The document summarizes key events and causes of the 2007-2009 financial crisis. It notes that housing prices increased sharply until 2005 but then leveled off and declined, default and foreclosure rates increased in 2006, and major investment banks collapsed in 2008. The crisis was sparked by the decline in US housing prices, which reduced the value of mortgage-backed securities and threatened the solvency of financial institutions due to leverage. The crisis put the US and world economies into a deep recession, the largest since the Great Depression.

1. 2007-2009 financial crisis
Safdar Hussain
`17270
Iqra Univesity Islamabad Campus

2. Key Events Leading up to the Crisis
• Housing price increase during 2000-2005, followed by
a levelling off and price decline
• Increase in the default and foreclosure rates beginning
in the second half of 2006
• Collapse of major investment banks in 2008
• 2008 collapse of stock prices

3. The list of casualties kept growing….
In this way… it has been managed

4. Major Cause
• Multiple causes, but US housing bubble was big
piece
• Focus on securitization of “nonprime” (subprime and
Alt-A) mortgages
• Gorton (2009):
“The [2007-2009] credit crisis was sparked by a
shock to fundamentals, housing prices failed to
rise.”

5. Housing price decline
The decline in house prices reduced the value of
mortgage backed securities. Be-cause of
leverage, this threatened the solvency of a
number of financial institutions, including
major investment banks. Risk premiums rose
sharply on many kinds of lending, and the
stock market lost about half its value.

6. The US housing bubble
0
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U.S. Real Housing Price Index 1890-2008
U.S. RealHousingPriceIndex 1890-2008
Source: Case-Shiller index

7. 2007-2009 financial crisis
 These shocks have combined to put the U.S.
economy and many economies through-out the
world into a financial crisis and a deep recession,
likely the largest since the Great Depression.
Balance sheets are an accounting device for
summarizing the assets, liabilities , and net worth
(or equity) of an institution. This can be a bank, a
household, or a government, for example

8. ABC Bank balance sheet
Assets Amount(M Rs.)
Liabilities Amount(M Rs.)
Loans 1000
Deposits 1000
Investments 900
Short-Term
Debt
400
Cash and
reserves
100
Long-Term
Debt
400
Total
Liabilities
1800
Total Assets 2000
Equity (net 2000

9. 2007-2009 financial crisis
Leverage magnifies both returns and losses, so
that small percentage changes in the value of
assets or liabilities can be enough to entirely
wipe out equity, causing an institution to
become insolvent, or bankrupt.
Credit unions
Commercial banks
Savings institutions
Brokers/hedge Funds
Fannie Mae
Freddie Mac
0 20 40 60 80
67.9
21.5
31.6
9.4
9.8
9.1

10. Systemic Risk
During the height of the financial crisis, the
solvency of numerous financial institutions
was called into question. Because financial
firms are interlinked through a complex web
of loans, insurance contracts, and securities,
problems in a few financial institutions can
create problems in many others, which is
called systemic risk.

11. Restructuring of the Economy : A Remedy
• To promote recovery in a crisis-affected
economy, it is essential to link together a
restructuring of the financial and the
corporate sectors, a so-called rapid
sequencing restructuring of the economy.

12. Cont.....
• International coordination at setting new rules will
be necessary Otherwise race to the bottom leading
to new deregulation International coordination of
rule setting is most challenging

13. rev200902
The Economic Crisis of 2008: Cause
and Aftermath
Slide 13 of 31
Lessons From the Great Depression
Avoid these policies:
– Monetary contraction
– Trade restrictions
– Tax increases
– Constant changes in policy; this merely creates uncertainty and delays private
sector recovery.

14. Thank You All For the Patient Listening !
safdarlashari@hotmail.com