no matter what politics

or wealth level it may has, every country has the common responsibility to prevent the “tsunami”

from spreading and damaging without control especially the developed countries However, it

depends on the particular economic characteristics of each nation like integration priority, economic

scale and regime to give their own policies

All things considered, we may reach an important conclusion that the focal point of all possible

solutions is what addressed radically the financial hazards related to stock market and banking

system Thence, we are going to do a thorough research into the causes, progress and impacts of

the crisis in respect of the macroeconomics as well as financial and banking terms which may bring

about many insightful implications for Vietnam in practical policy implementation to survive the global

crisis

CONTENT

I SIGNALS OF FINANCIAL CRISIS IN US ON THE US ECONOMY

The US financial crisis happened worse and worse each day, while the number of entrepreneurs

which collapsed or were taken over increased continuously day by day

After the plan of $700-billion-rescue package was not approve by House of Representatives, Dow

Jones Index fell down to 770 points or 6.9% - the biggest decreasing daily volume since the crisis

arise

(From 16.8.2008 till 8.10.2008)

From 2nd February 2007 to 24th July 2009, 92 banks declared their bankruptcy

From 22nd February 2008 to 29th March 2009, 34 banks declared that they were taken over

Institutions (taken over) Type of organization

worth ( USD , EUR và GBP )

Northern Rock

Retailed bank and mortgage

credit

California

Secondary mortgage credit $4.000.000.000

Alliance & Leicester

Retailed bank and mortgage

Fannie Mae và Freddie Mac Secondary mortgage credit

York City

Insurance company $182.000.000.000

Lehman Brothers, New York City B Investment bank $1.300.000.000

HBOS General financial services $21.850.000.000

Washington Mutual, Seattle,

Washington

Credit fund $1.900.000.000

Lehman BrothersC Investment bank $2

Dexia

Public finance and retailed

bank

Pennsylvania

Jersey

II IMPACTS OF HOUSING/CREDIT CRISIS IN US ON THE US ECONOMY

In this part, we mention the effect on 5 aspects of the economy: US Financial Institution, Money

Supply, Trade Deficit, National Wealth, and some economic indicators

1 Effects on US Financial Institution

Firstly, the crisis began to affect the financial sector in February 2007

The chart above expresses the trend of changing leverage ratio or the ratio of debt over

equity of 4 big investment banks in US Though the value of this ratio is different through these 4

great banks, it is clear to point out that this ratio has trend of increasing strongly as times went by

Merrill Lynch is a typical example with the huge increase from ratio as about 20 in 2006 jumping to

over 30 in 2007 So impressively, this bank jumped from just 15 up to over 30 after 4 years In

addition, as we can see from the chart, 4 of 5 banks had the ratios over 30 in 2007, compared with

just 1 bank had this level of ratio in 2006 and all banks had the ratios as 20-25 in 3 previous years

This is the detailed data for the losses of many banks and financial institution

Company Business Type Loss (Billion USD)

Merrill Lynch investment bank $29.1 bln

Morgan Stanley investment bank $11.5 bln

Bank of America bank $7.95 bln

Bear Stearns investment bank $2.6 bln

Washington Mutual savings and loan $2.4 bln

Lehman Brothers investment bank $3.93 bln

JP Morgan Chase bank $5.5 bln

Goldman Sachs investment bank $1.5 bln

Freddie Mac mortgage GSE $4.3 bln

Fannie Mae mortgage GSE $0.896 bln

MBIA bond insurance $3.3 bln

Ambac Financial Group bond insurance $3.5 bln

American International Group insurance $11.1 bln

Countrywide mortgage bank $4.0 bln

A series of financial institution have suffered from a huge loss According to IMF, the total losses of

all mortgage loan is about 495 billion USD During 2007, at least 100 mortgage companies either

shut down, suspended operations or were sold More and more financial firms either merged, or

announced that they were negotiating seeking merger partners.(3)

During 2007, the crisis caused panic in financial markets That encouraged investors to take their

money out of risky mortgage bonds and shaky equities

During 2008, three of the largest U.S investment banks either went bankrupt (Lehman Brothers) or

were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch) These failures

augmented the instability in the global financial system As a result of bankruptcy in US, people

worried and withdraw their money in the bank, making the situation worse This is the imagine of

people queuing at the front door of Northern Rock bank in England, one of the first victim of the

crisis People and investors are really afraid of a collapse of financial system

2 Effect on Money Supply

During late 2008, the most liquid measurement of the U.S money supply (M1) increased

significantly as the government intervened to inject funds into the system.The focus on managing

the money supply has been de-emphasized in recent history as inflation has moderated in

developed countries Historically, a sudden increase in the money supply might result in an

increase in interest rates to ward off inflation or inflationary expectations (3)

Should the U.S government create large quantities of money to help it purchase toxic

mortgage-backed securities and other poorly-performing assets from banks? There is risk of inflation and

dollar devaluation relative to other countries However, the dollar has strengthened as other

countries have lowered their own interest rates during the crisis This is because demand for a

currency is typically proportional to interest rates; lowering interest rates lowers demand for a

currency and thus it declines relative to other currencies

11

During a January 2009 speech, Fed Chairman Ben Bernanke described the strategy of lending

against various types of collateral as "Credit Easing" and explained the risks of inflation as follows:

"Some observers have expressed the concern that, by expanding its balance sheet, the Federal

Reserve is effectively printing money, an action that will ultimately be inflationary The Fed's lending

activities have indeed resulted in a large increase in the excess reserves held by banks Bank

reserves, together with currency, make up the narrowest definition of money, the monetary base; as

you would expect, this measure of money has risen significantly as the Fed's balance sheet has

expanded However, banks are choosing to leave the great bulk of their excess reserves idle, in

most cases on deposit with the Fed Consequently, the rates of growth of broader monetary

aggregates, such as M1 and M2, have been much lower than that of the monetary base At this

point, with global economic activity weak and commodity prices at low levels, we see little risk of

inflation in the near term; indeed, we expect inflation to continue to moderate." (3)

3 Impacts on US macro-economy

Next, we mention the effect of financial crisis on some other economic indicators such as GDP and

Unemployment rate Real gross domestic product — the output of goods and services produced by

labor and property located in the United States — decreased at an annual rate of approximately 6

percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago

periods The U.S unemployment rate increased to 10.2% by October 2009, the highest rate since

1983 and roughly twice the pre-crisis rate The average hours per work week declined to 33, the

lowest level since the government began collecting the data in 1964

This is the chart showing changes in GDP and unemployment rate during the crisis and forecasting

for the future in comparison with Canada The figure is collected from the IMF website:

You can see on the chart (6) , from 2007 to 2009, the GDP growth rate dramatically fell We just

focus on the year 2007, 2008, 2009 and find that’s the very bad impacts The unemployment rate,

in contrast, rise to the number of 10.2 % in the late of 2009 US economy really seriously affected

by the financial crisis

4 Global economics effects

Financial crisis generated in United State and quickly develop and spread to global economics

shock The result was in September 2008 the industrialized world had been undergoing a

recession This global recession has been taking place in an economic environment characterized

by various imbalances and was sparked by the outbreak of the financial crisis of 2007–2010

This figure shows us the real GDP growth rate in 2009 for many country and area in the world The

GDP growth rate of US is from -4% to -2 % Many area in the world have the GDP growth rate is

negative especially the North Asia This indicated that the world is experiencing a recession

13

The financial crisis has been linked to reckless and unsustainable lending practices compounded

by government intervention and the growing trend of securitization of real estate mortgages in the

United States The US mortgage-backed securities, which had risks that were hard to assess, were

marketed around the world The emergence of Sub-prime loan losses in 2007 began the crisis and

exposed other risky loans and over-inflated asset prices With loan losses mounting and the fall of

Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan market

As share and housing prices declined many large and well established investment and commercial

banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting

in massive public financial assistance

A global recession has resulted in a sharp drop in international trade, rising unemployment and

slumping commodity prices In December 2008, the National Bureau of Economic Research

(NBER) declared that the United States had been in recession since December 2007 Several

economists have predicted that recovery may not appear until 2011 and that the recession will be

the worst since the Great Depression of the 1930s

III REASON FOR THE CRISIS

1 The imbalance of US economy

1.1 Consumption-oriented policy

While almost all countries in the world stimulate their economies through investment and export, the

US chose its own way to maintain the growth rate by promoting and encouraging internal

consumption In these years the public consumption, which has always taken up the increasingly

high portion in US GDP, contributed up to 70% of US GDP This policy at first seemed to be rather

positive when consumers have high belief in the economy However, this policy was creating a big

hole, which made the economy become imbalanced The US gradually had the tendency to be

over-optimistic and over-encouraged by the looseness of credit institutions This created the

increasingly huge trade deficit and made the economy rather vulnerable In order to sponsor for

such huge trade deficit, the US were willing to borrow from outsides by issuing bonds all over the

world In the last 5 years, the US average extra loan was $2 bill When the trade deficit increased

steadily in many years, Fed would have to increase money supply to settle the maturity debts,

which would make the USD depreciate, public belief in depreciate also and consumers, therefore,

would cut down on their expenditures On that condition, the US would lose its only impetus for

economic growth and dive into total recession

1.2 Housing market boom

Low interest rates and large inflows of foreign funds created easy credit conditions for a number of

years before the crisis, fueling a housing market boom and encouraging debt-financed

consumption While housing prices were increasing, consumers were saving less and both

borrowing and spending more This credit and house price explosion led to a building boom and

then to a surplus of unsold homes, which caused U.S housing prices to peak and begin declining in

mid-2006 Easy credit, and a belief that house prices would continue to appreciate, had encouraged

many subprime borrowers to obtain adjustable-rate mortgages These mortgages appealed to

borrowers with a below market interest rate for some predetermined period, followed by market