Transcript financial crisis of 2007 to the present

TWO ECONOMICS,
DIFFERENT REMEDIES
Professor: Cheng-Nan Chen
GROUP’S MEMBERS
.
Mamunur
Rahsid
Betty
Nguyen Tan
Nhat Duy
Do Nguyen
Yen Nhi
Huynh Tan Tai
ViVi
CONTENT
The America
Deflation in US Today
World financial crisis
Solution
Introduction – China
Brief history of SOEs
China’s Stimulate
Plan
THE UNITED STATE
The AMERICA is the third or fourth largest
country by total area, . It is one of the world's most
ethnically diverse and multicultural nations, the
product of large-scale immigration from many
countries.The U.S. economy is the world's largest
national economy, with an estimated 2009 GDP of
$14.3 trillion (a quarter of nominal global GDP and a
fifth of global GDP at purchasing power parity.The
United States is the largest importer of goods and third
largest exporter, in the world. .
DEFLATION IN THE US TODAY
Productivity has surged, thereby contributing to
the lack of hiring since 2001
Unemployment dropped slightly to 6.1 percent in
September 2003, and 57,000 jobs were created
for the first gain in eight months. However, more
than one million jobs have disappeared since
November 2001 .
DEFLATION IN THE US TODAY
Some assets (particularly housing) appear
overpriced.
The U.S. trade deficit continues to grow, hitting
$41.8 billion in May 2003.
World production may be outpacing demand,
particularly in some sectors such as capital goods
and consumer durable goods.
FINANCIAL CRISIS OF 2007- 2009
The financial crisis of 2007 to the present is a
crisis triggered by a liquidity shortfall in the United
States banking system.
It has resulted in the collapse of large financial
institutions, the bailout of banks by national
governments, and downturns in stock markets
around the world.
THE GROWTH OF THE HOUSING
BUBBLE
Between 1997 and 2006, the price of the typical
American house increased by 124%.
By September 2008, average U.S. housing prices
had declined by over 20% from their mid-2006
peak
When prices declined, Banks couldn’t refinancing
and customers couldn’t pay loans. During 2007,
Banks began foreclosure proceedings on nearly
1.3 million properties.This increased to
2.3 million in 2008.
SUB-PRIME LENDING
These United States banks believed that the risks
of subprime loans could be managed, a belief that
was fed by constantly rising home prices.
However, the gradual decline of home prices in
2006 led to the possibility of real losses.
As home values declined, many borrowers
realized that the value of their home was exceeded
by the amount they owed on their mortgage.
These borrowers began to default on their loans,
which drove home prices down further and ruined
the value of mortgage-backed securities This
downward cycle created a mortgage market
meltdown
FINANCIAL MARKET IMPACT
Initially the companies affected were those
directly involved in home construction and
mortgage lending such as Northern Rock and
Countrywide Financial, as they could no longer
obtain financing through the credit markets. Over
100 mortgage lenders went bankrupt during 2007
and 2008
FINANCIAL MARKET IMPACT
The financial institution crisis hit its peak in
September and October 2008. Several major
institutions either failed, were acquired
under duress, or were subject to government
takeover. These included Lehman Brothers,
Merrill Lynch, Fannie Mae, Freddie Mac,
Washington Mutual, Wachovia, and AIG
FINANCIAL MARKET IMPACT
Japan’s years of pain were made worse by
deflation, an affliction that assailed the United
States during the Great Depression. While falling
prices can be good news for people in need of
cars, housing and other wares, a sustained, broad
drop discourages businesses from investing and
hiring.
FINANCIAL MARKET IMPACT
Germany has done relatively well in the current
downturn without large stimulus spending, and
that experience is now cited by adherents of
austerity.
Germans had two advantages over Americans: A
more extensive social safety net to give
consumers more money, and a vibrant
manufacturing base to churn out more goods for
export
FED’S SOLUTION
The Primary way to attack deflation is to inject
credit into the economy, giving reluctant
consumers the ability to spend
Fed traditionally adjusts a benchmark overnight
rate for banks that influences rates on car loans,
mortgages and other forms of credit
FED’S SOLUTION
Governments have increased spending or cut
taxes to offset declines in consumer spending and
business investment.
The Fed also relieved American banks of troubled
investments, many linked to mortgages, to give
the banks room to make new loans.
New or reinstated rules designed help stabilize the
financial system over the long-run to mitigate or
prevent future crises
FED’S SOLUTION
The Fed pulled this lever long ago, and has kept
its target rate from 6.5% to 1.0% to combat the
perceived risk of deflation.
The Fed then raised the Fed funds rate
significantly between July 2004 and July 2006.
This contributed to an increase in 1-year and 5year adjustable-rate mortgage (ARM) rates,
making ARM interest rate resets more expensive
for homeowners.
INTRODUCTION-CHINA
INTRODUCTION
Since 1979, China has reformed and opened its
economy. The Chinese leadership has adopted a
more pragmatic perspective on many political and
socioeconomic problems, and has reduced the role
of ideology in economic policy.
China's has been the largest reduction of poverty
and one of the fastest increases in income levels
ever seen.
China today is the fourth-largest economy in the
world. It has sustained average economic growth of
over 9.5% for the past 26 years.
INTRODUCTION
Chinese legislators unveiled several proposed
amendments to the state constitution.
Proposal to provide protection for private
property rights.
Rebalance income distribution between urban
and rural regions, and to maintain economic
growth while protecting the environment and
improving social equity.
INDUSTRY
Industry and construction account for about 46% of
China's GDP.
Major industries are mining and ore processing, iron,
steel, and so on.
Consumer products including footwear, toys, and
automobiles.
Other transportation equipment including rail cars and
ships, aircraft, and telecommunications.
CHINA’S ECONOMY
Figure: Chinese Exports of Goods and Services as a
Percent of GDP: 1985-2008
THE DEVELOPMENT STAGES OF
ECONOMY
First stage (1952~1976): Planning economy
Second stages:
First period(1977-1980): 1978- implemented
reformed and opened policy
Second period(1981-1990):
Third period(1991-1993): 1993-GDP grew
highest in the history
Fourth period(1994-2001): 1998- Asia
Financial Crisis
The development stages of economy
Fifth period(2001-now):
2007-China overtook the United States to become
the world’s second largest merchandise exporter
after the European Union (EU).
2009- a huge expansion of the government role in
the corporate sector. Economic expansion from iron,
steel, motor vehicle, and tourism.
BRIEF HISTORY OF SOEs
Before the economic reforms in the 1980s,
businesses in China were operated and strictly
controlled by governmental agencies.The
government and its agencies retained all
investment and operating decisions.
The managers of these SOEs had little incentive
and managerial authority to enhance its efficiency.
SOE was not regarded as a mere commercial
organization. It was also considered as a quasigovernment agent that was required to pursue the
broad social, political and economic objectives of
the government
BRIEF OF SOEs
It has been generally agreed that the government's
direct control and management of SOEs, together
with other factors such as an over-centralized
national economy, result in poor performance of
SOEs
In the early 1980s, the government began
reforming the SOEs. The objective of the SOE's
reform was to rejuvenate the SOEs by giving
more and more autonomy in making economic
decisions and providing financial incentives to
managers and employees of SOEs.
BRIEF OF SOEs
Two major reforms have been adopted for SOEs.
They are the contract responsibility system (CRS)
and corporatization.
CRS
The government retains the ownership
The SOE is subcontracted to selected individuals
(managers) to independently run the firm
The managers are rewarded if the operating
targets set in the contract are achieved. The
financial incentives for managers include sharing
of the profits in excess of the targeted amount.
CORPORATIZATION
Unfortunately, the CRS has not been successful in
improving the economic efficiency of SOEs.
Consequently, the government intends to replace
CRS by corporatization. Corporatization refers to
converting SOEs into companies with limited
liabilities.
FEATURES OF SOEs AFTER
RESTRUCTURING
There is increasing degree of separation of
management and ownership... The decision power
now is in the hands of the SOE's managers or the
board of directors.
Except for large and key SOEs, operations of
most SOEs are no longer subject to state plans. 3.
SOEs are now operating in freer market and are
subject to market forces. The government no
longer guarantees a market for an SOE's products
and has stopped subsidizing losses incurred in
SOEs.
FEATURES OF SOEs AFTER
RESTRUCTURING
The reward of the manager is often directly linked
to the performance of the SOE.
Accounting information is widely used to
measure performance.
There is no market for stocks issued by most
SOEs.. the value of the firm cannot be determined
in a free market. Merger and acquisition of SOEs
is not a common practice as there are political
restrictions as well as technical problems
NEW PROBLEMS HAVE EMERGED
Although the abovementioned reforms have
improved efficiency of SOEs, new problems have
emerged. One of the problem is the self-serving
management.
China's large SOEs, either corporatized or still
under the CRS, now significantly resemble
modern corporations in the West in that the SOEs
are characterized by a high degree of managerial
authority and a separation of ownership from
control. As a consequence, potential agency
problems have emerged.
NEW PROBLEMS HAVE EMERGED
The agency problem is more serious among the
SOEs' managers as the incentive system is shortterm oriented. Their primary financial reward
system is linked the profit performance. As these
managers are not allowed to own shares in the
SOEs they managed, there is no long-term
incentive.
NEW PROBLEMS HAVE EMERGED
The manager may inflate the profits to their
benefit or provide false financial statements to
conceal embezzlement and other irregular
behavior. The financial statements provided do
not represent the true and fair state of SOEs.
NEW PROBLEMS HAVE EMERGED
As a result, relying on these misleading or false
financial information may lead to serious
consequences, such as the loss of state funds, the
wrong assessment of managers, and the
formulation of incorrect economic decisions and
policies.
CHINESE ECONOMIC STIMULUS PLAN
Environment
Rural infrastructure
Disaster rebuilding
Tax cuts
Industry
Stimulus Package
588 billion USD
Housing
Health and education
Finance
Transportation
Distribution of The Stimulate Fund
1600
1500
1400
1200
1000
1000
Yuan 800
600
400
370
370
210
200
150
0
Public
Reconstruction
Rural
Infrastructure
Work
Development
Development
Technology
Promoting
Advancement Energy saving
Program
Education,
Culture
RESULT OF THE STIMULATE PACKAGE
The stimulus provided funds for infrastructure
projects and housing developments. Some were
used to assist local governments to lend money to
state-owned companies to develop housing estates,
roads and bridges.
This will drive employment in areas of
manufacturing, steel, cement and other sectors of
the economy.
RESULT OF THE STIMULATE PACKAGE
Some expert says the vast bulk of stimulate
package went to state-owned companies
And they used the money to strengthen their
dominance in their markets or to enter new
ones
RESULT OF THE STIMULATE PACKAGE
China's economic growth was sustained by the
economic stimulus and in addition, assisted
neighboring countries with the economic recovery
in 2010
Chinese economic growth was around 10 percent
even as its European and north American
economies were slowing.
THE END
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