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2007-2009 Financial Crisis

Money & Currency
by

Michael Johnson

on 17 December 2014

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Transcript of 2007-2009 Financial Crisis

1999-2001
2009-Present
2007
2007-2009 Financial crisis
Roots of the Crisis
Leverage, Profits and Risk


2004
2006
2008-09
Overview
How does our financial system work

Events leading up to the 2007-2009 financial crisis

What caused the recession

What happened during the recession

What's happening post recession
Money & Currency
The dot-com bubble (also referred to as the dot-com boom, the Internet bubble

FED made borrowing easier by pushing the federal funds rate down to 1%

2000-2007 The global pool of fixed-income securities increased from approximately $36 trillion in 2000 to $80 trillion by 2007


House prices in the United States soared by 60% to 90%

Loans securitized, transformed into marketable securities when the are packaged together into bond-like instrument. ie. mortgage-backed security (MBS)

Banks became insolvent ie. Lehman Brothers and Bear Sterns

The U.S. stock market peaked in October 2007, when the Dow Jones Industrial Average index exceeded 14,000 points.




Post Recession
End of Recession
Following the depths of the 2007-2009 recession there's a "new world" characterized by:

Non-existent consumer discretionary spending
Tighter credit and borrowing standards
Reduced home ownership
Increased consumer savings

The severity of the crisis forced Goldman Sachs and Morgan Stanley to convert to bank holding companies, as well as Merrill Lynch being absorbed by Bank of America

Monetary and Fiscal Policies
Recapitalize -
Government became part owners of banks
TARP -
Troubled Assets Relief Program
Stimulus Package -
$787 by President Obama


Stock Prices soared more that 60% between March and November 2009



Marked the turning point in the crisis. Lehman filed for bankruptcy on September 15,2008

GDP growth rate went from 3% in 2007-4 to -5% 2009-1

Monthly job loss went from >100,000 in 2007 to 800,000 by 2009

Fluctuations in employment riding on the status of the auto-industry
The U.S. stock market entered a decline. By March 2009, the Dow Jones average had reached a low of around 6,600.

Business became starved for credit to finance inventories and payrolls.

Between June 2007 and November 2008, Americans lost an estimated average of more than a quarter of their collective net worth.

The unemployment rate rose from 4.8% in February 2008 to 8.5% by March 2009.


Financial crisis
Bank of United States
Derivatives Transactions
Are financial instruments that derive their value on their claim to another asset
Can be used to hedge against risk, protecting against a decline in value of the underlying asset
Or they can be used for simple speculation

Credit Default Swap
Is a form of derivative transaction
A form of bond insurance
The Crisis
Asset-Backed Securities
Banks prioritize self-protection

Stagnant Credit

Cautious loan policies result in massive delay

Hoarding

Europe Financial woes

Reports for the merger of Guardian Trust Company and Union Commerce Corporation on local newspaper

The Collapse of Lehman Brothers
Roots of crisis cont'd
Investors searched for higher yields than those offered by U.S. Treasury bonds
Junk Bonds
Emerging market debt
Mortgage-backed securities

Consumers purchased homes with sub-prime mortgage's or NINJA loans



Home prices
Financial Meltdown
Unemployment peaked at 10.1% October 2009
Michael Johnson
Recap
Full transcript