Causes, impacts and recovery from Global crisis 2008

1. The Global Financial Crisis 2008

2. What is financial Crisis?
• The term financial crisis is applied broadly to a variety of
situations
• 1 Banking panics and recessions
• 2 Speculative bubbles and crashes
• 3 Currency crisis
• 4 Sovereign defaults

3. Reasons for The Crisis

4. REASONS FOR THE CRISIS
Housing price increase during 2000-2005, followed by a
leveling off and price decline.
Increase in the default and foreclosure rates beginning in
the second half of 2006 due to the Fed’s manipulation of
interest rates during 2002-2006
 Collapse of major investment banks in 2008.
 Collapse of stock prices in 2008.

5. HOUSE PRICE CHANGE
Housing prices were relatively stable during the 1990s,
but they began to rise toward the end of the decade.
Between January 2002 and mid-year 2006, housing
prices increased by a whopping 87 percent.
 The boom had turned to a bust, and the housing price
declines continued throughout 2007 and 2008.
 By the third quarter of 2008, housing prices were
approximately 25 percent below their 2006 peak.

6. INCREASE IN INTEREST RATE
Fed's prolonged Low-Interest Rate Policy of 2002-2004
increased demand for, and price of, housing.
The Fed injected additional reserves and kept short-term
interest rates at 2% or less throughout 2002-2004
Due to rising inflation in 2005, the Fed pushed interest
rates upward.
 Interest rates on adjustable rate mortgages rose and the
default rate began to increase rapidly.
Default rate reached 5.2 percent during the third quarter
of 2008.
 Starting in 2006, there was a sharp increase in the
foreclosure rate

7. COLLAPSE OF INVESTMENT BANK
• An SEC Rule change adopted in April 2004 led to highly leverage lending
practices by investment banks and their quick demise when default rates
increased.
• The rule favored lending for residential housing.
• Based on historical default rates, mortgage loans for residential housing
were thought to be safe. But this was no longer true because regulations
had seriously eroded the lending standards and the low interest rates of
2002-2004 had increased the share of ARM loans with little or no down
payment.
• When default rates increased in 2006 and 2007, the highly leveraged
investment banks soon collapsed.

8. Consequences

9. Consequences

10. IMPACT ON MARKETS
• The global financial crisis affected virtually all areas,
including the process of globalization.
• Housing prices crashed;
• foreclosures became commonplace;
• unemployment reached 10 percent in the United States
and higher levels in Europe and elsewhere;
• manufacturing declined sharply, especially in the
automotive industry;
• Students were faced with higher costs as colleges
suffered financial losses;

11. • On the other hand, many developing countries that took a
prudent approach to finance and saved money were not as
badly damaged. In fact, countries that did not fully
embrace financial liberalization were less affected than
those that gave in to American pressure to fully engage in
financial globalization.
• We also saw a global power shift, with the United States
losing ground to China, India, Brazil, and other developing
countries

12. FORECLOSURES
• People could no longer
afford to purchase homes,
which meant that
homebuilders were forced
to abandon construction
projects.
• This resulted in a fall of
demand of goods required
in construction.
• All of the industries that
produced these products
generally experienced
declining sales.

13. DECLINE IN MANUFACTURING
Manufacturing, already in decline, fell dramatically.
 This especially was the case in the automotive industry,
with General Motors and Chrysler declaring bankruptcy
after closing many factories and dealerships, despite
unprecedented financial support from the U.S.
government.

14. GLOBAL POWER SHIFT
• Another major impact of the global financial crisis is a global
power shift.
• Although most countries were negatively affected bythe
financial crisis and global recession, some emerged stronger
than others.
• Brazil, Russia, India, and China, also known as the BRIC
countries, enhanced their power vis-à-vis the United States,
Western Europe, and Japan.

15. How the government react ?

16. Reduce the interest rate
 Interest rate = opportunity cost of investing and consuming
• Interest rate ↓
• More people are willing to borrow money
• opportunity cost of investing and consuming ↓
• Consumption , investment ↑
• Expansionary effect on economy

17. Reduce the discount rate
• Discount rate ↓
• Commercial banks borrow money ↑
• Reserve of banks ↑
• Source of capital for company ↑
• Investment tends to increase

18. Increase the government
expenditure on infrastructure
• Provide job opportunities
• Unemployment ↓
• Income ↑
• Consumption ↑
• Improving the economic environment

19. Reducing tax rate & Increasing
Transfer payment
• Disposable income ↑
• Stimulate consumption & investment
• Improve the economic environment

20. Establish fund for the company
to borrow money
• Stable source of capital
• Borrow money easily
• The underfinanced problem can be resolved
• Not needed to close down
• Reduce the pressure on unemployment