US RECESSION 2008(HOUSING BUBBLE)

Deepankar Khare

BEGINNING OF THE FIASCO

• Glass-Steagall Act,1935 was replaced by Gramm–Leach–Bliley Act,1999

• Relation between Real Street & Wall Street (Extreme Capitalism)

• Effects of DOT COM bubble

• Global Investments

• Greed of Wall Street Investors

Commercial Banks

Insurance

Agencies

Investment

Banks

Post 2000s

• FEDERAL Reserve declined the interest rate to 1% from 4% to encourage spending.

• Potential Investors willing to invest but interest rate is very low.

• Housing investment begins where loans were provided to non secured citizens also

•Prime Mortgages & Sub Prime Mortgages

• Collateralized Debt Obligations (CDO’s)

• Credit Default Swaps

• Role Of Insurance agencies and Rating Agencies

• Greed of 1% resulted into collapse of Whole Economy.

• Mahatma Gandhi: “The world has enough for everyone's need, but not enough for everyone's greed.”

SUB PRIME MORTGAGES

Loans provided to people who have poor record of income or poor credit history.The Brokers got commission from the investment bankers to get them borrowers.

Collateralized Debt Obligations (CDO’s)

The bundle of mortgage backed securities tied up by the commercial banks to invest them in the market with three layers 1. AAA ratings2. AA Ratings3. Unrated

BUBBLE BURST IN 2008

•Sub-Prime Mortgages stopped paying EMI’s which in case they lost their houses.•The houses were available as auctions to recover the bank’s loan.•But no buyer to buy the houses as most of the people have house now.•Economics: More Supply Less Price•The House prices started declining.•As the Prime mortgages who were paying the Interest on Loan for Houses was observing that the amount of EMI became more than the amount of the house.•Prime Mortgages also stopped paying for the interest.

This created a stagnation in the economy, as there was more houses to sell and no one is wiling to buy the house.

Involvement of Credit Rating Agencies & Insurance Agencies

• Major Credit Rating Agencies like Moody’s and Standard and Poor’s (S&P) were involved in making this scam possible.• Rated AAA or AA to the sub prime mortgages as welll.• Insurance Agency Like American International Group (AIG) insured all the CDO’s and made money via commission.

Nobody ever thought of the Burst, because all things were going smoothly

POST RECESSION

• Govt. Bailed Out Companies that were TOO BIG TO FAIL.

• AIG, Freddie MAC & Fanny MAE.

• Quantitative Easing by Federal Reserve – Ben Bernanke

• TARP organized by US Govt. (Trouble Assets Relief Program)

• Occupy Wall Street (OWS) movement by citizens of USA.

•USA’s GDP fell to -3.91% post 2008.

•Most people think that the big bank bailout was the $700 billion that the treasury department used to save the banks during the financial crash in September of 2008. •The Special Inspector General for TARP summary of the bailout says that the total commitment of government is $16.8 trillion dollars with the $4.6 trillion already paid out.

•This is a story about lies, cheating, and a multi-faceted corruption which was often criminal.

Impact on WORLD’S ECONOMY

• Sovereign FUNDS injected by ICELAND in US Companies.

•The total debt was around 200% of their GDP.

• Most of the European Countries were affected by the Recession of 2008,Including The Netherlands, The UK, Spain, Norway.

• Asian Countries like China, India (ICICI), Indonesia. •Australia and New Zealand were also the victims of the bubble.

•US Government replaced Gramm–Leach–Bliley Act,1999 by Dodd–Frank Wall Street Reform and Consumer Protection Act,2010.

•Introduced barrier in transactions between Commercial banks, Investment Banks, Insurance Agencies.

SUGGESTED READINGS & MOVIES

• The Black Swan: The Impact of the Highly ImprobableAuthor: Nassim Nicholas Taleb

• The BIG SHORT

•The Wolf of Wall Street