GLOBAL FINANCIAL
CRISIS
GLOBALIZATION LESSON 3
OBJECTIVES
• Review events leading up to financial crisis that
struck the US in 2008.
• Explore the reverberations of said crisis on Europe
and the global economy.
• Identify if we have learned any lessons in the past 5
years.
WARM UP
• What have we
learned about
globalization so far?
• Cultural, economic,
political?
• Effects on people?
• Benefits?
• Downsides?
SUBPRIME MORTGAGE CRISIS
• Global Pool of Money
• World’s total investments
• Doubled 2000 ($35t) – 2006 ($70t) b/c BRICS
• Invested in US housing market via Mortgage-Backed Securities
(MBS). Investments insured via Credit Default Swaps (CDS).
• US Housing Bubble Bursts
• Speculative – drove up prices, artificial values
• Extended mortgages to subprime borrowers
• ARM’s, NINA loans
• Bubble bursts 06-07 – Values fall, ppl underwater or default on
loan payments, banks see cash flow dry up, investors withdraw
$
SUBPRIME MORTGAGE CRISIS
• Collapse US Economy
• Major US investment banks (Lehman Bros, Bear Sterns) assume massive
losses, declare bankruptcy. AIG taken over by US govt.
• Fed Reserve (TARP) & EU inject billions
• Decline in production = loss of jobs = decline in spending
• Global Effects
• Banks unwilling to lend, economies slow as credit tightened
• Internatl trade declines (decline US imports = decline global GDP =
decline US exports = decline US GDP…)
• Drop in US demand hurts rising economies
• Stock values all over world drop w/loss confidence
• Low interest rates = weaker $ = less profit trade partners
• Too Big To Fail Explains It All
LESSONS LEARNED?
• Dodd-Frank reforms
not enacted
• Big Banks Bigger
• No prosecution
• Wall St Recovery,
Main St Struggles
• Debt Persists
• Debt Ceiling Crisis
EUROZONE
• EU (28)
• European
Commission
• Eurozone
• Same currency
(euro)
• European Central
Bank (monetary
policy)
• Separate national
fiscal policies
(budgets)
EUROZONE DEBT CRISIS
• When: Late 2009
• Why: Government Debts, Banking & Housing Crisis
(similar to US – pool & securitize investments) & Slow,
Uneven Economic Growth
• Where: PIIGS and others
• Who’s In Charge: European Commission, European
Central Bank, IMF
• Relief: Bailout, Loans, Lower Interest Rates, Austerity
Budgets
• Consequences: Economic & Political Changes,
Social Upheaval
ACTIVITY
“Read” Interactive Charts on NY
Times.com “It’s All Connected:
An Overview of the Euro Crisis”
http://www.nytimes.com/interact
ive/2011/10/23/sundayreview/an-overview-of-the-eurocrisis.html and “Datapoints: It’s All
Connected: A Spectator’s Guide
to the Euro Crisis”
http://www.nytimes.com/imagep
ages/2011/10/22/opinion/201110
23_DATAPOINTS.html?ref=sundayreview
Identify and define any terms
with which you are unfamiliar!
I know there will be some!
• WHO called the euro zone “the
ultimate contagion machine”?
• WHAT are the major
components of the debt crisis
in Europe?
• WHAT does “debt exposure”
mean?
• WHERE in Europe and around
the world is the crisis having
impact?
• WHEN was the euro established
as a form of currency?
• WHY might rising borrowing
costs, runs on banks and other
financial troubles happen in
certain European countries?
• HOW much do borrowers in
various European countries
owe to banks of other nations?