[THE 2008 WORLD

FINANCIAL CRISIS]
Paula Cern
Fabin Lpez
Luis Montero

What features of the global economy, and especially of the

US, exposed the world to the major crisis that started in 2008?

Federal Fund Rates below the neutral interest rate the fed maintain low rates at
real value of 1%, which creates huge increase on
borrowing and low or negative savings

Financial deregulations which leads to certain freedom and low

government control in banks and financial institutions whom of
course are the base of the model under these type of government

Since the dot com crisis the government took measures to increase
the investment and create certain tax exemption to capital gains
mostly but creating fiscal risk and huge government expenditures
and of course increasing the level of debt.

II
III

Exceed liquidity coming from China, fuel the housing market giving strong
incentives to buy property of course through mortgage, without any financial
analysis, because it was given in the base on the price of the land not the
property per se.

IV

What was the chain of events that finally triggered it?

2000

2001

Dot.com
crisis

Prices
of
Fed
lowered
interest
rates
houses
to 1.75%
increase

US economy started
to recover

Lenders were convinced

that a housing turndown
was remote

2006
Houses were 70%
overvaluated

Fed lowered funds rates 11

times from 6.5% to 1.75%
Flood of liquidity in the
economy
Subprime borrowers get
easy acces to mortgages

2006

Prices of
Houses prices
houses
fall
increase

The market reached its

10% of all mortgages

Americans inrease

Borrowers stop paying

maximum peak

spending trustin in the

high value of their homes

Adjustable rate

mortgages increase rates

were in foreclosure

because of the increase

of the interest rates

House market saturated

2003
Housing market
takeoff
Wrong undervaluation of
the risk of the loans
Houses prices were rising
steadiily
Less requirements for a
mortgage

2007
Credit crunch
Financial institutions had

huge losses because the

houses that they received
were devaluated

Banks become afraid to

lend money to anybody ,

including other banks

2004

Pricesand
of
CDOs
houses
MBSs
securities
issued
increase
This products attracted

hungry high risk investors

Over optimistic analysis of

the future houses prices

2008

Prices of
Large banks
houses
problems
increase
Lehman Brothers was
sent to bankrupcy

Bear Stearns and Merrill

Lynch were sold

Goldman Sachs and

Morgan Stanley became

commercial banks

Why did this problem propagate into something so big?

U.S. consumption
accounted for
more than a
third of the growth in
global consumption
between 2000
and 2007

the net debt of

commercial banks
located in the
United States to their
foreign offices
increased by $575
billion

The failure of Lehman Brothers was a severe shock to US

financial markets, because it undermined the prevailing
assumption that no systemically-important financial institution
would be allowed to fail, even if it was not a bank

The U.S. unemployment rate

increased to 10.1% by
October 2009, the highest
rate since 1983 and roughly
twice the pre-crisis rate.
The reduction in their buying
power affected all the world

63 percent of all Americans

wealth declined in that period.
77 percent of the richest
families had a decrease in
total wealth, while only 50
percent of those on the
bottom
of
the
pyramid
suffered a decrease.

Foreign banks bought collateralized US debt. Many of

these subprime mortgage loans were rebounded
into CDOs and sold onto financial institutions around the
world. For example, many British and European banks had
exposure to these mortgage loans. Therefore, when
defaults rose, European banks lost a lot of money.
The banking system is internationally linked. When some
banks started to lose money they became reluctant to
lend to other.

What policies were used to fight it?

The president of U.S. subsided

700,000 millions to the banks to
provide
liquidity
to
the
economy.

Elimination of one size fits all

rate in the European union.

2
4

New monetary policy in the

USA in which the interest rates
and loans were highly control.

EU and U.S. reduced

economic help to developing
countries.

Why did events happening mostly in the US end up

affecting the entire world, including your own country?
Due to the fact that Latin America economy is
aligned to China economy the effect of the crisis
was manageable. The main affected areas were:

The decreased price

of the oil
Higher prices in import goods
that were use forindustrialization and technology

Less exportation
to the USA
Lost of confidence
in the dollar

How did the global crisis propagate so badly

into Europe??

Price of euro went down

Fall of the European Stock Market
Freezing credit for the private sector, lost of short
term liquidity

Increased of unemployment and increased

of inflation
Increased in deficit
The most affected countries were PIIGS
(Portugal, Italy, Greece and Spain)

What will be the long-term scars from this crisis?

There will be a recessions the world

consumption would be slow (i.e. China)
therefore the future will be developed
by small consumption as well as small
grow.
The pressure and
banks and financial
more extensive the
be stabilized but
profitability as well.

legislation on the
institution would be
system its going to
might affect the

Lack of confidence in the market as

well as in the banks, that would take
some time to heel and of course
unemployment rate would decrease
and the interest rates are going to be
higher to stimulate saving.

According to Moody's: in the way the

crisis is passing the interest rate would
recover their value to positive values in
real terms; the excess liquidity would be
control by the central banks and they will
benefit on financial integration

Graph 1

U.S. Median price of houses sold

Source: U.S. Department of Commerce

Graph 2

Source: World Bank

Unemployment rate USA

Graph 3

U.S. real Interest rates

Source: U.S. Federal Reserve

Graph 4

U.S. properties with foreclosure activity

Source: U.S. Foreclosure Market Report

Graph 5

U.S. Subprime Lending 2004-2006

Source: U.S. Census Bureau, Harvard University State of the Nations Housing Report

Graph 6

Source: World Bank

GDP % of growth

Graph 7

Source: World Bank

GDP % of growth of U.S. vs. L.A, Ecuador,

Colombia and Costa Rica

Graph 8

Target federal funds rates

Source: Federal Reserve Board

Graph 9

Source: World Bank

Central Government Debt %GDP

Graph 10

Source: World Bank

European Stock Market

Graph 11

2007

Source: World Bank

Euro price (2007 2008)

2008

Graph 12

Source: World Bank

UNEMPOYMENT RATE
USA vs. European Union

BIBLIOGRAPHIC REFERENCES

Bernanke, Ben.Poltica Monetaria y la burbuja inmobiliaria. Annual

Meeting of the American Economic Assosiation. Atlanta Georgia. Enero 3,
2010.
Reye, Gerardo. Moslares, Carlos. La Union Europea en crisis:2008 2009.
Problemas del Desarrollo. Junio 2010, Vol 41, num. 161.
Dooley, Michael.. Etl. Las dos crisis de economa internacional.CEMLA.
National Bureau of economic. Oct-Nov 2009.
Bumachar, Joao. Goldfajn, Ilan. America Latina durante la crisis: el papel
de los fundamentos.Revista Monetaria. enero- junio 2013