In 2008, world finance faced many difficulties. With the starting point is the liquidity crisis in the US banking system. This crisis led to the collapse of a number of major financial institutions, the nationalization of many credit institutions, and a decline in stock markets around the world. Economists consider this crisis to be the worst financial crisis since the Great Depression of the 1930s. The financial crisis broke out in the US and spread globally, leading to the simultaneous collapse of many giant financial institutions, and the stock market faltered. The year 2008 saw unprecedented efforts of economies to cope with the crisis.
UNIVERSITY OF ECONOMICS AND BUSINESS VIETNAM NATIONAL UNIVERSITY FINAL ASSIGNMENT INTERMEDIATE MACROECONOMICS TOPIC: GLOBAL FINANCIAL CRISIS 2008 LECTURER : MR NGUYEN DUC BAO STUDENT : NGUYEN KHANH LINH STUDENT CODE: 19050143 CLASS CODE :INE2102-E2 July, 2021 INTRODUCTION: In 2008, world finance faced many difficulties With the starting point is the liquidity crisis in the US banking system This crisis led to the collapse of a number of major financial institutions, the nationalization of many credit institutions, and a decline in stock markets around the world Economists consider this crisis to be the worst financial crisis since the Great Depression of the 1930s The financial crisis broke out in the US and spread globally, leading to the simultaneous collapse of many giant financial institutions, and the stock market faltered The year 2008 saw unprecedented efforts of economies to cope with the crisis EVOLUTION OF THE FINANCIAL CRISIS OF 2008: In August 2007, a number of US credit institutions such as New Century Financial Corporation had to file for bankruptcy Others fell into the state of their stocks plummeting like Countrywide Financial Corporation Many depositors at these credit institutions were afraid and came to withdraw their money, causing a sudden surge in deposit withdrawals that made it even more difficult for those institutions The risk of credit scarcity is formed The real financial crisis officially broke out From the US, this disorder spread to other countries In the UK, Northern Rock Bank was reeling as depositors lined up to withdraw their deposits Faced with that situation, the US Federal Reserve has taken measures to increase the liquidity of the credit market, such as conducting open market operations to buy US bonds, government bonds, etc US government and US government agency bonds guaranteed under housing credit In September 2007, the Federal Reserve also reduced the interbank overnight lending rate (Fed fund rates) from 5.25% to 4.75% Meanwhile, the European Central Bank has injected US$205 billion into the credit market to improve liquidity In December 2007, the crisis turned more serious when year-end economic reports showed that the correction of the real estate market took longer than expected and the scale of the crisis was also wider than expected Credit starvation became apparent The Federal Reserve System attempted to sharply lower interbank rates in December 2007 and February 2008 but to no avail In March 2008, the Federal Reserve Bank of New York tried to save Bear Sterns, but failed The company agreed to let JP Morgan Chase buy it back at $2 a share, which is much less than the $130.2 a share price at its most expensive prior to the crisis The fact that the Federal Reserve Bank of New York could not save Bear Sterns and was forced to let this company be sold at too low a price has raised concerns about the ability of the government to intervene to rescue financial institutions in trouble hard Bear Stern's demise pushed the crisis up the ladder In August 2008, it was the turn of Lehman Brothers, one of America's oldest and largest financial institutions, to go bankrupt Lehman was followed by a number of other companies In September 2008, the US Senate passed the Emergency Economic Stabilization Act of 2008 allowing the US Treasury secretary to spend up to $700 billion to save the country's finances by buying back bad loans from banks goods, especially securities backed by real estate CAUSES OF THE GLOBAL FINANCIAL GIRLS 2008: 2.1 Subprime: Debt Subprime loans are loans to entities with low creditworthiness They are often poor, not have stable jobs, low social status or have a history of poor credit payments Therefore, subprime debt has a very high level of credit risk, but also very attractive interest rates This is also a solution to balance global credit capital to maximize profits However, excessive subprime lending in a short time leads to the loss of credit quality control From Figure 1, we see the percentage of US subprime mortgage lending in the year 2006 was 23.5%, the highest ever And dropped to 9.2% in 2007 when America's worst credit crunch began to erupt Figure 1: Percentage of Subprime Mortgages in the Entire 2.2 Securitization: The basic principle of securitization is to turn asset documents into products that can be sold on the stock market Any asset document can be converted: traditional credit, real estate credit, commercial credit, etc It has become an effective risk transfer instrument to implement subprime loans Securitization first appeared in the US in 1970 and has thrived in an environment of loose monetary policy since 2001 When the economy is in recession, home borrowers can't repay their loans, credit risk is transferred to bond packages with real estate credit portfolios as collateral As the crisis increases, the sale of properties increases, causing real estate prices to decrease Therefore, the value of the collateral of the bond decreases and the credit risk increases The spiral of crisis continued like that, causing stock prices to plummet 2.3 Credit rating companies: Due to the introduction of credit rating agencies, asset-backed debentures (CDOs) are very attractive to buyers, have the lowest risk, and are highly rated by credit rating agencies A series of loans valued at AAA for securitization are secondary loans, the borrower defaults, leading to a domino effect throughout the financial system Thus, as Alan Greenspan has observed: It was the securitization of low-quality home loans - not the loans themselves - that caused the global credit crisis 2.4 Structural investment tools: Many U.S credit unions have set up subsidiaries, called special purpose divisions (SPVs) to buy and sell MBS (Collateralized Securities) and CDOs This allows them to place MBS and CDOs off the balance sheet, and thus reduce the risk of being prompted by financial watchdogs Structural investment instruments (SIVs) operate in the form of short-term capital mobilization by issuing commercial paper with low interest rates, investing in asset-backed securities with high interest rates SIV companies borrow by issuing low-interest short-term securities and then lend them back by buying long-term securities, especially MBS and CDO, thereby enjoying the difference However, when the interest rate of long-term securities is lower than the interest rate of short-term securities, these SIVs suffer losses According to Moody's (2008), as of July 2008, the asset value of the SIVs is estimated up to 400 billion dollars When the subprime debt crisis occurred, and then spread to CDOs, borrowers were no longer able to pay, these SIVs had to fall into a critical situation, leading to mass bankruptcy On October 2, 2008, Sigma Finance, SIV finally collapsed 2.5 Credit loss swaps: CDS credit loss swap is an agreement between two parties in which one party pays a recurring service fee to the other and is committed to receive the full amount of the credit loan if the third party defaults As credit risks appeared more and more in the US, CDS services became popular In 2007 alone, the credit swap market had a total value of $62 trillion CDS is like an insurance policy, as they can be purchased by creditors against the risk of default by the borrower However, in practice, since there is no requirement to pledge any assets, CDS can also be used for speculative purposes As more and more US companies fail to pay their issued securities as the economic downturn deepens, the collapse of CDSs is inevitable 2.6 Buy and sell short: When speculators were sure that the shares of corporations involved in subprime lending would decline, they massively borrowed these stocks and sold out massively, creating a huge downward pressure on prices After the price drops to a certain level, they will buy and return to the lender plus a little fee, as much as the difference they will enjoy They even applied a groundless short sale method (Naked Short Sale), that is, no longer borrowing securities, but continuously ordered to sell because of taking advantage of the gap 2.7 Crisis of confidence: Joseph Stiglitz explained the cause of the crisis as a catastrophic collapse of trust Banks compete on loan levels as well as assets Complex transactions are created to eliminate risk and mask slippage in the real value of the bank's assets The whole market goes down and everyone loses Financial markets revolve around the principle of reliability, and that credibility has been degraded Lehman31's demise is symbolic that confidence has fallen to a new low and its reverberation will continue IMPACTS OF THE 2008 FINANCIAL CRISIS ON THE WORLD: 3.1 The banking and financial system: The number of banks that went bankrupt, merged, dissolved or were nationalized increased rapidly Specifically, in 2008, there were 25 banks in the US that went bankrupt, from September 15, 2008 to the end of 2008, there were 15 banks From the beginning of 2009 to July 24, 2009, the number of banks that went bankrupt increased to 64 banks From February 22, 2008 to March 29, 2009, 33 banks of the US and EU countries were acquired According to IMF data published in April 2010, the world banking industry lost 2.28 trillion USD because of the financial crisis, of which the US banking industry lost 885 billion USD Big banks in the world such as Northern Rock (UK), BNP Paribas (France) and the banking system of some other countries are also facing difficulties The central banks of the countries eased by cutting interest rates to deal with the economic downturn and injecting liquidity into the banking system LIBOR interest rates fluctuated strongly, specifically, overnight LIBOR in 2008 increased to a record 6.87%/year and in 2009 fell to a record low of 0.102%/year 3.2 Stock market: Market The stock market declined sharply, in 2008, the global financial stock market lost about 17 trillion USD Stock markets of emerging countries fell 54.72%, markets of developed countries fell 42.72% The highest decline fell in Brazil, Russia, India and China, about more than 70% Morocco and Israel were the best performing markets In some major markets from September 12, 2008 to January 12, 2008, most stock indexes Stocks of all countries fell like the US: Dow Jones fell 25.81%, Britain's FTSES 100 index fell 18.29%, Russia's RTX index fell 49.06%, etc The main reason for this situation is due to the context of the global financial crisis that made investors Investors had to sell off stocks in the financial sector as well as stocks in the industrial sector 3.3 GDP growth rate: The global financial crisis caused the world's GDP growth rate to drop sharply in 2009 Specifically, developed countries decreased from 0.9% to -3.8% GDP of developing countries dropped sharply from 6.1% to only 1.1%, In particular, the Japanese economy has a negative growth rate and is in a weak state due to its dependence on the growth rate of the US economy, on the global currency and stock markets as well as on oil prices China alone still has a relatively high growth rate, although it has decreased by 46% in 2009 On the other hand, the unemployment rate is high in most countries in the world The unemployment rate in the US increased by 6.7%, the highest level since the last 15 years European countries such as Spain, Austria, England, etc also experienced an increase in unemployment In Asia, Japan had 2.7 million unemployed people at the end of 2008 Singapore had about 13,400 workers lost their jobs in the whole of 2008 (much higher than 7,700 in 2007) 3.4 International Trade: According to the World Bank, the export value of 44 major economies in the world (currently accounting for about 75% of global trade value) decreased by about 7.4% in October 2008 and decreased by 15.4% in November/November 2008 before holding steady on December 12 and falling further 12.2% in January 2009 For the whole of 2008, world exports increased by 2% However, under the impact of the global financial crisis, world exports fell sharply to -12.5% in 2009 and then recovered in 2010 3.5 International investment: While international investment in 2007 was 13.2%, in 2008 it was 3.5% Due to the lingering effects of the crisis, global outward direct investment (FDI) in 2009 fell by 38.7% compared with 2008, to $1040 billion 3.6 The price of USD: KTTC has caused a sudden increase in USD liquidity demand of banks around the world, pushing the USD up sharply against other currencies Movement of USD from 12/01/2009 increased by 6.99% against Euro; up 18.06% against GBP ; but depreciated 17.3% against JPY and stable against CNY (SBV 2009) The US Dollar is the most popular means of payment in the world today, so global investors have bought the Dollar to improve their liquidity, pushing the US Dollar up This hurts US exports Central banks of emerging economies such as Korea, Mexico, etc had to cut interest rates to stimulate the economy This makes these currencies depreciate against the USD However, the Japanese Yen still appreciated against the USD SOLUTIONS TO THE CRISIS OF GOVERNMENTS AROUND THE WORLD 4.1 Monetary policy According to Economist Richard Swain (Swain, 2009, University of Sydney), the sharp decline in consumer spending and business confidence caused by the financial crisis, as reflected by a drop in real personal consumption down 3.8% (3rd quarter 2008) and 4.3% (4th quarter 2008) for the US economy It has led to a leftward shift of the IS Line in the IS-LM model The short-term result is a significant reduction in output and the interest rate target if held, output would fall further to Y" as shown in figure Figure Monetary policy has been attempted to stimulate growth and stabilize the global financial system With Central Banks cutting their interest rate policy significantly since September 2007 For example, the Federal Reserve (0-0.25%), the Central Bank of Japan (0.1%) %), the Bank of England (0.5%) all cut their policy rate targets to near zero By reducing real interest rates, central banks have helped stimulate domestic demand through six channels of transmission mechanism In Australia, the Reserve Bank of Australia (RBA) increased liquidity in the overnight cash market through multiple open market purchases, thereby lowering interest rates through a downward shift in the LM curve This has helped offset the leftward shift of the IS curve, encouraging the retention of output at Y"' in the short run as shown in figure Figure The expansion measure is also appropriate because the rate cut has reduced upward pressure on real interest rates from the upward movement of the LM curve due to increased risk and the risk premium helps maintain investment and Quantity For example, the RBA's 100 basis point cuts in December 2008 and February 2009 were highly relevant given the reluctance of domestic Australian banks to cut rates as credit market disruptions increased fees term insurance and credit and liquidity spreads 4.2 Fiscal policy Governments around the world have enacted expansionary fiscal policies to mitigate the impact of the economic crisis The US government has proposed a number of spending initiatives worth 1.1% of GDP to stimulate aggregate demand Other governments have also responded in kind, with the UK, France, Germany and Japan governments passing discretionary spending initiatives worth 1.5%, 1.3%, 20% and of the respective domestic GDP while in Australia the $42 billion Stimulus Plan includes targeted cash payments of $8.7 billion and $12.2 billion in December 2008 In February 2009 a $22 billion national construction plan was implemented Such spending initiatives are appropriate The first reason is that an increase in net government spending leads to a rightward shift of the IS curve representing higher output Second, the rational use of traditional monetary policies has led many countries to fall into a liquidity trap where monetary policy cannot stimulate investment further The reason is that the nominal interest rate is near zero any change in the money supply that shifts the LM curve downwards will have no effect on output as shown in figure Figure Furthermore, output below the natural level of output implies a downward adjustment of inflation expectations This poses a major risk to economies as a rise in deflation when nominal interest rates are zero raises the key interest rates A higher exchange rate shifts the IS curve and thus the AS curve to the left and down respectively, placing the economy in a downward cycle as shown in figure Therefore, the fiscal expansion measures adopted were appropriate to avoid deflation, the consequences of which were seen in the major economic problems in Japan in the 1990s Figure Expansionary fiscal policies are successfully implemented to prevent any onset of liquidity or deflationary crises and increase aggregate demand, underscoring the adequacy of fiscal responses Expansionary fiscal policies have been successfully implemented to prevent any onset of liquidity or deflationary crises and increase demand For example, financial expansion was successfully applied 1950-1970 to manage demand in Australia and a budged deficit of $4.6 billion after the 1982-83 recession helped the economy recover In 1989-1990 a financial expansion contributed to Australia's growth of more than 3.5% during 1990 Furthermore, financial expansion in the United States in 2001 reduced both the duration and length of the recession after the bursting of the tech bubble and the Japanese government's pump-and-prime measures helped stimulate the economy The domestic economy stagnated in 1999, reducing the real GDP growth rate to 0.6% 10 THE RESULTS OF ECONOMIC POLICIES 5.1 The economy of US: Stable growth over the same period last year around 2% since 2010 and inflation in July 2013 is 2%, creating a basis for the FED to expect to reduce QE3 package in the fourth quarter of 2013 and stop completely in the second quarter of 2014 5.2 The economy of EU: The economy exited the longest recession in history, for the first time since the fourth quarter of 2011 the euro area grew positive but also only 0.3% qoq, lower than average 0.35 % Two economic giants in the Euro economy, Germany and France, had positive changes in the first quarter of 2013 and in the following quarters, private enterprises in this area had more orders than before in the following quarters years ago 5.3 UK economy: Growth is more positive, reaching 0.7% in Q2/2013, higher than the average rate of 0.65% since Q3/2007 5.4 Chinese economy: China's economy is likely to grow lower than the 7.5% plan due to the increasing bad debt situation China's growth slowed from 7.9% in Q4/2013 to 7.5% in Q2/2013 5.5 Japan's economy: The continuous economic growth in recent quarters in 2013 has shown a good signal for the economy of this country The nikken 225 index is up 3% as of September 9, 2013, Nomura Securities strategist Hisao Matsuura said that this positive data shows that the Japanese economic recovery is on the right track Along with the increase in capital spending by companies in Japan, household spending has also increased and the labor market has strengthened, he said 5.6 Indian economy: 11 The world's second largest national economy is facing the risk of a systematic decline in growth due to weak infrastructure, administrative procedures are the main cause of the wave of capital withdrawal and growth Growth has declined continuously since 2010 (down from 9.4% in Q1/2012 to 4.8% in Q1/2013) 5.7 Vietnam Economy: Regarding economic growth GDP growth in the third quarter of 2013 was higher than expected (up 5.54% compared to the second quarter of 2013), contributing to GDP growth in the first months of 2013 (5.14%) slightly better than same period in 2012 (5.1%, based on 2010 constant prices) However, industrial production is still lower than the same period last year, while agricultural, forestry and fishery production reached the lowest level in the past 10 years (the first months of 2013 was only 2.4%) Enterprises still face many difficulties, especially domestic enterprises compared with FDI enterprises Inflation: The inflation continues to be controlled at a low level compared to previous years (CPI in months increased by 3.53% compared to the beginning of the year) ) The overall balance of payments continues to be in surplus and is forecasted to have a surplus of 1.5-2 billion USD in 2013 However, the balance of payments surplus decreased much compared to 2012 when the surplus in the first months was 1.5 billion USD, down 79% over the same period; balance of capital surplus of 2.56 billion USD, down 37% over the same period Import and export grew quite well but mainly concentrated in the FDI sector Import and export in months increased by 14.7% but the State sector only increased by 3.1% Similarly, imports increased by 14.9% but the state sector only increased by 4% CONCLUSION: This recession showed however economic theories are developed, new theories are necessary, at least within the financial sector Moreover, relationship between economies of 12 states increases risks and threats; when an excellent economy like America economy is facing to a crisis, it is not just for that country It may well be global So, new theories in international finance and economics are predicted 13 REFERENCE LIST N.Gregory Mankiw (2013) “Macroeconomics” Published by: Worth U.S government printing office (2011) “Financial Crisis Inquiry Commission Report” Tran Thi Thuy Tram (2016) “Research about the financial crisis of 2008” Iran Trading Development Organization (2009)“Solutions in some Selected Countries for Contrasting to the Financial Crisis” Swain, Richard (2009) “Policy Responses to the Global Financial Crisis” RBA Economics Competition, Australia VnEconomy (2013) “The economy of the world years after the financial crisis of 2008” 14 ... the global financial crisis that made investors Investors had to sell off stocks in the financial sector as well as stocks in the industrial sector 3.3 GDP growth rate: The global financial crisis. .. many giant financial institutions, and the stock market faltered The year 2008 saw unprecedented efforts of economies to cope with the crisis EVOLUTION OF THE FINANCIAL CRISIS OF 2008: In August... world Economists consider this crisis to be the worst financial crisis since the Great Depression of the 1930s The financial crisis broke out in the US and spread globally, leading to the simultaneous