The Effects of the Current Financial Crisis. - PowerPoint PPT Presentation


PPT – The Effects of the Current Financial Crisis. PowerPoint presentation | free to download - id: 57b3e2-MDc1N


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation

The Effects of the Current Financial Crisis.


The Effects of the Current Financial Crisis. House Prices and Mortgages As we saw, the price of housing was driven by anticipation of rising capital value, not the ... – PowerPoint PPT presentation

Number of Views:82
Avg rating:3.0/5.0
Slides: 27
Provided by: rand194


Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: The Effects of the Current Financial Crisis.

  • The Effects of the Current Financial Crisis.

House Prices and Mortgages
  • As we saw, the price of housing was driven by
    anticipation of rising capital value, not the
    need or demand for houses.
  • Thus there was no real demand for houses
    justifying the insane prices.
  • Once this is realized, then prices dont just
    fall, they collapse.

House Prices and Mortgages
  • People take out mortgages based on the value of
    the property.
  • If the value falls, the mortgage remains the
    same, so the buyer is paying more than the
    property is worth.
  • This is called Negative Equity.
  • This has a psychological factor.

House Prices and Mortgages
  • The buyers used the increased value of the
    home, as prices rise to take out Home Equity
    Loans, to buy, e. g. cars.
  • All this vastly increased the amount of domestic
  • This debt grew out of irrational exuberance or
    false expectations of eternal growth.

Debt Fright.
  • As house prices were rising rapidly, banks loaned
    to people with inadequate income or prospects.
  • Why? Because they could sell the house for more
    than they borrowed, and get out of debt.
  • After all, There is no better investment than
  • Wrong. False confidence.

Debt Fright
  • As house-prices fell, people now realized that
    they had investments they could not afford, and
    could not sell for enough to cover their debts.
  • Builders and Developers, who had been building
    millions of houses, suddenly found that they had
    houses they could not sell.

Debt Fright.
  • Even if the buyers, who had unsupportable debt,
    wanted to sell their house, they couldnt.
  • Rental took over from purchase.
  • The buyers could not afford to pay their
    mortgages, and so they defaulted, which panicked
    the banks, and they tried to cover their losses
    by seizing the houses. Foreclosure.

  • The banks have a totally short-term cash-flow
    perspective, and so they moved to foreclose.
  • But the banks are not in the business of selling
    houses, and so they tried to sell foreclosures as
    fast as possible at whatever price.
  • This further depressed house prices, and worsened
    the situation.
  • If a house is foreclosed, the houses around it
    lose their price. Spiral.

Bank Debt
As a result, nobody knows what the banks are
worth, and so they lose their value, and share
  • The key factor in the developing crisis is the
  • They do not know how much bad debt they are
    holdinghow many more people will default?
  • They are making this worse with foreclosure!
  • Since they do not know how many bad debts they
    have, they dont lend anything to anyone.

Mortgage Banks
  • In some countries there are banks that
    specifically lend to home owners.
  • They collapsed like a house of cards, especially
    in Britain.
  • Lines of people were seen trying to take all
    their money out of the Bank ( a run on the
  • The Banks did not have the money.

  • People now start to panic, this causes the total
    market to collapse.
  • People stop spending.
  • The big items go firstcars, fridges etc.
  • This reduces demands, and puts people out of
  • Further reduces demand.

  • Growth comes to a stop.
  • Bank paralysis leads to economic paralysis.
  • The Finance Companies who had loaned billions to
    banks to fuel the idiotic housing bubble, needed
    their money back now.
  • That finally ruined the banks, and many of the
    financial inst.

External Factors Energy
  • As the housing boom rose, there was an explosive
    growth in the price of energy.
  • Oil went from 40 bbl to 150.
  • This ruined sectors of the car industry (SUVs)
    and people panicked even more about the ability
    of their income to cover the cost of living.

Trade and Revenue.
  • During the growth madness of the 1990s and early
    2000s, the economy was driven by Consumerism.
  • The goods for this demand were made increasingly
    by the cheap labor of China.
  • US ran HUGE trade imbalance with PRC. China used
    its HUGE income to buy Treasury Bonds.

Trade and Revenue.
Credit CrunchParalysis
  • In this model, if consumers stop buying, the
    whole thing stops, in the USA and China.
  • US government cannot raise tax levels, and cannot
    raise money through Bonds.
  • Plus, very low interest rates do not encourage
    private investors.
  • Low interest rates also encourage scams (Ponzi
    schemes) Madoff.

  • Low interest rates to encourage borrowing,
    suppress deposits (saving) by the
  • Banks still having a problem not knowing how much
    debt they have.
  • Paralysis.
  • Fear of unemployment further suppresses

Falling Share Value
  • As demand goes down, the value of companies goes
    down along with consumer confidence and profit
  • Many people have invested in shares, and so have
    their pension funds.
  • So they see their savings evaporatefurther
    confidence loss.

Sell Everything!
Currency Slides
  • With the lack of confidence, the collapse of
    banks and the eroding value of shares, this has a
    serious effect on the trading value of the
    currency, especially the British pound.
  • In a global crisis, of course, all currencies
    would slide, canceling out the effect. But some
    economies worse than others.

Pound Exchange Rate
  • Governments struggle to save their currencies by
    deflecting billions into supporting the currency,
    which is more taxpayer money, and deflecting
    money from investment.
  • As currency devalues, it makes the exports of
    that country more attractive, and imports more

  • In declining demand, there is a rush to sell at
    any price and so there is a rapid decline in
  • This further depresses the profit margin of
    companies, and unless it results in increased
    demand, the company is likely to go out of
  • This was key element in US Depression of the

Downward Spiral
  • Closure of retailers leads to unemployment.
  • Rising unemployment leads to further depression
    of demand.
  • Which leads to further closures of retailers (one
    per day in the UK over Christmas).
  • Which leads to unemployment among manufacturers

Social and Political Effects
  • As unemployment grows, there is pressure on the
    governments for Protectionism.
  • This was demonstrated by the Buy America clause
    in the second Bail-Out proposal.
  • This could start a Trade War, but it sets
    politics against economics.

A Quote
  • Mr. Putin, an unlikely source
  • do not react to the crisis with unrestrained
    economic selfishness.
  • Another possible mistake is excessive
    intervention by the state in economic life.
  • It shows the bankruptcy of the law of the
    jungle capitalism that no longer invests in
    companies and job creation, but instead makes
    money out of money in a totally uncontrolled way
    (Martin Schultz, Chairman of the Socialists in
    the EU Assembly.)

  • As unemployment grows, then workers increasingly
    resent the presence of immigrant workers when
    there is competition for jobs.
  • This can become violent and again puts serious
    pressure on the politicians.
  • We can see this in the UK, France Poles,

Effect of Developing World
  • Many of the developing countries export raw
    materials, and the demand for these will fall, as
    manufacturing falls.
  • AID and investment will also fall, and these
    countries cannot afford this loss.

  • Banks need to lend, but wont
  • Confidence needs to be restored, but how?
  • Mortgages need to be stabilized
  • House prices need to relate to real demand
  • Spending needed to get the economy moving again.

Its better you dont ask