The U.S`s Financial Crisis of 2007-2009

download report

Transcript The U.S`s Financial Crisis of 2007-2009

U.S Financial Crisis
Present by
Huan He
Prepared for
Dr. Ramon Castillo
Econ 462
Spring 2011
Eric Le
Grace Peng
U.S Crisis 2007-2009
• Referred as a Financial and Real Estate Crisis
Stock prices decreased
Prestigious financial institutions failed
Lending was disrupted
Unemployment rose to near 10%
U.S Crisis 2007-2009 (cont.)
• Governments, central banks, and
international organizations implemented
various plans to combat the crisis.
 Fiscal expansion
 Monetary expansion
 Institutional bailouts
Causes of the Crisis
• Growth of the housing bubble
• Easy credit conditions
• Subprime lending
• Deregulation and lax regulation
• Collapse of the shadow banking system
Growth of the housing bubble
 During the housing bubble, the growth of home prices outpaced
income growth.
 The price of the house increased 124% in 2006 .
 At the peak of the bubble in 2006, the home price was 4.6 times the
median household income.
 After the peak in 2006, housing prices declined over 20% by the end of
Growth of the housing bubble (Cont.)
• The U.S. residential properties subject to
foreclosure actions from 2007 to 2010.
Easy credit conditions
• Low interest rates made credit more
accessible, enable consumers to increase
• Less manageable loans coupled with the
inverse relationship between interest rates and
asset prices made speculation in the housing
market more risky
Subprime Lending
 A greater risk of default than conventional loans.
 In March 2007, 7.5 million first-lien subprime
mortgage loans were outstanding $1.3 trillion.
 High risk subprime lending increased due to
government policies and competition among financial
 2008: The poorer loan screening increased to 25% in
subprime defaults
Insufficient Regulation and Deregulation
 Regulation did not keep pace with financial innovations
 The central bank had not federal supervision over:
Investment banks
Hedge funds
Other firms involved in derivatives or complex financial
 About half of the subprime loans were written by statechartered mortgage companies with minimum
Impact on the Aggregate Economy
Crisis began with:
Assets price declined and Financial institution
Crisis reduced
aggregate demand
causing economic activity
>>>Aggregate economy decreased
Impact on the Aggregate Economy (Cont.)
 2008 -2009: Real GDP decreased 6 %
 Average hours per workweek declined to 33%
The Collapses of Major Bank & Investment Bank
Jan 2008 – Countrywide Financial Institution
March 2008 – Bear Stearns
Sept 2008 – Lehman Brother
Sept 2008 – Merrill Lynch
Sept 2008 – Washington Mutual
Dec 2008 – Fannie Mae & Freddie Mac
US Unemployment Rate
US Unemployment Rate
1) Total Unemployment Rate – 4.6 in 2006 increase
to 9.6 in 2010
2) Major sector:
 Financial Sector – 2.7 in 2006 to 6.9 in 2010
 Construction Sector – 6.7 in 2006 to 20.6 2010
 Manufacturing Sector – 4.3 in 2007 to 10.6 2010
GDP (Purchasing Power Parity)
Response of Policy Makers
1) “Too big to fail”
 Limit the size of institutions to prevent them from
becoming TBTF
 Firms that arrange risky transactions must take on
some of the risk.
 Reduce incentive for executives to take risky gambles
in hopes of high short-run gain.
2) Financial regulation
 Inconsistencies and gaps in regulation contributed to
the 2007-2009 financial crisis
 Consolidate regulators of add an agency that oversees
and coordinates regulators
Monetary Policy
1) Federal Reserve System
 Repair commercial paper market – Buying
back unsecured and asset-backed commercial
paper directly from issuers.
 Restore securitizations
 Reduce mortgage interest rates – Reduced of
Interest rate 6.41 (2006) to 4.69 (2007)
 Federal Fund Rate – Reduced of Fed funds from
5.02% to near 0.18%
Fix Rate Mortgage Rate
Federal Fund Rates
Fiscal Policies
1) Economic Stimulus Act of 2008
 Government spent about $152 billion on the
stimulus package.
 Tax rebates – gear toward low & middle-income
 Tax incentives for businesses.
2) Emergency Economic Stabilization Act of
 Mortgage-backed securities
Fiscal Policy (Cont.)
3) Troubled Asset Relief Program (TARP)
AIG – Sept 2008 they received about $85 billion;
May 2009 they received another $97 billion.
Big Four Banks:
Citigroup – received $45 Billion in bailout money
Bank of American – Guarantee $118 billion of the bailout
money, but used only $45 billion
JP Morgan Chase – Received $25 billion in bailout money
Wells Fargo - Received $25 billion in bailout money
Outcome of monetary and fiscal policies
• Outcome from “too big to fail policy”
• Taxpayer subsidy
• Cost of funds for small and large institutions
before and during the bailout
• Cost-of-funds spread between small & large
banks increased to 0.69%
Economic Stimulus Packages
 Fisical Stimulus package – by borrowing and
spending to offset the reduction in private sector
demand caused by the crisis. In 2008 and 2009, the
U.S. excuted total of $1 trillion.
Recovering from the Crisis & international
institution Intervention
• Global Implications:
The stimulus reduced the risk of a sharper
 Reduced more sustained global downturn.
 FRS – interest rate cuts make money cheaper.
 State and local revenue recovering
 tax receipts up 5% on the annual basis
Thank You!