international financial market

Introduction:The US economic crisis of 2007-2009 has profound impact on all aspects of the economy in the world.. Literure review: The financial crisis 2007 has been viewed as the bigges

I Introduction:

The US economic crisis of 2007-2009 has profound impact on all aspects

of the economy in the world It has triggered the global economic crisis of 2008-2010 The United States and many other countries suffered the heavy damage as the effect of the crisis

This study aims to analyze the causes, consequences and the response policy of the currency crisis 1997 in Thailand The paper includes three sections: literature review, discussion part, and conclusions.

II Literure review:

The financial crisis 2007 has been viewed as the biggest, most severe economic crisis in the world over the past 60 years since the Great Depression 1929-1933 The main cause and consequece of financial crisis was analyzed by many economist to prevent and overcome crises, prevent future crises In researches from Allen et al (2010), Taylor (2008), Brunnermeier (2009), Greenlaw et al (2008) provied an overview of crisis The seeds of the crisis came from the remaining low interest rate adopeted

by Federal Reserve Taylor (2008) studies that the monetary policy was loose fitting in the period from 2000 to 2007 The policy of loosening monetary policy (weak dollar) has encouraged people to borrow money buying houses, and credit institutions are ready to lend and venture capital The study of Allen et al (2010) shown that the global imbalances, cheap credit card combine with the global imblances leading to bubble In 2006, the housing bubble in United States reached the highest level started to burst

The financial crisis became the economic crisis in the US then rapidly spreading the global economy Reinhart and Rogoff (2008,2009) indicated that housing prices drop 35% spead over the period of 6 years Equity prices and output fall 55% and 9% respectively over 2 years The results also find that unemployment rate rises about 7% over 4 years, and central government debt increased signicantly at 86% compared with its pre-crisis

rate.Reinhart and Rogoff warned that the global nature of the crisis would undermine the development of the world economy

III Discussion part

1 The main ingrediant of financial crisis

The first main cause of the crisis 2007 in US is the buble housing in the real estate market Between Jully 2007 and September 2008, there was a wide argument that the the bubble bust in real estate market caused a serious problem securitized mortgage market Many agreement that the loose of monetary policy is the most importion reason leading to the buble housing

in the United States From 2003 to 2004, the Federal Reserve remain the very low level of interest rates at 1% Frankin at al (2011) assumed that the main funtion of the low of interest is that avoiding a recession after the technology-stock buble burst in 2000 and the September 11 terroist attack

in 2001 Taylor (2008) pointed this interest rates was much lower than the preiod of economy performed well and conclude the monetary loose fitting during this period Therefore, the housing prices increased slight dramatically, above 8% throught the period It thus provides evident that the Federal Reserve created a essential motivation for people in United States borrowing at 1% and buying houses growth up at higher rates Otherwide, there were various other policies encouraging poor people to buy houses such as the tax advanges, none deduction for rent payment Thus, the low-interest rate of Fed is the first factor that caused an increase demand in property market leding to the rising in housing prices

The second important reason of crisis is the global imbalances Rich and middle-income countries responded to the 1997 East Asian crisis by accumulating huge foreign reserves They create a trade surplus, and move into the international capital markets China, for example, one of the countries were not affected directly by Asian crisis 1997, invested these reserves mainly in debt instruments such as treasury bond, mortgage-backed securities and other kind of debt securities Following this, other countries acquired large amount of reserves also invested vast money in

debt securities Thus, the lending standard was drived down to guarantee that there was enough demand for debt from borrowers and buyers

2 The consequence of crisis

The colapse in housing market in the US created a downward trend in the whole world economy The biggest and most damaging affect of the crisis is the destruction of production forces, which repels the development of the world economy In the United States, the financial crisis turned into an economic crisis, a recession, a rising unemployment, and named as a

"three in one" crisis The crisis has bankrupted many banks and financial companies, including the leading banks and financial firms in the United States Bear Steams, One of Wall Street's leading brokerage and investment banks, which has been operating for 85 years in the US financial market, suffered heavy losses as the housing market slumped After the problems in liquidity developed for few months, Rederal Reserve finally provided emergency funding to recue the Bear Steams’s sistuation However, the emergency funding could not help Bear Steams get out of downward spiral after the market closed on March 14, 2008 Few month later, in May 2008, J.P Morgan completed buying Bear Stearns with commitment to financial support from Federal Reserve Following, Fannie Mae and Freddie Mac, two insitituions played an important role in U.S mortgage market, defaulted in the beginning of Steptember as a sign of a systemic financial crisis in the US The situation was getting worse for the

US government because Fannie and Freddie are the largest issuers of agency bonds, and the foreign government such as China and Japan purchased and held very large amount of these securities Moreover, the financial institution, insurance companies, pensions funds and other instituiton investors also held these debt securities Thus, economic crisis happened undoubtedly leading to the US government unable to mobilize captital throught selling debt instrument As the process of contagion, on September 15, 2008, Lehman Brather, the fourth-largest investment banker on Wall Street, had 158 years of operation, filing for bankruptcy protection for a loss of $ 768 billion Before bankruptcy, Lehman Brothers shares fell 94% In an attempt to find a resolution fo Lehman

Brothers following the ways that organized for Bear Stearns, a series of meeting was being held by the US Treasury and Federal Reserve However, the US government rejected to provide sufficient financing due

to some reasons At that time, the Us government predicted that the default of Lehman would not affect negatively to financial system The failure of Lehman became the bigest and the most complex bankruptcy event in history Meanwhile, after withdrawing from the tender package for Lehman, Bank of America agreed to buy Merrill Lynch which is one of three largest investment bank in United States At the same week, AIG (American International Group) which is the largest insurance in the world at that period required a bailout from Fed to avoid bankruptcy The Fed and Treasury Department oganized a series of meeting to discuss about rescue plan Financial Market plummeted over frightened about the possible collapse of AIG As an important role, AIG provided a wide range of financial insurance contracts to investors all around the world If the collapse happened, AIG would probably unable to pay additional collateral On September 16, AIG received an eighty-five billion dollar bailout from Federal Reserve including a condition which is 79.9% equity stake in the company taking over by the US government

The brankruptcy in series of banks, financial companies, credit institutions led to the unemployment rose rapidly The number of unemployment increased dramatically from around the end of 2007 as a result of saving in public expenditures and austerity policies It can be seen from figure 1 that the unemployment rate which was 4.6% in 2007, went up dramatically and hit a peak of 9.6% in 2010, the highest level after The Great Depression

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0

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Unemployment Rate

Unemploymet Rate

Years

Sources: World Bank databank Figure 1: Unemployment rates in United State (2000-2016)

After the recession in 2001 caused by the terrorist attack in 11 September and Y2K crace, the US government has implemented many policies to improve the economic situation In the period of three years from 2002, GDP growth rate rose significantly then reached a highest level of 3.8% in

2004 After 2005, the GDP growth rate in US turned to negative, declined rapidly and fall to a low point of -2.8% in 2009 (figure 2)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -4

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-1

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5

GDP growth rate

GDP growth rate

Years

Source: World Bank data Figure 2: GDP growth rate in United State (2000-2016)

Before the crisis, inflation rate in US stayed in a relatively range from 2% to 3% between 2002 an 2007 From 2008 to 2009, the inflation rate decreased sharply and hit a lowest point of -0.35%, the lowest levels in second half of century (figure 3) It means that the US economy experienced the deflation and could be faced a downward spiral which occurred when the inflation rate below zero percentage in a long period of time

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 -1

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Inflation, Average Consumer Prices

Inflation, Average Consumer Prices

Years

Source: World Bank data Figure 3: Inflation rates in United State (2000-20016)

Production and consumption in the United States also fell into very difficult situation Automobile production, one of the most important manufacturing sectors of the US economy, declined sharply The top US automakers, General Motors, Ford, and Chrysler, all suffered heavy losses In January

2008, Lyondell Chemical, one of the largest chemical producers in the United States, filed a patent application in January 2008 The economic downturn, consumer declines hit a number of major US retailers such as Circuit City Store Inc., Sharper Image Corp, Steve & Barry's LLC, Macy

Inc., Ann Taylor Stores Inc., forced bankruptcy or bankruptcy protection Manufacturing stagnated and US jobless claims increased for months, reaching its highest level in 25 years, from 2.59 million in 2007 to 3.84 million in 2008 and 4.61 million in 2008 February 2009

From the US, the crisis has shaken financial markets, stock markets, bankruptcies, financial companies, large corporations in many countries around the world, causing serious losses trade relations, finance,

Scotland, Kaupthing, Landsbanki, Glitnir (Iceland), Northern Bank, Brandford & Binglay (UK), IKB Bank, DZ Bank, Deutsche Bank, Sachsen

LB Germany, Yamato Life Insurance Co (Japan) and many other banks are victims of the US financial crisis, forced to ask for help from the government or nationalized by the government The research from Asian Development Bank in 2008 showed the global economic crisis damaged $

50 trillion of global financial assets, Asian development suffered the worst with a total loss of $ 9.6 trillion, higher than the country's GDP in one year

3 Policies response

When the banking crisis broke out, the US government introduced several supportive measures such as monetary polices, open market operations, and the government’s baiout package

Firstly, regarding to monetary policy, as soon as the secondary housing crisis broke out, the Fed began intervening by lowering interest rates and buying mortgage-backed security Interbank rates declined from 5.25% on September 18, 2007 to 2% on Arpil 30, 2008 After that interest rates decreased to a lower interest rates at only 0.25% on December 16, 2008 Secondly, The Federal Reserve performed open market operations instrument through the acquisition of US Government bonds held by its banks Particular, the Fed introduced agency mortgage-backed securities program to support mortgage and housing markets On March 31, FED completed its purchased about $ 1.25 trillion in mortgage-backed security but continues to conduct transactions over the coming months The

purpose of this program is to improve conditions and to help revive the financial markets

The third policies response is economic stimulus packages In the face of a severe banking crisis, the President George W Bush signed TARP (Troubled Assets Relief Program) fiscal package which based on the " Emergency Economic Stabilization Act" (EESA) into law The bill allows the

US Treasury Department to use up to $ 700 billion from the federal budget

to buy illiquid mortgage-backed securities and other properties from large institutions to restore liquidity to the currency market or ensure high-risk financial assets of financial institutions in US On July 21, 2010, The Dodd-Frank Wall Street Reform and Consumer Protection Act (simly known as Dodd-Frank) came into effect reducing the overall amount to $ 475 billion1

On February 17, 2009, President Barack Obama signed the American Recovery and Reinvestment Act (ARRA) The goals of ARRA are to relief immediately for families, create more jobs by funding shovel-ready public works projects and help small business The Obama administration

approved President to pour $787 billion into the pockets of American families and small business in attemp of boost demand and instill confidence People received the funds through income tax cuts, unemployment benefits and expand health care The ARRA was promulgated when United States GDP growth rate fell more than 6% per year and the number of people who lost their jobs increased by more than 500,000 people per month

The following policies response of US government is the Term Auction Facility (TAF) On December 17, 2007, the FED launched new tool known

as TAF, which aims to increase the liquidity of the US credit market by facilitating the borrowing from sound institutions when the markets are not operating efficiently TAF allows organizations to deposit auctions for short-term loans with collateral, and the institutions auctioned through the Fed's banks The auctions began on December 17, 2007, with interest rates starting at 4.17% and ending at 4.65%, the Fed received $ 63 billion in

1 https://www.investopedia.com/terms/t/troubled-asset-relief-program-tarp.asp

deposits and $ 20 billion in loans with 93 different organizations In November 2008, there were $ 300 billion in loans under the TAF program Fifthly, regarding to banking restructuring, the US Treasury Department encourages banks to participate in a Capital Purchase Program which is purposed to raise the flow of financing to US businesses and support the

US economy This program is a part of the Troubled Asset Relief Program (TARP) in November 2008 Under the program, Banks can get money by offering to sell preferred stock to the Treasury The refinancing is done on a large scale with certain conditions such as salary limits, compensation for senior executives Banks participating in the program are members of the Federal Deposit Insurance Corporation (FDIC), and FDIC covered these bank temporary following the rule in the The Temporary Liquidity Guarantee Program (TLGP) In addition, the Fed has lent up to $ 200 billion in AAA rated assets

With timely and effective measures, the US banking sector has prospered Specifically, JP Morgan Chase & Co - The nation's largest bank posted rose 31% in profits in the second quarter, from 5 billion dollar in profit and

22 billion dollar in revenue in 2012 to 6.5 billion dollar and 25.2 billion dollar respectively Meanwhile, Wells Fargo Bank posted a second-quarter profit

of 19.4% from 4.6 billion dollar in 2012 to 5.5 billion dollar in the second quarter of 2013, thanks to improved credit quality in the housing market and higher lending activity However, the handling of weak US banks is also limited The biggest incorrect decision of the US government was allowed Lehman Brothers to collapse This has caused unintended consequences

in the banking system because every bank thinks that if Lehman failed, any other bank could be the collapse In general, Lehman Brothers brankrupted leding to many bad consequences

IV Conclusion

In conclusion, this paper has examined the cause, consequence and government policies response to the 2007-2009 financial crisis in United State America faced many tough problems as the affter impact of crisis in long lived The problems is that when the bubbles housing collapse, its not

only result in financial market but also economy system During the period

of crisis, many reforms and baiout package was provided to improve the sistuation but it take a long time to settle