The economic crisis in US in 2008 It could be said that the picture of the world economy in 2008 was a picture with bleak color blocks. In which, the US economy is the first drawing. In the economic field, the most mentioned event from the second half of 2008 up to now was the crisis that originated in the US and spread around the world, leading to a serious decline of the global economy.
Introduction It could be said that the picture of the world economy in 2008 was a picture with bleak color blocks In which, the US economy is the first drawing In the economic field, the most mentioned event from the second half of 2008 up to now was the crisis that originated in the US and spread around the world, leading to a serious decline of the global economy 80 years after the Great Depression, America was facing a serious crisis However, if the previous crisis was violent and tragic, the current crisis in the United States is much larger and more complex If the crisis of the early 1930s happened because it was not planned, the financial structures were too sketchy, the US government did not react appropriately and promptly, this time it has come even though people We already know it and try to prevent it, it continues to increase despite the decisive measures to be taken If the crisis of 1929 - 1932 was limited to a few developed countries, mainly the United States and Western Europe, the current crisis has spread to the whole world Despite the fact that the US economic-financial crisis has passed, the implications for many countries' economies have been severe, and many countries are still experiencing difficulties it had left behind This is a crisis in many regions, stemming from the secondary housing credit crisis, which was a direct cause of the global economic crisis of 2008-2010 The world was surprised when the American crisis occurred No one could have imagined that a Planet Monument, a locomotive of the World, would fall so rapidly and cause such a slew of problems for the entire world So, what's the cause of this disaster? What is the status of the situation? What are the ramifications? Was there any action taken by the US administration to deal with the crisis? Following that, there is a summary of the US economic crisis of 2008 The economic crisis in US in 2008 - The Federal Reserve Bank of New York attempted, but failed, to salvage Bear Sterns in March 2008 The corporation agreed to let JP Morgan Chase buy it back for $10 per share, which is far less than the $130.2 per share it was before the financial crisis The fact that the Federal Reserve Bank of New York was unable to save Bear Sterns and was obliged to allow the company to be sold at an unacceptably low price has raised questions about the government's ability to intervene in troubled financial companies hard The death of Bear Stern accelerated the situation - July 1, 2008, Bank of America acquired Countrywide Financials (one of the largest sellers of mortgage backed securities) - July 11, 2008, IndyMac bank was placed under the control of the Fed and then declared bankrupt - September 8, 2008, Freddie Mac and Fannie Mae were nationalized (with total assets of more than trillion USD) - September 15, 2008, Lehman filed for bankruptcy (largest fortune in US history: $600 billion) - September 15, 2008: This is the worst day on Wall Street since the market reopened after the terrorist attacks on the twin towers in the US in September 2001 Lehman Brothers collapse marked bankruptcy the largest in the US; Merrill Lynch was acquired by Bank of America Corp; American International Group (AIG) - the world's largest insurance group insolvent due to losses related to mortgage debt - September 16, 2008, the Fed was forced to save AIG with $ 85 billion in bailout (its assets are more than trillion USD) - September 25, 2008: Washington MutualInc (WaMu), one of the largest banks in the US, collapsed due to a huge bet on the mortgage market With $307 billion in total assets, WaMu has become the largest bank failure in US history - September 29, 2008: The House of Representatives unexpectedly did not approve the plan to rescue the US financial market - October 2008: The US Senate approved a rescue plan of 780 billion USD The reason for this is that these organizations are bankrupt A huge number of personnel in the financial and real estate sectors were laid off as a result of a string of companies in the finance and real estate sectors defaulting The sharp decline in real estate and stock prices depleted the assets of the middle class, the basis of the US economy's purchasing power, resulting in a drop in aggregate demand for high-end and long-lasting items such as cars, as well as entertainment services Car companies like GM, as well as a large number of its subcontractors, went bankrupt as a result of this Many huge entertainment venues, such as those in Las Vegas, are likewise deserted Many financial and non-financial enterprises have gone bankrupt, increasing the number of unemployed individuals and causing a contraction in aggregate demand for consumption and investment, resulting in a negative spiral Because the United States is the world's financial center, consumer market, and largest debtor, the financial and economic crisis in the United States spread quickly to other economies, resulting in a global economic crisis Unregulated finance, in other words, always leads to bubbles Systemic risk is always a result of macroeconomic instability When these two forces combine, they produce large-scale luck, which always encourages greed and irresponsible behavior in unregulated financial institutions The main institutional cause of an economy as powerful as America's being pushed into catastrophe is uncontrolled greed The cause of this economic crisis in the US in 2008 First, the crisis stemmed from subprime lending It might be said simply that Americans have long had the habit of borrowing money from banks to shop for houses, with contract terms ranging from 10 years to 30 years It is a traditional action But in the past 10 years, due to the strong development of the housing market, banks and lending institutions have rushed to market to create substandard loan contracts and encourage even people who cannot afford it financial ability also means borrowing money to buy a house In addition, lending institutions "invent" very low rate of interest rate contracts in the early years and so adjust them to market interest rates As a result, a large number of loan contracts fail to collect Even more dangerous is that Wall Street financial institutions have pooled these real estate loan contracts as collateral to issue bonds to the international financial market These bonds are called “Mortgage backed securities – MBS”, a derivative financial product backed by mortgaged real estate loan contracts And it is bought by banks, insurance companies, hedge funds, pension funds all over the world without knowing that the important estate loan contracts used as security are ineligible Meanwhile, within the past few years, the real estate market has continuously cooled down, borrowers who have not been able to repay their debts are also finding it very difficult to sell real estate to repay their debts, and even if they sell, the worth of their debts will be reduced Real estate has also dropped to the point where it is not enough to pay off outstanding loans As a result, an outsized number of property loan contracts accustomed secure MBS bonds are bad debts, MBS bonds depreciate in the secondary market, and are even no longer tradable in the market making banks and investors holding these bonds not only suffer heavy losses and lose their solvency This causes stock prices to plummet Investment banks, while not holding all of the chance, directly or indirectly maintain certain portfolios of securities associated with land As a result, a series of investment banks reported business losses one after another The rapid escalation of the US current account deficit from 1996 to 2006 was the second key cause of the 2008 financial crisis Large and expanding current account deficits in the United States affected labor markets, international commerce, and asset values, finally leading to lower interest rates This is important since the event resulted in a significant reduction in interest rates thanks to a complicated process When Country A sends more of its currency to Country B than Country B sends back to Country A, there is an accounting deficit Excess countries, such as China, increased their holdings of US dollars in the years leading up to the crisis and used those dollars to buy US dollar–denominated assets, especially US Treasury securities Many other “surplus” countries used similar measures to prevent their currency exchange rates from rising against the dollar It's also worth noting that a run-up in deficits like this is only possible in the absence of a gold standard As a result, the policy study must go all the way back to President Nixon's decision to decouple the US from the gold standard in 1971 Policy effects, clearly, can have very long tails Foreign central banks of surplus countries exhibited a strong preference for purchasing the sovereign debt of deficit countries in the run-up to the 2008 financial crisis This attitude is understandable; it stops a country's currency from rising, hence increasing the country's capacity to export goods to deficit countries like the United States As a result of the increased demand for government debt, bond prices rose and interest rates fell As a result of the decreased interest rates, the housing and mortgage markets were stimulated to take on even more debt (capturing more demand) This phenomenon appears to have been fueled by the so-called Reverse Plaza Accord, during which in April 1995, the Federal Reserve agreed to increase the value of the dollar (relative to the Japanese yen and the German mark), which prevented US deficits from returning to equilibrium The US dollar's value against the yen and mark increased by around 50% in the 18 months that followed This shift in exchange rates signaled the beginning of the end for the current account, which had been largely balanced for the previous 25 years Bond prices rise as international demand for Treasuries rises, but yields fall Some economists suggest that current account balances not have a discernible impact on interest rates, but it is harder to argue that the large, escalating bid on Treasuries from foreign governments did not have a control on sovereign bond prices or yields Moreover, some argue that money simply flows around an economy, so whether US consumers or foreign governments spend it matters little This study overlooks a crucial divergence between the private sector in the United States and foreign central banks: Foreign central banks have a strong preference for US Treasury bonds and other so-called low-risk instruments, whereas the private sector does not The impact on interest rates, therefore, is best associated with to this cumulative incremental foreign demand for US Treasuries relative to what the US public may need demanded had this money stayed inside the U.S Third, the crisis was caused by the lack of a strict monitoring mechanism The fact that people have a habit of borrowing money from banks to buy real estate, while companies have money, but banks encourage people to borrow their own money has led to the following consequences: Companies offer portfolio loans to investment banks based on which to issue shares to borrow money Since then, banks have had a large amount of capital to lend to people It also meant that companies' money is easier to reach those in need As for investment banks, on the basis of their loan portfolios, they are divided into low-risk and high-risk categories, depending on credit ratings Therefore, investors also have many options for their risk, they can even choose stocks with no credit rating with the ability to earn high returns but with great risks Therefore, lending risk has been transferred from lenders, financial companies, to banks and investors Rich investors in the world have poured a lot of money into buying stocks of this type, thus providing a huge amount of capital for the hot US real estate market Fourth, a crisis caused by a crisis of confidence In 1932, receiving America in a state of panic after the Great Depression, Franklin D Roosevelt implemented comprehensive and radical reforms in the law and economic management apparatus In the end, he also succeeded brilliantly in bringing America to overcome fear, regain confidence Nearly 80 years after Franklin D Roosevelt's government reforms, America is once again in danger of a serious crisis of confidence Investors are not only concerned about the investment climate but also have lost confidence in the government's ability to monitor the market Just days before the US government was forced to save Fannie Mae and Freddie Mac, Hank Paulson, the US Secretary of the Treasury also declared that the two companies had enough capital to withstand the crisis This crisis impacted many different areas in the US as follows The biggest and heaviest consequence is to destroy productive forces and push back the development of the world economy First of all, for the United States In the US, the financial crisis turned into an economic crisis, production declined, unemployment increased, thus being considered a "3 in 1" crisis The crisis bankrupted a series of banks and financial companies, including the leading banks and financial companies in the United States Bear Stearn - one of the leading securities brokerage and investment banking groups on Wall Street, has been operating for 85 years in the US financial market, suffered heavy losses when the housing market fell, on March 16, 2008 declared bankruptcy, was bought by Morgan Chase for $2 a share Lehman Brother, the fourth largest investment bank on Wall Street with 158 years of operation, on September 15, 2008, had to file for bankruptcy protection due to losses, total debt amounting to $ 768 billion Bankruptcy losses also occurred with a series of other large banks and financial companies such as IndyMac Bancorp Inc, Freddie Mac and Fannie Mae, Merrill Lynch & Co, City Group, National Bank of Commerce, Bank of Clarke County… The US stock market wobbled, many stocks fell dramatically Before the bankruptcy, shares of Lehman Brother bank fell 94%, shares of Freddie and Fannie fell 90%; from the beginning of 2008 to March 2009, AIG's shares fell 79%; shares of City Group, Bank of America, Goldman Sachs fell more than 60%, etc All four important indexes of the US stock market, namely the DowJone, S&P 500, Nasdaq and FTSE indexes all fell seriously, a huge decline The sharpest decline since the 1930s Production and consumption in the US also fell into a very difficult situation The auto manufacturing industry, one of the most important manufacturing industries in the US economy, saw a sharp drop in revenue The top three American automakers, General Motors, Ford, and Chrysler, all suffered heavy losses In January 2008, Nortel Networks Corp, one of the largest telecommunications equipment corporations in the US, in February 2008, Lyondell Chemical, one of the largest chemical manufacturers in the US, had to file for insurance Bankruptcy… Economic recession, serious decline in consumption caused a series of large US retail companies such as Circuit City Store Inc, Sharper Image Corp, Steve & Barry's LLC, Macy Inc, Ann Taylor Stores Inc, etc bankruptcy or apply for bankruptcy protection Production stagnation, layoffs caused US unemployment to increase month by month and reach the highest level in 25 years, from 2.59 million people in 2007 to 3.84 million in 2008 and 4.61 million in 2008 February 2009 P AS2 AD AS1 E2 P2 P1 E1 Y2 Y1 Y Initially the economy is at the equilibirium E1 P = P1; Y = Y1 Aggregate supply decreases and aggregate supply curve shifts to the left The economy reaches the new equilibirum at E2: P = P2; Y = Y2 P2 > P1: Price level increases Y2 < Y1: Total output decreases From the US, the crisis shook the financial market, the stock market, bankrupted many banks, financial companies, and many large economic groups in many countries around the world, causing a serious decline in financial services international trade, financial and investment relations and the world economy in general Royal Bank (Scotland), Kaupthing, Landsbanki, Glitnir (Iceland), Northern Bank, mortgage lender Brandford & Binglay (UK), IKB Bank, DZ Bank, Deutsche Bank, Saxony LB ( Germany), Yamato Life Insurance Co (Japan) … and many other banks are victims of the US financial crisis, forced to ask for help from the government or nationalized by the government Research by the Asian Development Bank (ADB) shows that, in 2008, the global economic crisis caused a loss of USD 50 trillion in the world's total financial assets, of which developing countries Asian development was the worst hit with a total loss of $9.6 trillion, higher than the total value of GDP in a year for these countries Although there are only more than 20 countries officially declared to fall into economic recession, in fact most of the countries in the world are affected, facing difficulties and slowing down their growth to varying degrees According to the forecast of the World Bank (WB), in 2009, the world economy will grow only 0.9%, the growth rate of OECD countries is -0.3% (in which, the US is - 0.9%, the euro area - 0.6%), the growth rate of emerging and developing economies is only 4.5%… The Fund's world economic forecasts International currencies, Organization for Economic Co-operation and Development (OECD), Citi Group or Reuters also have the same downward trend Another consequence of the current global financial crisis and recession is the bankruptcy of the liberalizing economic policy that the United States has implemented for many years and wants to impose on the world After the crisis, in the US and around the world, economic policies of governments will be more balanced between market regulation and state regulation; the state's economic intervention and regulation on the economy will be more; State supervision over business activities of enterprises, especially the financial system, banking system, and stock market will be tighter than at present The crisis also changed the correlation between countries and major economies in the world with the decline in the role of some countries (such as the US, Japan, ) and the emergence of some other countries (such as China, India, Russia, Brazil, etc.) Therefore, there is a requirement to change the world economic and financial system with the dominant role of the US for many years, to change the structure and operating regulations of the IMF, WB, and WTO ; seek other currencies to replace the exclusive role of the US Dollar as an international reserve and settlement currency The process of changing to shape the world economic and financial system in a more democratic and reasonable direction is being gradually implemented This is of course a long process The crisis also created pressures and opportunities for countries to re-evaluate the strengths and weaknesses of their economies, consider renovating, perfecting economic institutions and economic structures, renovating equipment technological equipment, develop new energy sources, new production technologies that consume less energy and raw materials, cause less environmental pollution, produce new products with high scientific and technological content, have high competition and high added value… improving the quality, efficiency and sustainable development of the economy With this trend, it is hoped that after the crisis, the world economy will enter a new stage of higher, more efficient and sustainable development The US economy entered a recession at a fast rate of minus 0.3% in the third quarter of 2008 Consumer spending, which contributes to two-thirds of economic growth, fell the most since 1980 The federal budget deficit in fiscal year 2008 surged to a record $454.8 billion, more than three times the deficit of $161.5 billion in fiscal 2007, mainly due to costs defense increased sharply, especially for the two wars in Iraq and Afghanistan The federal budget deficit in fiscal year 2009 is forecast to reach trillion USD According to the US Department of Labor, the current unemployment rate of this country is 6.5%, the highest in 14 years According to forecasts, the US economy will continue to decline in 2009, the unemployment rate may rise to 8%, while the reserves and real estate values decrease sharply, the confidence index of the American people decreases down to record levels This makes the world's number one economy fall into a more serious recession In order to reduce the crisis and stimulate the economy, the US government has applied a number of timely measures as follows a, Federal Reserve (Fed) The Fed began helping as soon as the secondary housing credit crisis erupted, cutting interest rates and expanding MBS purchases The US Federal Reserve (Fed) continued to implement monetary easing measures to improve liquidity for financial institutions until the situation deteriorated into a financial crisis in August 2007 Specifically, the interbank overnight lending rate has been reduced from 5.25% in installments to 2% in less than months (September 18, 2007 to April 30, 2008) This interest rate then continued to decrease and on December 16, 2008, it was only 0.25%, a rare near-zero interest rate The Fed also lowers the discount rate by conducting open market operations (buying back current US government bonds) The Federal Reserve proposed a financial plan to loosen cash in mid-December 2008 e LM*1 LM*2 E2 E1 IS*2 IS*1 Y Y1 Y2 Event: The government conducts expansionary fiscal policy (G increases or T decreases) ↑AE = C + I + G↑ + NX Aggregate expenditure increases → The IS* curve shifts to the right and puts upward pressure on exchange rate To keep the exchange rate unchanged, the central bank must sell domestic currency, which increases money supply and shifts the LM* curve to the right The economy reaches the new equilibrium at E2: e = e ; ̅ Y = Y2 e = e ̅: Exchange rate is unchanged Y2 > Y1: Total output increases Conclusion: Expansionary fiscal policy leads to a higher total output under fixed exchange rate system b, Government Faced with a serious financial crisis, the Bush administration presented Congress with a $700 billion fiscal package Initially, a majority of US Democrats rejected the US House of Representatives, claiming that it was impossible to waste money to save too many troubled financial companies However, the plan to spend $700 billion was changed to focus on initiatives that benefit a wide number of people in order to boost consumption The Senate approved it, reviving the economy in the process President Bush signed the Emergency Economic Stabilization Act of 2008 on October 3, 2008, authorizing the $700 billion stimulus plan The US government, whether Republican or Democrat, can only intervene in economic life indirectly through the two monetary and financial systems The government can cut interest rates under the monetary system so that borrowers can pay rents or firms can borrow to grow their operations, so creating jobs This measure aims to keep property values from plummeting while also lowering the number of unemployed people e LM*1 LM*2 IS* Y1 Y Event: The government conducts expansionary monetary policy => Money supply increases => The LM* curve shifts to the right and reduces e To prevent the fall in e, the central bank must buy domestic currency, which reduces Money supply and shifts LM* back left e = e : ̅ Exchange rate is unchanged Y = Y1: Total output is unchanged Conclusion: Expansionary monetary policy leads to an unchanged total output under fixed exchange rate system Conclusion The global economic crisis of 2007-2009 had a significant influence on all parts of the US economy It was the catalyst for the worldwide economic crisis of 2008-2010 This situation is costing the United States and many other countries a lot of money This crisis marked the deterioration of the United States' economic and financial position, as well as other difficulties and challenges that are lowering the United States' position and image in the international arena, hastening the transformation of the world economy to a more multipolar system, and promoting the trend of gradually forming a multipolar world in the future However, there were numerous encouraging signals in 2010 that the economy was beginning to emerge from the depths of the crisis, albeit slowly Economic stimulus initiatives could take up to ten years to bring the US economy back to normalcy As aggregate demand falls in Europe, many economies are still struggling While monetary and fiscal policy could have had a more positive impact in reality IMF Managing Director Christine Lagarde noted that the international community has overcome numerous mistakes in the past when reflecting on the 10-year journey of Lehman Brothers' bankruptcy Many governments have increased bank safety by erecting numerous control obstacles in the purchasing and selling of financial products Although policymakers have taken many steps to make the economy safer in the ten years since Lehman Brothers' bankruptcy, there is still considerable work to be done to ensure that a comparable disaster does not happen again References Asian Development Bank Report (3/2009), “Global Economic Crisis and Emerging Economies: Negative Effects and Losses” Andreas Jobst (2008), “What is Securitisation” Austin Murphy (2008), “An Analysis of The Financial Crisis of 2008: Causes and Solution, Small Business Administration – SBS Publication, USD” Cleveland Fed, “The Great Recession in retrospect” Liyun Jin (2009), “Stimulus to Fund Transportation” Mankiw, Gregory (2010), “Marcoeconomics ed Worth Publishers” Martin Neil Baily, “The Origins of the Financial Crisis” Manoj Singh (2021), “The 2007-2008 Financial Crisis in Review” Michel Beaud and Gilles Dostaler (2008), “Economic thought from Keynes, Tri Publishing House, Hanoi” 10 Michael (2009), “Creditors Back CIT’s Bankruptcy” 11 M Alex Johnson (2008), “Bush signs $700 billion financial bailout bill” 12 Hà Linh (2008), “Các ngân hàng trung ương Âu Mỹ đồng loạt giảm lãi suất” 13 Hoang Toan (12/2008), “American financial crisis - an inevitable consequence of liberalism, Journal of Modern Defense Knowledge” 14 “ The Chrysler Bankruptcy”, Thời báo New York 15 “Financial Crisis Inquiry Commission Report”, U.S goverment printing office