2008 Crisis

INTRODUCTION

FINANCIAL CRISIS MORTGAGE INDUSTRY

• A financial crisis is defined as a scenario in which the • This industry deals with the market of loans for
value of financial institutions or assets drops rapidly. people and organizations to buy the property.
• A financial crisis is often associated with a situation • Also, it provides a market for the mortgages that are
in which investors sell off assets or withdraw money brought by Financial Institutions and traded as asset-
from accounts with the expectation that the value of based securities.
those assets will drop if they remain at a financial • It is of two types: Primary Mortgage Market and
institution. Secondary Mortgage Market.

Global Financial Crisis Primary Mortgage Secondary Mortgage

2008 Market Market
 MORTGAGE INDUSTRY AFFECTING CRISIS
9/11 Last 70 years,
terrorist Real Estate was Overleveraging
attack growing

Historically Higher
2001 Dot Low Mortgage
low Interest Investment flow
Com Bubble Interest Rate
rates into Mortgage
Industry

Foreign
Investment High no. of
from China & people applying
Japan for loans
Institutions turn High demand
towards Subprime for houses –
Housing Bubble
borrowers and ARMs
starts
Existing Owners
and
New Owners
 MORTGAGE INDUSTRY AFFECTING CRISIS

Community Credit Rating Government

Reinvestment Act Agencies Deregulations

Financial
Institutes turn Weak & Innovations &
towards Subprime Fraudulent Complexities
borrowers and ARMs practices (MBS, CDO,
CDS)

Predatory Irrational
Lending Speculations
practices
Further increase
Expansion of the in the number of
Housing Bubble people applying
for loans
 MORTGAGE INDUSTRY AFFECTING CRISIS
Supply of
Federal Houses in
ARM Rates Market increases
rates
increases
increases
House
Defaults increases
Prices
leading to Higher
Decreases
Subprime loans Foreclosure rates
starts defaulting
Mortgages
becomes more
than House
Housing Price
Bubble
bursts

Banks do not Investors do Financial Crisis

get paid not get paid happens
 SUBPRIME CRISIS 2008 TIMELINE
Federal reserve began to
• Bush Announced Tax Rebate
purchase MBS from GSE’s
plan was signed
Federal Fund Rates set to
historical low target of 0 –
• Fed announced Term 0.25%
Auction Facility Program
releasing $50 billion on two
diff dates

• Rating Agencies downgraded

0ver 100 bonds backed by
subprime mortgages

• Fed rates kept on falling

Firms Like : HSBC, • Treasury and Federal reserve Board authorized to lend
Deutsche Bank, Merrill
to Fannie Mae and Freddie Mac. Later on both of them
Lynch, UBS, Citigroup,
Barclays, Bear Stearns, were put in Govt. conservatorship and also proposed
BoA, Morgan Stanley $700 Billion Bailout to stabilize US Financial System
announced write downs
and losses • Lehman Brothers file for Chapter 11 and Merrill Lynch is
bought by BoA for $50 Billion

• Federal Reserve announces $85 Billion rescue package

for AIG to prevent bankruptcy for 80% stake in the firm

• Asset backed Commercial Paper Money Market Fund

Liquidity Facility was established by fed lending $540
Billion
 CRISIS AFFECTING MORTGAGE INDUSTRY
Unemployment
FACTORS Rate THEIR EFFECTS
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• Notable example is UK Mortgage Industry
New Regulatory after Greece Crisis.
Actions

Decrease in Mortgage
Interest Rate
 IMPACT ON INDIAN ECONOMY
1. On 10th October 2008, 250,000 crores was wiped from Indian share market

2. It took a toll on our Trade Deficits because of drying up of remittances and Foreign Institutional Investor in
initial phase which led to withdrawal worth $5.5 Billion taking place

3. Indian Export fell by 9.9% in Nov 2008 as manufacturing sector – leather, textile, gems and jewellery was
hard hit by this crisis, widening the month end trade deficits by over $10 Billion. Due to the above, 50,000
artisans employed in jewelry industry lost their job which affected the 3000 Crore handloom industry and
reduced volume of handloom exports by 4.6% in 2007-08

4. Exchange rate Depreciation happened with outflow of FII’s which led to depreciation in Indian rupee by 20%
against US Dollar
 RESEARCH SOURCES
1. A Summary of the Primary Causes of the Housing Bubble and the Resulting Credit Crisis: A Non-Technical Paper by Jeff
Holt, The Journal of Business Inquiry, 2009

2. Global financial crisis; ‘relationship between the Mortgage loan rates and Dow jones industrial average stock index
and the implication for the Nigerian capital market by Njiforti Peter, European Scientific Journal, Vol. 8, May Edition,
2012

3. https://commons.wikimedia.org/wiki/File:Subprime_Crisis_Diagram_-_X1.png

4. http://www.elitefeetkc.com/economic-crisis-essay.html

5. https://www.thebalance.com/2008-financial-crisis-timeline-3305540

6. https://www.thebalance.com/2009-financial-crisis-bailouts-3305539

7. https://www.thebalance.com/2007-financial-crisis-overview-3306138
US CHINA TRADE WAR
INTRODUCTION
 REASONS
• Unfair Trade practices of
China costing US jobs

• High Trade surplus of China

wrt to US

• Rise of Protectionism in US
TIMELINE
 FUTURE
• Most forecasters still have Chinese growth at 6.5 percent or higher for 2018. However, if the trade
war continues to escalate, there is a risk of capital outflow from China precipitating a financial crisis.

• For the US, in general, the trade war will destroy some jobs in export sectors and create some jobs in
import-competing ones. This is a bad tradeoff because export jobs are generally higher productivity
and pay.

• If the U.S. persists in the trade war, then American firms are likely to be shut out as China opens up.
By 2019, the negative effects of the protection are likely to be stronger while the influence of the
fiscal stimulus wanes.

• China has a basic offer in place: It is willing to buy more agricultural products, energy and high-tech
manufacturing if the U.S. is willing to sell. The US hasn’t accepted it yet
Next stop…..Europe
Brexit
Introduction

 Brexit is a word which has been formed from the merger of two words- Britain and exit that refers to the exit of UK from
the European Union.

 Two terms- "Hard Brexit" and "Soft Brexit" have been much in use. These terms mainly refer to the closeness of UK's
relationship with the European Union post-Brexit.

 Hard Brexit refers to the UK refuse to compromise

on issues like free movement of people so that EU
could be maintained as a single market.

 Soft Brexit means that UK could retain membership

of EU as a single market for goods and services and
allows free movement of people to some extent.
Brexit Timeline
Reasons for Brexit

Immigration - People are also Sovereignty- Another reason for Brexit

People who are supporting
concerned about rapid immigration is the rise of nationalism across the
Brexit base their support on
to the UK. They cite sovereignty and world. There’s a growing distrust of
factors like the global
democracy, and they want that the multinational financial, trade, and
competitiveness of British
UK will control its borders and there defence organizations created after
businesses and European
should be some restriction on the World War II. Opponents of EU believe
Debt crisis.
number of people coming there to that these organizations take control
live or work. away from individual nations.
Overall Impact

Impact of exit on the UK and EU’s economy

Pound slumped 15% lower against the dollar and 10% against euro.

Predictions of downfall in GDP hasn't been proved very accurate. UK economy has
grown by 1.8% in 2016 that has been second after Germany's 1.9% among world G7
leading industrialised nations.

Inflation has increased to 2.3% in February which is highest in three and half years, but
unemployment has fallen to 4.8% which is lowest among 11 years.

Annual house price increases have fallen from 9.4% in June to 7.4% in December.

Britain can remain well integrated with Europe — is to model itself on Norway or
perhaps Switzerland, two countries that are not part of the E.U. but maintain free
trade within the bloc.

Decline in business confidence and a rise in uncertainty, paired with limited responses
by central banks, makes a recession a major risk in Britain and in the rest of Europe
and the United States.
Impact on Brexit on Indian Economy

Positive implications

Plunge in the British pound Falling currency also Brexit will compel Due to political Due to Brexit, there will be
will make study and travel helps Indian the UK to seek more and financial changes in immigration policy that
in the UK less expensive companies as well uncertainty
robust trade would favour high skilled workers
especially for Indian as individuals to go across the
relationship with European from India. Britain might face a
students. for less expensive
India. As India is one Union, Indian dearth of high-skilled EU workers
real estate options
which are otherwise of the highest stock market if the movement of people from
very expensive growing GDP’s in the has become an EU is stopped. This situation will
world, UK will try to attractive support Indian workers.
enter into a trade destination for
foreign
agreement with
investment
India.
Impact on Brexit on Indian Economy

Negative implications

India owned businesses in the UK likely to be hurt Earnings of IT companies Remittances to Britain is one of the
likely to be affected. India will suffer major market for
800- No of Indian owned businesses in UK because of Indian exports like
6.6-14%- Revenue of top depreciation of textiles, clothing,
Lot of people have been employed in these Indian IT companies to their British pound. machinery and
businesses UK businesses Remittances from jewellery. This
UK to India in 2015- export rate might
Biggest challenge would be to find another European3-8% hit would be taken by 16 is $ 3.9 billion decrease after Brexit
city as their entry point companies in their earnings
due to Brexit
ASIAN CRISIS
1997
INTRODUCTION
• Countries like Thailand, South Korea, Hong Kong, Singapore, Taiwan,
Indonesia maintained very high growth rates (8-12%) between 1960s-1990s

This was mostly due to:-

• High interest rates
• Export driven economy
• Rapid industrialization
• Forex inflows (due to recession in US)
• Currencies pegged to the US Dollar
THE BUBBLE
• Thailand’s economy was fueled by hot money and development went
in a largely uncontrolled manner

• Debt-GDP reached over 180%

• Very high leverage and exposure to forex risk

• Country became excessively dependent on exports

THE TIPPING POINT
• The US Economy began to recover from recession in the 1990s

• It began to raise US Interest Rates to reduce Inflation

• Therefore, it made the US a better destination for capital inflows than South
East Asia which had been attracting money through short term interest rates

• Increase in US Rates also increased the US dollar, which made exports

costlier for the Asian countries and less competitive
THE DOWNTURN
• Capital flight became a major issue, with capital now flowing to the US

• Asset prices began to collapse, companies began to default, credit crunch and
bankruptcies started

Government Actions:-
• Raised interest rates to prevent capital flight
• Started buying excessive domestic currency at fixed rate to maintain peg
• Changed currencies to floating, which increased depreciation and worsened
the crisis
ROLE OF IMF
• IMF started giving rescue bailout packages to the most affected economies, tying the
aid to financial reforms

• IMF imposed Structural Adjustment Packages (SAP) on the nations, asking them to
raise interest rates and reduce government spending

CRITICISM
• Despite the IMF bailing out the countries, it received criticism from some quarters
• This was mainly due to the reforms which made the Asian countries follow ‘Fast-
Track Capitalism’
• Characteristics were high domestic interest rates, liberalization of the financial sector
and fixed currency rate with the dollar to ensure investor confidence
Dot Com Bubble
Early • Advent of the World
Wide Web
90s
• Launch of the
information age
Late 90s with sharp increase
in the use of the
Internet

• Large scale rise of

1997- Internet companies
• Soaring valuations
of any company
2001 with the suffix
“.com”

• Loss making
Early companies were
grossly overvalued,
and now investors
00s were going bankrupt
as capital ran out
Where did it all go wrong?

As Internet penetration Ordinary investors were American media, respected

increased, demand for “.com” attracted to the supernormal business publications like WSJ
companies increased rapidly, profits during the boom and & Forbes and even the
thus bringing in high risk even quit their daily jobs for Federal Reserve added fuel to
taking venture capitalists full time trading the fire by promoting the
positive vibes

The companies were spending The unprecedented levels of

big on growth and market cash brought in lavish
penetration, rather than look spending
at sustainable business
Market statistics
Paramete 1997-
1996 2001
r 2000
Nasdaq Index ~1000 ~5000 ~1100

Number of Tech
34 522 13
IPOs

Total Amount
<$1 billion $44 billion $7 billion
Offered

• Stocks during the dot com bubble were grossly overvalued, to the tune of 200-300% of
their initial offering, including companies which were not set to make any profit for at
least another 3-5 years
Impact on global & Indian economies

US stock markets corrected themselves before the bubble could engulf

markets across the globe leaving other economies in much better conditions

Indian IT firms had sound fundamentals and business models

IT stocks in India lost some market cap, but were largely insulated due to this
 Investors became a lot more cautious about investing
into tech companies

Th The
Aftermath Overall funding into start-ups went down severely

afterm
The crisis caused a lot of people to lose money, fuelling
policies towards deregulation and tax cuts which
ultimately led to higher risk taking by mortgage firms
References
• https://en.wikipedia.org/wiki/Dot-com_bubble
• http://www.investopedia.com/terms/d/dotcom-bubble.asp
• http://cnnfn.cnn.com/2000/11/09/technology/overview/
• http://www.thebubblebubble.com/dotcom-bubble/
Steps of Demonetisation

Online
Transaction
Usage of There was no limit
demonetized in online
notes transaction
Withdrawal Demonetized through NEFT,
Limit (Cheque) notes could be IMPS, Mobile
used in wallets etc
Withdrawal Withdrawal limit- government
Limit hospitals, rail-
• Rs. 10000 against a
station, bus-stand,
Daily withdrawal cheque or slip
Depositing old airport within 3
notes limit- • Weekly withdrawal days after the
• Rs. 2000 per limit- Rs. 20000 announcement
• Last date to deposit old ATM per person against a cheque
notes was 30th
• Rs. 4000 per
December, 2016
person from
• Deposit limit- Rs. 2.5 bank
lakh per person for
savings and Rs. 12.5
lakh for current account
3
 Benefits of Demonetisation
Cash-less economy
Unavailability of cash, increasing cash-less
transaction, lowering tax-evasion with promote
cash-less transaction
Curbing Domestic Black Money
Curbing Providing
Easy Loan Rs. 2.5-3 lakh crores of domestic black-money was
Domestic
expected to be accounted, penalty on individual
Black Money
deposit over certain limit
Countering
Inflation Providing Easy Loan
Rs. 15.4 Crores to be returned into bank, easy loan
ards to private investors, boosting economy
Going tow nomy
eco
Cashless Cu
Countering Inflation
fin rbing
an
cin terr Rs. 400 Crores of fake currency, large chunk of black
g o
& r money would be eradicated, decreasing price-level
co
‘Demonetisation is a useful rr up (Quantity theory of money)
method of flushing out black tio
n
money, given that a large Curbing Terror-financing & Corruption
percentage of cash holding is Terror-financing, real-estate scam, corruption in
in these two denominations’ - Demonetisation election would be reduced
Arvind Virmani 4
Demonetisation _ Downsides & criticism

Tackling Black Economy Misery of Farmers

• Domestic black money is less than 5% of total • Insufficient funds to middlemen, delay in
black money harvesting, loss due to wastage
• no effect on black economy • Loss of sales of 25% -50%

Distress to Poor People Tackling Counterfeit Currency

• Rural India is 90% cash-based • 0.03% of total demonetized currency
• No ATM in many villages • One-time cleansing, no advanced security
Demonetisation feature
Downside
Cashless Economy is difficult & Criticism Tackling Inflation
• 21% smartphone penetration in India • Above 90% of total demonetized notes already
• 9% in rural India have access of internet returned and more to come
• So, inflation is not tackled

Harassment of Common People World bank Lowered GDP Forecast

• Inefficient recalibration of ATMs • Private investment has fallen in fear of
• 100 people died in ATM queue uncertainty
• GDP forecast lowered to 7% from 7.6%

‘Demonetisation in a booming economy is like shooting at the tyres of a racing car’ – Jean Drèze 5
 Cost-benefit analysis & comments

Benefits
• Rs. 4 billions of counterfeit
Real Implication on Black money Costs currency was eradicated
Black-money hoarders did find way out by • People standing in queues lose Rs. • It was expected to impose penalty
converting their money into some other asset or
by some other means 150 billion of wages due to not on Rs. 3 Trillion of black money
working • Already 90% of money returned
Cashless Way • Extra cost of banks-Rs. 351 billion without getting penalized
• Printing & Transportation of old • Tax was collected for some part of
In some metro cities, now, the option of cashless notes- Rs. 168 billion the returned money, which had
transactions are more than ever
• Loss of enterprises due to 50 days- evaded tax previously
low foot fall- Rs. 615 billion
Government Intention
• Total Cost- Rs. 1.28 trillion for 50
Government-intention was perceived to be good, days
although, many argued that this move was taken to
improve the health of PSU banks

‘The value of the demonetisation program isn't particularly that

the black money is caught. It's that the general population believe
that something is being done to catch the black money’-
6
Forbes.com
Appendix
Sources:
 http://www.forbes.com/
 http://www.financialexpress.com/
 www.cmie.com
 http://www.thehindubusinessline.com/
 http://www.thehindu.com/
 http://www.internetworldstats.com/
 http://economictimes.indiatimes.com/
 http://indianexpress.com/
 http://timesofindia.indiatimes.com/
 http://www.hindustantimes.com/
 http://www.huffingtonpost.in/