Can you please give me 2 questions based on this topic which I can asked during
ID: 359185 • Letter: C
Question
Can you please give me 2 questions based on this topic which I can asked during the presentation.
The Global
Financial Crisis
(2008)
By: Alex Campagne
What is a Global Financial Crisis?
A global financial crisis is defined as: A worldwide period of economic difficulty experienced
by markets and consumers. A global financial crisis is a difficult business environment to
succeed in since potential consumers tend to reduce their purchases of goods and services until
the economic situation improves.
The Global Financial Crisis that will be referred to in this presentation is the Global Financial
Crisis of 2008.
What caused the Global Financial Crisis?
The issues started in 2007 when when US consumption was larger than its output (GDP).
Steadily decreasing interest rates backed by the Federal Reserve and foreign financing fueled
the housing boom and encouraged debt-financed consumption. The ability to receive loans
easily kept demand falsely high. Loans were used mainly for buying homes. The supply of
houses increased by 6% and demand – according to population growth and lower average
incomes—should have reduced by approximately 1.4%. When supply is greater than demand,
prices fall. But that wasn't exactly the case...
What caused the Global Financial Crisis?
(continued)
bankers realized that by making financing easier, i.e.. giving out loans more readily, aggregate
demand also increases. If standards for mortgage lending were lowered, for example, smaller
down payments, credit scores and less job stability were required, more people would get loans.
What caused the Global Financial Crisis?
(continued)
how does this benefit the banks if people are unable to pay back their loans? As long as
demand for houses is kept high, prices rise, and banks would never lose out in this investment –
if a person is unable to pay the loan back, they may choose to sell their house at a profit and
repay the loan, or face foreclosure and return the asset, which will be worth more.
What caused the Global Financial Crisis?
(continued)
The ongoing demand for new mortgage-backed securities and collateralized debt obligations by
investment bankers and foreign markets facilitated the lowering lending standards. But an
increase in adjustable-rate mortgages made ARM interest rate resets more expensive for
homeowners; this also deflated the housing bubble as asset prices are usually inversely
proportional to interest rates. High-risk mortgages and an unemployment surge caused
distressed sales. Once the interest rates began to rise and housing prices fell by mid-2007,
homeowners faced foreclosure; by August 2008, 9.2% of all mortgages were either
delinquent or in foreclosure. Banks found themselves in negative equity; their liabilities
greater than their assets. To avoid bankruptcy, they wrote off their assets as more than they were
worth, claiming the market value was based on distressed values, and under-valuing their risks.
But this was unsustainable, and if one bank was to default, others would experience a fall in
their assets due to their loans to that bank not being repaid. The risk of a systemic default made
banks want to collect money and not give it out. And so the deflationary spiral began.
What is the deflationary spiral?
Receiving loans made harder –> low consumer confidence –> low capacity utilization of the
population –> low employment –> receiving loans made harder –> and so on.
Summary of the causes.
We can thus say that the present financial crisis was caused by deregulation or inadequate regulation
of investment banking, by the inadequate application of regulations that were already on the books, by
unfortunate economic policies (granting home mortgages to people who could not afford them), by economic
greed (financial firms caught in a gigantic profit-seeking scheme with insufficient risk management- i.e., profit at
all costs), and by outright fraud.
Who was to blame as the catalyst for the
2008 Global Financial Crisis?
The Global Financial Crisis started after the failure of the Lehman Brothers Investment
Banking Company.
Lehman Brothers, at one point, was the fourth largest investment bank in the United States and
their downfall triggered the crisis.
What countries were hit the hardest?
Iceland
Pakistan
Brazil
Ireland
South Africa
Zambia
United Kingdom
United Arab Emirates
How are we looking now?
As seen in the graph, the United
States (pink line) has seen roughly
a 7% GDP (gross domestic
product) increase since the Global
Financial Crisis of 2008.
(Mandilaris, The Conversation,
2017).
References
http://www.catch21.co.uk/2012/02/theover-simplified-version-what-caused-the-
2008-financial-crisis
http://www.businessdictionary.com/defini
tion/global-financial-crisis.html
Managerial Economics in a Global
Economy by Salvatore, 8th edition,
http://twopenniesearned.blogspot.com/20
09/08/8-countries-hit-hardest-byglobal.html
http://theconversation.com/six-chartsthat-show-how-much-the-world-haschanged-since-the-2007-08-financialcrisis-83477
Explanation / Answer
What are Collateral Debt Obligations (CDOs)? How this fueled the global financial crisis? How did the housing insurance and investment banking companies collude to cheat the customers? What was the role of the credit rating agencies like Standards & Poor, Moody’s, etc. and why they did not raise any alarm? They also rated such toxic products the highest rating possible, AAA? Why is their role not investigated in this entire scam?