United State Financial Crisis 2007 - 2008 ppsx

1 Macroeconomic Assignment UNITED STATE FINANCIAL CRISIS 2007-2008 Group member Name Student ID 1. Pham Thanh Hai 0851050064 2. Nguyen Quynh Mai 0851050049 3. Nguyen Huong Thuy 08510500 59 4. Dao Bich Ngoc 08510500 51 5. Duong Thi Minh Thu 0851050057 6. Dang Hong Thai 08510500 19 7. Dinh Thi Bich Phuong 0851050054 2 TABLE OF CONTENT PREFACE 3 CONTENT 4 I. SIGNALS OF FINANCIAL CRISIS IN US ON THE US ECONOMY 4 II. IMPACTS OF HOUSING/CREDIT CRISIS IN US ON THE US ECONOMY 7 1. Effects on US Financial Institution 7 2. Effect on Money Supply 10 3. US Trade Deficit Error! Bookmark not defined. 4. Impacts on US macro-economy 11 5. Global economics effects 12 III. REASON FOR THE CRISIS 14 1. The imbalance of US economy 14 2. Loosened regulation 17 IV. SOLUTIONS 18 1. Emergency economic stabilization act of 2008 18 2. Economic stimulus act of 2008 20 3. The American Recovery and Reinvestment Act of 2009 (ARRA) 20 4. Act of Fed 22 5. Development under the Acts: 23 CONCLUSION 25 REFERENCE 25 3 PREFACE The global economy has been developing rapidly and gaining many achievements which have a lot of motivating influences on the wealth of many countries in the recent decades. However, there still remain a number of difficult problems that need proper solutions brought in by the governments. Financial crisis is not out of the case. For many years now, financial crisis is deemed to offend so many countries and people including economists, brokers, bankers, policy makers, and so on. Most recently, we cannot help mentioning the worst financial crisis in the US in 2007 – 2009 ever seen not only severely damaging the US economy itself but the global economy. The financial crisis in US was directly the main reason for the following Great Financial Crisis which proceeded globally in a very complicated way and caused the worldwide destruction to quite a few giant established economies such as United States, United Kingdom, EU and so on. Therefore, no matter what politics or wealth level it may has, every country has the common responsibility to prevent the “tsunami” from spreading and damaging without control especially the developed countries. However, it depends on the particular economic characteristics of each nation like integration priority, economic scale and regime to give their own policies. All things considered, we may reach an important conclusion that the focal point of all possible solutions is what addressed radically the financial hazards related to stock market and banking system. Thence, we are going to do a thorough research into the causes, progress and impacts of the crisis in respect of the macroeconomics as well as financial and banking terms which may bring about many insightful implications for Vietnam in practical policy implementation to survive the global crisis. 4 CONTENT I. SIGNALS OF FINANCIAL CRISIS IN US ON THE US ECONOMY The US financial crisis happened worse and worse each day, while the number of entrepreneurs which collapsed or were taken over increased continuously day by day . After the plan of $700-billion-rescue package was not approve by House of Representatives, Dow Jones Index fell down to 770 points or 6.9% - the biggest decreasing daily volume since the crisis arise . (From 16.8.2008 till 8.10.2008) From 2 nd February 2007 to 24 th July 2009, 92 banks declared their bankruptcy. From 22 nd February 2008 to 29 th March 2009, 34 banks declared that they were taken over. 5 Institutions (taken over) Type of organization  worth (USD, EUR vàGBP )  Northern Rock Retailed bank and mortgage credit  Bear Stearns, New York City investment bank $2.200.000.000  Catholic Building Society mutual fund to buy house £51.000.000  Countrywide Financial, Calabasas, California Secondary mortgage credit $4.000.000.000  Alliance & Leicester Retailed bank and mortgage credit £1.260.000.000  Roskilde Bank Retailed bank $896.800.000 (kr4,500,000,000)  Fannie Mae và Freddie Mac Secondary mortgage credit  Derbyshire Building Society Mutual fund to buy house £7.100.000.000  Cheshire Building Society Mutual fund to buy house £4.900.000.000  Merrill Lynch, New York City Investment bank $44.000.000.000  American International Group, New York City Insurance company $182.000.000.000  Lehman Brothers, New York City B Investment bank $1.300.000.000 6  HBOS General financial services $21.850.000.000  Washington Mutual, Seattle, Washington Credit fund $1.900.000.000  Lehman Brothers C Investment bank $2  Bradford & Bingley D General financial services £21.100.000.000    Fortis General financial services €11.200.000.000  Dexia Public finance and retailed bank  Wachovia, Charlotte, North Carolina Retailed and investment bank $15.000.000.000  Landsbanki Commercial bank  Glitnir Commercial bank  Kaupthing Bank Commercial bank  BankWest (subsidiary of HBOS) Bank £1.200.000.000  Sovereign Bank, Wyomissing, Pennsylvania Bank $1.900.000.000  Barnsley Building Society Mutual fund to buy house £376.000.000  National City Bank, Cleveland, Ohio Bank $5.580.000.000 7  Commerce Bancorp, Cherry Hill, New Jersey Bank $8.500.000.000  Scarborough Building Society Mutual fund to buy house  IndyMac Federal Bank Credit fund $13.900.000.000  Anglo Irish Bank Bank  Straumur Investment Bank Investment bank  Dunfermline Building Society Mutual fund to buy house  Caja de Ahorros Castilla La Mancha Credit fund €9.000.000.000 II. IMPACTS OF HOUSING/CREDIT CRISIS IN US ON THE US ECONOMY In this part, we mention the effect on 5 aspects of the economy: US Financial Institution, Money Supply, Trade Deficit, National Wealth, and some economic indicators. 1. Effects on US Financial Institution Firstly, the crisis began to affect the financial sector in February 2007 8 The chart (1) above expresses the trend of changing leverage ratio or the ratio of debt over equity of 4 big investment banks in US. Though the value of this ratio is different through these 4 great banks, it is clear to point out that this ratio has trend of increasing strongly as times went by. Merrill Lynch is a typical example with the huge increase from ratio as about 20 in 2006 jumping to over 30 in 2007. So impressively, this bank jumped from just 15 up to over 30 after 4 years. In addition, as we can see from the chart, 4 of 5 banks had the ratios over 30 in 2007, compared with just 1 bank had this level of ratio in 2006 and all banks had the ratios as 20-25 in 3 previous years. This is the detailed data for the losses of many banks and financial institution . Company Business Type Loss (Billion USD) Citigroup bank $39.1 bln Merrill Lynch investment bank $29.1 bln Morgan Stanley investment bank $11.5 bln Bank of America bank $7.95 bln Bear Stearns investment bank $2.6 bln Washington Mutual savings and loan $2.4 bln Lehman Brothers investment bank $3.93 bln JP Morgan Chase bank $5.5 bln Goldman Sachs investment bank $1.5 bln Freddie Mac mortgage GSE $4.3 bln Wells Fargo bank $2.9 bln Fannie Mae mortgage GSE $0.896 bln MBIA bond insurance $3.3 bln Ambac Financial Group bond insurance $3.5 bln American International Group insurance $11.1 bln Countrywide mortgage bank $4.0 bln 9 A series of financial institution have suffered from a huge loss. According to IMF, the total losses of all mortgage loan is about 495 billion USD. During 2007, at least 100 mortgage companies either shut down, suspended operations or were sold. More and more financial firms either merged, or announced that they were negotiating seeking merger partners .(3) During 2007, the crisis caused panic in financial markets. That encouraged investors to take their money out of risky mortgage bonds and shaky equities. During 2008, three of the largest U.S. investment banks either went bankrupt (Lehman Brothers) or were sold at fire sale prices to other banks (Bear Stearns and Merrill Lynch). These failures augmented the instability in the global financial system. As a result of bankruptcy in US, people worried and withdraw their money in the bank, making the situation worse. This is the imagine of people queuing at the front door of Northern Rock bank in England, one of the first victim of the crisis. People and investors are really afraid of a collapse of financial system. 10 2. Effect on Money Supply During late 2008, the most liquid measurement of the U.S. money supply (M1) increased significantly as the government intervened to inject funds into the system.The focus on managing the money supply has been de-emphasized in recent history as inflation has moderated in developed countries. Historically, a sudden increase in the money supply might result in an increase in interest rates to ward off inflation or inflationary expectations. (3) Should the U.S. government create large quantities of money to help it purchase toxic mortgage- backed securities and other poorly-performing assets from banks? There is risk of inflation and dollar devaluation relative to other countries. However, the dollar has strengthened as other countries have lowered their own interest rates during the crisis. This is because demand for a currency is typically proportional to interest rates; lowering interest rates lowers demand for a currency and thus it declines relative to other currencies. [...]... of real estate mortgages in the United States The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world The emergence of Sub-prime loan losses in 2007 began the crisis and exposed other risky loans and over-inflated asset prices With loan losses mounting and the fall of Lehman Brothers on September 15, 2008, a major panic broke out on the inter-bank loan... just focus on the year 2007, 2008, 2009 and find that’s the very bad impacts The unemployment rate, in contrast, rise to the number of 10.2 % in the late of 2009 US economy really seriously affected by the financial crisis 4 Global economics effects Financial crisis generated in United State and quickly develop and spread to global economics shock The result was in September 2008 the industrialized... REFERENCE 1 [Company Annual Report - SEC 10 K] 2 www.recovery.gov 3 Financial Crisis 200 7- 2008 – www.wikipedia.com 4 [Vice President Joe Biden's Annual Report to the President on Progress Implementing the American Recovery and Reinvestment Act.] 5 ProPublica 6 www imf.org 7 [Khủng hoảng cho vay thế chấp dưới chuẩn của Mỹ - Bài học và một số kiến nghị - Phạm Toàn Thiện - Phòng 1217, Toà nhà Crystal, Sô... US macro-economy Next, we mention the effect of financial crisis on some other economic indicators such as GDP and Unemployment rate Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of approximately 6 percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods... banks in the United States and Europe suffered huge losses and even faced bankruptcy, resulting in massive public financial assistance A global recession has resulted in a sharp drop in international trade, rising unemployment and slumping commodity prices In December 2008, the National Bureau of Economic Research (NBER) declared that the United States had been in recession since December 2007 Several... was sparked by the outbreak of the financial crisis of 2007 2010 This figure shows us the real GDP growth rate in 2009 for many country and area in the world The GDP growth rate of US is from -4 % to -2 % Many area in the world have the GDP growth rate is negative especially the North Asia This indicated that the world is experiencing a recession 12 The financial crisis has been linked to reckless and... the USA financial markets Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the direct impact of the crisis USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets Financial institutions invested foreign funds in mortgage-backed securities USA housing and financial. .. economic stimulus intended to boost the United States economy in 2008 and to avert a recession, or ameliorate economic condition The law provides for tax rebates to low- and middle-income U.S taxpayers with the amount not less than $300, tax incentives to stimulate business investment, and an increase in the limits imposed on mortgages eligible for purchase by government-sponsored enterprises (e.g., Fannie... projected at $152 billion for 2008 3 The American Recovery and Reinvestment Act of 2009 (ARRA) In late 2008, President Obama stated that the rescue programme did not have the expected results He said that it’s a fault to only inject money to big financial institutions with purpose of stablize financial markets The American Recovery and Reinvestment Act of 2009 (ARRA) (Public Law 11 1-5 ) and commonly referred... by a circular repetition over time of the whole economy but the failures and faults of US financial and banking system The unpredictable financial hazards kept moving for a long time and created bigger and bigger “bubbles” In the last 2007 and early 2008, these bubbles come to explosion and the Great financial crisis kicked in on the global scale The triggering aftermath is the downturn of stock market . 1 Macroeconomic Assignment UNITED STATE FINANCIAL CRISIS 200 7- 2008 Group member Name Student ID 1. Pham Thanh Hai 0851050064 . the financial crisis. 4. Global economics effects Financial crisis generated in United State and quickly develop and spread to global economics shock. The result was in September 2008 the industrialized. the United States. The US mortgage-backed securities, which had risks that were hard to assess, were marketed around the world. The emergence of Sub-prime loan losses in 2007 began the crisis