Transcript Group 2 - Kleykamp in Taiwan

What Caused the 20082009 Global Recession?
“The road to hell is paved with good intentions”
And a lot of greed
Yuan Chang-Lee
Tzuting WANG
Chia-Wen TSAI
Jorge Seaman
Cause of 2008-2009 global
recession
1. Loose monetary policy – low interest
rates
2. Financial deregulation
3. US housing boom, sub-prime mortgages
4. New, complex, innovative financial
products(securitization)
5. Ratings Agencies
1. Loose monetary policy and low interest
rates
• After ‘Dot-com bubble’ and 9/11, FED reduces interest rates from 6.5%
in 2000 to 1% in 2003
• Printed too many dollars – banks had too much cash
• Foreigners increased holdings of US Treasury bonds, increasing liquidity.
Proceeds mainly went into housing market.
2. Financial deregulation
• Differente measures for e.g. Securities and Exchange Commission
relaxes restrictions on amount of debt which investment banks are
allowed to hold, etc…
• Growth of ‘shadow banking system’ unchecked and unregulated. By end
2006, unregulated banks are bigger than traditional
• In 2000, President and Congress allow ‘credit default swaps’ to be selfregulated
3. sub-prime mortgages
• Not enough mortgages to satisfy Wall Street’s demands for
derivatives, so riskier loans, second mortgages to finance consumers
• Interest rates increase suddenly from 1% to 6% so by August 2008,
15% of all mortgages had defaulted
• Mortgages as % US GDP increased from 45% in 1990 to 73% in 2008.
US private household debt represented 127% of personal disposable
income by end 2007. By end 2008, US private debt equals 290% GDP
• 6 million Americans lost their homes
• House prices fell by 30-40% in 2008, MBS and CDS shown to be
worthless pieces of paper
4. New riskier financial products
•
•
•
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Structured investment vehicle
Derivative
Mortgage backed securities
Credit default swaps
5. Ratings agencies
• Only 3 Ratings Agencies (Moody’s, Fitch, S&P) = world
cartel
• All the derivatives, CDS, MBS etc., plus all the investment
banks (including Bear Stearns and Lehman) had been
given AAA ratings as “safe investments”
• Since 2000, ratings agencies paid by the companies they
rated rather than by potential investors
5. Conclusion
• Recession was due to a series of a multiple factors, not
an single and isolated event
• Market and financial institutions should be regulated
• Investors should be carefull when investing and assess
their options