Beruflich Dokumente
Kultur Dokumente
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Name 1. Pham Thanh Hai 2. Nguyen Quynh Mai 3. Nguyen Huong Thuy 4. Dao Bich Ngoc 5. Duong Thi Minh Thu 6. Dang Hong Thai 7. Dinh Thi Bich Phuong Student ID 0851050064 0851050049 0851050059 0851050051 0851050057 0851050019 0851050054
TABLE OF CONTENT
PREFACE...................................................................................................................................3 CONTENT ..................................................................................................................................4 I. II. 1. 2. 3. 4. 5. III. 1. 2. IV. 1. 2. 3. 4. 5. SIGNALS OF FINANCIAL CRISIS IN US ON THE US ECONOMY ................................4 IMPACTS OF HOUSING/CREDIT CRISIS IN US ON THE US ECONOMY ....................7 Effects on US Financial Institution ...........................................................................7 Effect on Money Supply ..........................................................................................10 US Trade Deficit ............................................................. Error! Bookmark not defined. Impacts on US macro-economy .............................................................................11 Global economics effects .......................................................................................12 REASON FOR THE CRISIS ......................................................................................14 The imbalance of US economy ...............................................................................14 Loosened regulation ...............................................................................................17 SOLUTIONS..............................................................................................................18 Emergency economic stabilization act of 2008 .....................................................18 Economic stimulus act of 2008...............................................................................20 The American Recovery and Reinvestment Act of 2009 (ARRA) .........................20 Act of Fed .................................................................................................................22 Development under the Acts: .................................................................................23
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.
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 February 2007 to 24 July 2009, 92 banks declared their bankruptcy.
nd th From 22 February 2008 to 29 March 2009, 34 banks declared that they were taken over. nd th
investment bank
$2.200.000.000
51.000.000
7.100.000.000
4.900.000.000
Investment bank
$44.000.000.000
Investment bank
$1.300.000.000
HBOS
$21.850.000.000
Lehman Brothers
Investment bank
$2
21.100.000.000
Fortis
11.200.000.000
$15.000.000.000
Landsbanki
Commercial bank
Glitnir
Commercial bank
Kaupthing Bank
Commercial bank
Bank
1.200.000.000
376.000.000
Bank
$5.580.000.000
Credit fund
$13.900.000.000
Bank
Investment bank
Credit fund
9.000.000.000
II.
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 Citigroup Merrill Lynch Morgan Stanley Bank of America Bear Stearns Washington Mutual Lehman Brothers JP Morgan Chase Goldman Sachs Freddie Mac Wells Fargo Fannie Mae MBIA Ambac Financial Group American International Group Countrywide Business Type bank investment bank investment bank bank investment bank savings and loan investment bank bank investment bank mortgage GSE bank mortgage GSE bond insurance bond insurance insurance mortgage bank Loss (Billion USD) $39.1 bln $29.1 bln $11.5 bln $7.95 bln $2.6 bln $2.4 bln $3.93 bln $5.5 bln $1.5 bln $4.3 bln $2.9 bln $0.896 bln $3.3 bln $3.5 bln $11.1 bln $4.0 bln
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.
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 mortgagebacked 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.
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During a January 2009 speech, Fed Chairman Ben Bernanke described the strategy of lending against various types of collateral as "Credit Easing" and explained the risks of inflation as follows: "Some observers have expressed the concern that, by expanding its balance sheet, the Federal Reserve is effectively printing money, an action that will ultimately be inflationary. The Fed's lending activities have indeed resulted in a large increase in the excess reserves held by banks. Bank reserves, together with currency, make up the narrowest definition of money, the monetary base; as you would expect, this measure of money has risen significantly as the Fed's balance sheet has expanded. However, banks are choosing to leave the great bulk of their excess reserves idle, in most cases on deposit with the Fed. Consequently, the rates of growth of broader monetary aggregates, such as M1 and M2, have been much lower than that of the monetary base. At this point, with global economic activity weak and commodity prices at low levels, we see little risk of inflation in the near term; indeed, we expect inflation to continue to moderate."
(3)
3. Impacts on 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. The U.S. unemployment rate increased to 10.2% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964. This is the chart showing changes in GDP and unemployment rate during the crisis and forecasting for the future in comparison with Canada. The figure is collected from the IMF website:
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(6)
, from 2007 to 2009, the GDP growth rate dramatically fell. We just
focus on the year 2007, 2008, 2009 and find thats 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.
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The financial crisis has been linked to reckless and unsustainable lending practices compounded by government intervention and the growing trend of securitization 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 market. As share and housing prices declined many large and well established investment and commercial 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 economists have predicted that recovery may not appear until 2011 and that the recession will be the worst since the Great Depression of the 1930s.
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III.
1.
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payments once the initial grace period ended would try to refinance their mortgages. Refinancing became more difficult, once house prices began to decline in many parts of the USA. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default. As more borrowers stop paying their mortgage payments, foreclosures and the supply of homes for sale increase. This places downward pressure on housing prices, which further lowers homeowners' equity. The decline in mortgage payments also reduces the value of mortgagebacked securities, which erodes the net worth and financial health of banks. This vicious cycle is at the heart of the crisis.
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those issuing mortgages were no longer required to hold them to maturity. By selling the mortgages to investors, the originating banks restocked their funds, enabling them to issue more loans and generating transaction fees. This created a moral hazard in which an increased focus on processing mortgage transactions was incentivized but ensuring their credit quality was not.
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2.
Loosened regulation
On the other hand, IMF did not agree with these above reasons. In an announcement on 6/3/2009, IMF believed that the main reason for the US recession is the undisciplined situation of financial system. IMF Chief Economist said the imbalance in the US economy is only an indirect reason
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2.3 Pipe-laying
The US authority used two companies (Fannie Mae and Freddie Mac) to carry out demagogy. Before 1968, these two companies had a duty of insuring for people who had low salaries to encourage banks to lend people money to buy houses. Normally, people can buy houses only if they have the amount of capital greater than 20% of house price. In 1968, two companies became joint stock company under the House of Representatives authorization. However, they are not taxed because they are patronized by the government. In 1992, the 102nd Congress under the George H. W. Bush administration weakened regulation of Fannie Mae and Freddie Mac with the goal of making available more money for the issuance of home loans. Congress also wanted to free up money for Fannie Mae and Freddie Mac to buy mortgage loans and specified that the pair would be required to keep a much smaller share of their funds on hand than other financial institutions. Whereas banks that held $100 could spend $90 buying mortgage loans, Fannie Mae and Freddie Mac could spend $97.50 buying loans. Finally, Congress ordered that the companies be required to keep more capital as a cushion against losses if they invested in riskier securities. In 1999, the US House of representatives even crossed out the conditions to buy house: people did not have to pay in full within two years and the interest rate was lower than one in the market. The aim of these actions is to court the belief of the poor for the election.
IV.
SOLUTIONS
The macroeconomic policies and financial rescue plans were issued by the government of Bush President very early. Before the $700 billion programme, the Federal Reserve (FED) injected hundreds of billions of dollars to protect many huge corporations from bankruptcy. Wall Street Rescue Plans were continuously issued. However, the effectiveness has been still inadequate.
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GDP. The financial solution of this package is to create the Troubled Asset Relief Program (TARP) Troubled Asset Relief Program. The Secretary of the Treasury established the Troubles Assets Relief Programme to purchase troubled assets from financial institutions. The Office of Financial Stability is created within the Treasury Department, consulting with the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Secretary of Housing and Urban Development.. when running the program. According to the programme, $700 billion would be injected to the financial market.The Treasury Secretary had immediate access to the first $250 billion. Following that, an additional $100 billion can be authorized by the President
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2.
This was an act of Congress enacted in February 13, 2008, providing for several kinds of 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 Mae and Freddie Mac). The total cost of this bill was projected at $152 billion for 2008.
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provide long-term economic benefits. To stabilize State and local government budgets, in order to minimize and avoid reductions
in essential services and counterproductive state and local tax increases. The Act is nominally worth $787 billion. It specifies that 37% of the package is to be devoted to tax cuts equaling $288 billion and 18% or $144 billion is allocated to state and local fiscal relief (more than 90% of the state aid is going to Medicaid and education). 45% or $357 billion is allocated to federal social programs and federal spending programs. The Act also includes expansion of unemployment benefits and other social welfare provisions, and domestic spending in education, health care, and infrastructure, including the energy sector. The following are details to the different parts of the final bill:
The American Recovery and Reinvestment Act of 2009 distributed the $787 billion as follows: Category Tax Benefits Contracts, Grants, Loans Total Recovery Act Funds $288B $275B Funds Paid Out $162.7B $97.4B
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$224B
$124.9B
4. Act of Fed
FED played a major role in the rescue plan. The Federal Reserve, the central bank of USA, in partnership with central banks around the world, has taken several steps to address the crisis by injecting money into the economy, and reduce interest rate. These solutions are helpful in stabilizing the real estate market, increasing production and consumption, creating job, boosting net export and then result in a recovery and development. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve's response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." The Fed has taken the main action as follow:
from 5.75% to 2.25%. This took place in six steps occurring between 18 September 2007 and 30 April 2008. In December 2008, the Fed further lowered the federal funds rate target to a range of 0-0.25% (25 basis points). Central banks have also lowered the interest rates (called the discount rate in the USA)
banks remain liquid. These are effectively short-term loans to member banks collateralized by government securities.
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Created a variety of lending facilities to enable the Fed to lend directly to banks and non-
bank institutions, against specific types of collateral of varying credit quality. These include the Term Auction Facility (TAF) and Term Asset-Backed Securities Loan Facility (TALF) In November 2008, the Fed announced a $600 billion program to purchase the MBS of
the GSE, to help lower mortgage rates. However Ben Bernanke also stated that: when the economy begins to recover, that will be the time that we need to unwind those programs, raise interest rates, reduce the money supply, and make sure that we have a recovery that does not involve inflation.
- According to figures provided by those who received grants and loans from the plan, 595,263 jobs were created or saved by the plan in the final three months of 2009, the White House said in late January. The White House Council of Economic Advisers estimated there would have been 1.5 million to 2 million fewer jobs in 2009 if not for the stimulus funds.
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- The Congressional Budget Office estimates the package is responsible for employing up to 2.4 million people.
- In January, the U.S. employment rate stood at 9.7 percent. A year earlier, when Congress was negotiating the stimulus plan, it had just reached 7.7 percent.
- Although the GDP of the whole year 2009 ($14,256.3 B) still decreases, in the fourth quarter of 2009 U.S. gross domestic product grew 5.7 percent, with two quarters of growth bringing hope that the economy was pulling out of recession.
- It also creates jobs and strengthens social programs. The plan still has $61.5 billion to outlay for these projects, which include developing high-speed rail, creating more energy efficiency in buildings, updating health information technology, scientific research grants.Although everything is not clear now, the final results are expected to be positive in the long term.
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CONCLUSION
In summary, US financial crisis 2007 2009 has great impact to its whole macroeconomic states and that of the global economies. The phenomenon is not really caused 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 with decreasing stock price, the following bad macroeconomic indicators of GDP, CPI and unemployment, and the consecutive collapse of a series of giants in banking and financial intermediaries in the US and many other nations. Even though US government has introduced many attempts to save the whole economy from destruction, most of the intervention is temporary and restricted in some fields. The Great Crisis is being curbed but it does not stop. Nowadays, the crisis is still the worry of the global financial regimes and people are trying to fix it.
REFERENCE
1. [Company Annual Report - SEC 10 K] 2. www.recovery.gov 3. Financial Crisis 2007-2008 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. [Khng hong cho vay th chp di chun ca M - Bi hc v mt s kin ngh - Phm Ton Thin - Phng 1217, To nh Crystal, S 2000 ph South Eads, Arlington, Virginia 22202, Hoa K ]
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