The Global Financial

Crisis of 2008
Md. Erfan Khan
ID # M140203052

Background Information
Dotcom- Telecom bubble of 1995-2000
Bubble bursting => Recession of 2001-02
Fed Response => Lower interest rate
Result => Lowest interest rate in history
Result => Massive Real Estate Bubble
Result => Global Financial Crisis of 2008

Bubble
A bubble simply means that the sector is much larger than the

economy is. Eventually when it bursts, it becomes a major crisis. It has

the power to collapse the whole economy.

What causes Bubble

Credit Expansion - banks provide more credit than the economy

needs.
Financial Speculation people borrow to buy real estate expecting
prices will rise.

Rising prices
More borrowing
More speculation
o

Even higher prices

The Cause for Real Estate Bubble

Extremely low interest rates about 0.25% Fed interest rate.

Interest rate is the cost of money

Money becomes cheap

Lower interest rate fueled non-productive credit like buy a car or a

house.

Eventually becomes bad credit, means the borrower cannot pay.

When the borrowers cannot pay, the bank becomes bankrupt.

Fundamental Causes of the

Financial Crisis of 2008
Reach for yield.
Minority Lending
Housing Policy
Credit Ratings
Credit Insurance
Bailout Policy
No punishment

Reach for Yield

People do not like the Fed interest rate, which drives them to make some
other investments which return is much higher than the Fed interest rate.
Reach for yield results in
Risky investments investing in risky stocks, risky bonds, risky financial

instruments like derivatives.

Financial Engineering Bankers designed new financial instruments to
sell to investors.

ABS, MBS etc.

Subprime Lending High-risk lending. Borrowers who may or may not

pay.
Maturity mismatch Borrow short and lend long.

Minority Lending
Minority lending means to lend money to a specific group of people, race
or culture.
Lending poor people
Government forces banks to minority lending

Lender policy
More profit
Securitization

Housing Policy
U.S. government provides
Guarantee certain loans
Lower interest rate in housing loan
Lower down payment
This policy finances risky borrowers who went bankrupt.

Credit Ratings
Credit rating agencies
Protected by government
No Accountability => No penalty
Bankers pay for better credit ratings

Credit Insurance
Credit insurance means if a loan is defaulted, the lenders will be paid to
recover his/her losses.
Insurance must be regulated and capital is required.
Bankers rejected regulation
Pressure on Fed
Pressure on Regulators
Pressure on Legislators

Government refused to regulate

Bailout Policy
Bailout policy means if a bank is about to collapse, the government will
give money to it and save it from bankruptcy.
Encourages risk taking
Encourages carelessness
Encourages unhealthy growth
Reckless lending
Mergers

No Punishment
Too big to jail.
No jail sentences
Criminals not punished
Criminals above the law

Who are responsible

Factors

Responsible

1. Reach for yield

Fed monetary policy

2. Minority lending

Government policy

3. Housing policy

Government policy

4. Credit ratings

Government and investors

5. Credit insurance

Government and bankers

6. Bailout policy

Government policy

7. No punishment

Government

Thank you all