The Housing Crash The Great Recession

What is a Recession A global recession is a period of global economic slowdown. Declared by the International Monetary Fund (IMF) growth of 3 percent or less is "equivalent to a global recession“ , 1998 and

What came before Global explosion in prices Housing People wanted homes Thinking they will always go up Media and Flipping Low interest rates 6.5% to 1% Commodities End of 20 year recession Oil, chemical, Food Real vs. nominal value Real Fixed value over time Nominal A dollar is a dollar even when it’s not Inflation year highs globally

Commodities 1980 Corn $3.69 per bushel Wheat $5.07 per bushel Copper $3, per tonne Gold $ per troy ounce Corn $1.45 per bushel Wheat $1.94 bushel Copper $1,319 per ton Gold $ per troy ounce

Commodities Bubble January 2008 Oil hits $100, first time July 2008 Oil peaked at $ gallon of gasoline $4 U.S.A Dramatic drop in demand December 2008 $35 a barrel Sulfuric acid steel, copper, and bioethanol production 3.5 times increases over one year

What made it happen? This is a debate and no one cause but many Subprime lending Government action Credit creation

Subprime lending Adjustable rate mortgages 80% of U.S. mortgages Interest, and payments go up in the interest rate goes up mortgage delinquencies and foreclosures Banks lose money, pull back credit House value dropped Can’t refinance Upside down mortgages Over-leveraging by banks Spend more then they can stand to lose Subprime lending riskiest category Those with money problems

Government action Less regulation of Fannie Mae and Freddie Mac (1992) Federal National Mortgage Association Federal Home Loan Mortgage Corporation Two of the largest loan corporation Securitization Spend up to 97.5% of capital

Credit creation and other cause Lots of Cheap Credit Low interest rates Overproduction Making to much stuff No one can make money Overgrowth beyond sustainable limits

Effects, what happened GDP Has been dropping Dropped into negative 2008Q3 Domestic demand Down five straight quarters Pace is increasing Capital investment Down to pace is increasing 23.2% less then 2008 in 2009Q1 4% less then last year

Trade Slow down in world trade 50% loss in one week October 2008 Baltic Dry Index financial crisis had created a manufacturing crisis February 2009 The Economist January 2008 to January 2009 Japan -31% Korea -26% Russia -16% Brazil -15% Italy -14% Germany -12%

Shift of Investments State owned Sovereign funds and private buyers Middle East Asia Especially China Buying stakes of European and U.S. businesses Weichai Power (Diesel- engine)-French GM plant Aluminum Corp (state)- Rio Tinto (Australian mining) Petrochemical Corp (oil)- Tanganyika Oil (Canada)

Unemployment 20 million jobs lost International Labour Organization (UN) Construction Real estate Financial services Auto sector 200 million total First time US rate Jan % June % September %

Financial markets Jan 07 to Oct 08 $8.3 trillion gone from US saving and investments By September 2009 Arab banks lost $4 billion Jan 08 to Oct 08 ~30% drop in stocks North America Europe Asia-Pacific Dow Jones Industrial Average 37%

Who’s hit the most? Carnegie Endowment for International Peace September 2008–May 2009 Hit most Hungary Ukraine Argentina Jamaica Poland Hit the Least China Japan United states South Africa Peru

Responses Most nations responded on their own Legislation Interest rates Stimulus plans Central Banks Tax relief G-20 November 2008 DC international financial regulation support their economy and to coordinate Refused protectionism April 2009 London restore global growth stimulate demand and employment supply of credit strengthening of the IMF