CỘNG HÒA XÃ HỘI CHỦ NGHĨA VIỆT NAM
ĐÔC LẬP –TỰ DO – HẠNH PHÚC
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ĐẠI HỌC QUỐC GIA THÀNH PHỐ HỒ CHÍ MINH
TRƯỜNG ĐẠI HỌC KINH TẾ - LUẬT
BỘ MÔN : ĐẦU TƯ TÀI CHÍNH
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GIẢNG VIÊN: TÔ THỊ THANH TRÚC
SINH VIÊN: NGUYỄN MINH HIỂN
MSSV: K204040853
LỚP: 222TC23
TOPIC
The Financial Crisis of 2008
I.
Progress of the crisis.
The financial crisis that began in the U.S. as an oil stain spread around the world,
its scale has so far not stopped at a country's borders and cast a shadow over the world
economy that has stagnated in recent years. The most affected subjects are the
banking system and the stock market.
1. Banking and financial system
Many financial institutions of developed countries, especially those in Europe,
also participate in the secondary housing credit market in the US. As a result, the
rupture of the U.S. housing balloon puts these financial institutions in the same danger
as U.S. financial institutions. The European countries with the worst financial turmoil
are the UK, Iceland, Ireland, Belgium and Spain. Many British banks have struggled
with cash problems. As early as September 2007, Northern Rock - the fifth largest
bank in the UK, after losing serious liquidity due to losses from real estate mortgage
lending, had to ask the Bank of England for help. Investors rushed to withdraw
money, causing the Government to take over this banking group. The spike in deposit
withdrawals has also strained the country's other banks. In 2008, it was Bradford &
Bingley plc's turn to split into two separate companies. Halifax Bank merged with
LOYDS TSB due to heavy losses in BDS mortgage lending. Other banks subject to
ownership changes include Catholic Building Society, Alliance & Leicester. The
London Scottish Bank and Dunfermline Building Society are subject to special
supervision by the UK Government.
- In Iceland there has been a widespread banking crisis. In the first quarter of
2008, Iceland's GDP fell by 1.5%, the largest decline since 1983. In early 2008,
the Bank of Ireland's credit rating fell, causing the bank's share price to plummet,
and its share price at the beginning of March 2008 fell by 99% from its peak price
in 2007.
- At the end of 2008, Belgium's Fortis began to be gradually sold, leaving only
the insurance services business. Dexia suffered a loss of 3.3 billion euros and had
to ask the Belgian government for loans to consolidate.
- In the Netherlands, in order to ensure the capital adequacy ratio, ING Group had
to apply for a loan from the Dutch Government.
- In Germany, as early as 2008, it was discovered that BavariaLB had suffered
large losses due to its participation in the secondary housing credit market in the
United States. The bank then had to plead for help from the German Federal
Government.
- On August 9-10, 2007, French bank BNP closed 3 investment funds worth about
$ 2.2 billion in the US, causing the world stock market to plummet.
- Switzerland's leading banking group UBS reported a large loss of about $510680 million, leading to the departure of its investment banker and Asian chief
financial officer. Japan's top three financial groups, Mitsubishi UFJ Financial
Group, Mizuho Financial Group, and Sumitomo Mitsui Financial Group, have
lost billions of dollars from investments in U.S. subprime debt assets. Even a wellknown Singaporean government investment conglomerate – Temasek Holdings
– suffered heavy losses, with investments on Wall Street and investments in
Britain's Barclays Bank.
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- South Korea's economy is also on red alert as the won has depreciated by more
than 40% since the start of the year and is now at its lowest level since the 1997
financial crisis. The South Korean government has had to take some urgent
measures such as cutting interest rates and pumping money into the financial
system.
2. Stock market.
The sharp decline in the US stock market has led to the decline of Asian and
European stock markets. The world's major stock markets in New York, London,
Paris, Frankfurt, Tokyo all had historically large declines.
- Asia
Markets have lost between 40.7% and 65.9% – along with trillions of dollars that
have evaporated from this market. The Sensex index (India) fell 3.4%, Taiwans
Banchmark (Taiwan) fell 4.1%, Singapore fell 3.2%, South Korea's KOSPI index
had the lowest decline (- 40.7%), while Vietnam's VN-Index, China's Shanghai
Composite index fell the most with a decline of more than 65% in value compared
to the markets included in the comparison. Japan has a relatively stable financial
system that underwent a period of restructuring after the 1996-1997 crisis.
However, the negative impact of the U.S. financial crisis still caused the country's
stock market to fluctuate. The Nikkei average share price index fell as much as
42.1% - the biggest drop since 1990 (-39%).
- Europe
The Dow Jones Stoxx 600 Banks Index fell 6.2%, its biggest drop since Jan. 1,
2008. The largest real estate giant in the UK is HBOS Plc. Down 18%, UBS AG
down 15%, France's CAC 40 index fell the most (-42%) and Britain's FTSE 100
index fell the least (31.5%). Germany's DAX fell 39.5%.
II.
The underlying causes of the Crisis.
The origins of the crisis come from the US with growing difficulties in the real estate
market. Specifically, when the Fed maintained a low interest rate of about 1% per
year since the beginning of 2000, people took advantage of low interest rates to
borrow and invest in real estate. Investment banks, insurance companies, credit rating
agencies, investors from all over the world are also involved in the process of buying
and selling these mortgage credits to form a closely linked network. However, faced
with the context of oil price inflation in 2005, the Fed was forced to raise interest
rates to about 5% per year, leading to difficulties and credit risks for borrowers. As
an immediate solution, banks offer risky mortgage loans to rescue homebuyers,
especially targeting low-income customers, resulting in very high lending risks,
affecting
all
parties
involved
in
the
subsequent
process.
More specifically about the loan process, in the face of the continuous increase in
house prices at that time, subprime borrowers can protect themselves against high
mortgage payments by financing or selling real estate and then making payments. If
the customer can no longer repay the debt, the bank has the right to recover the asset
and sell it at a higher price. From a banking perspective, this is considered a profitable
investment,
so
they
promote
investment
in
this
model.
In the 17 years from 1990 until 2007, loans rose sharply from 2.5% to nearly 15.7%
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per year. The increase in credit while all comes from subprime investors, unable to
afford to repay debts, so although the housing market at that time was high, the
internal process itself soon rotted, the risk of default escalated uncontrollably. And
when countless borrowers defaulted at the same time, the supply of houses increased
because everyone wanted to resell their homes at a higher price to return the money
invested, the real estate market officially turned around in Q1 2007. The
consequences of the significant increase in default risk were concretized by the
formation of the housing bubble and then the bursting in 2008.
III.
Measures and policies to recover the economy of the USA
government.
Measures:
- The government will use taxpayer dollars combined with FDIC financial activities
to co-invest with the private sector to buy bad assets on banks' balance sheets. This
will cause the purchasing power between the public and private parties to be
maximized and the U.S. budget will be best funded.
- Share risks as well as profits among private entities participating in the program. In
addition, the PPIP program will aim to ensure that if a loss occurs, the private
investment side will be affected first and foremost, and if there is a profit, the taxpayer
will benefit.
- In order to avoid the possibility that the government has to pay too high or too low
prices for bad assets, participating in the acquisition of assets from investors like this
will create a certain level of competition, so that these assets will be determined to be
true. The program to exclude bad assets on the accounting tables of banks will be
carried out in an amount equal to half of the total amount from TARP. In addition,
the private sector that can participate is also expanded, including private investors,
pension funds, insurance companies and other long-term investment companies. The
process of buying bad assets starts with identifying delinquent debts that banks want
to sell. After that, these bad debts will be auctioned by the FDIC, and the private
investors who win this bad asset auction will be supported by the FDIC and the
Ministry of Finance with an additional amount of money to be able to complete the
acquisition of bad assets.
Policies:
1. Fiscal Policy: Budget and Tax Expenditures
- October 3, 2008, President Bush signs the Emergency Economic Stabilization
Act of 2008 authorizing $700 billion in stimulus spending on stimulus programs
such as assistance to the unemployed, nutritional assistance to the poor and lowincome, and infrastructure development.
On February 13, 2008, President Bush signed the Economic Stimulus Act of 2008
under which the government would adopt a $168 billion consolidated stimulus
program primarily in the form of personal income tax refunds.
- On February 17, 2009, Barack Obama signed the Reinvestment and Recovery
Act allowing the Government to implement the second stimulus package since
the crisis began.
2. Monetary policy: money supply and interest rates
- As soon as the housing credit crisis erupted, the Federal Reserve (Fed) began to
intervene by lowering interest rates and increasing purchases of MBS collateralbacked securities. After that, because the economic situation did not change well,
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the agency continued to take monetary easing measures to increase liquidity for
financial institutions. Specifically, the interbank overnight lending rate was
reduced from 5.25% in 6 installments to 2% in less than 8 months (18/9/2007 –
30/4/2008), then continued to decrease and by 16/12/2008 only 0.25%, the
interest rate was a record low.
- The Fed also conducts open market operations (buybacks existing U.S.
government bonds)
- October 6, 2008: The Fed announces plans to buy large amounts of short-term
debt from companies in order to clear the frozen money market.
- 9/11/2008: Insurance giant AIG receives additional financial support from the
US Government, bringing the total amount received to $ 150 billion (initial
bailout from $ 85 billion).
November 23, 2008: Key U.S. financial regulators, including the Treasury
Department, the Fed, and the Federal Deposit Insurance Company (FDIC)
announce stabilization measures at Citigroup Inc. The Treasury Department will
spend $20 billion from a $700 billion package to support liquidity for the bank
with the world's widest service network. Citi received $25 billion and was one of
the first banks to receive U.S. government support.
- 25/11/2008: New solution package with a total amount of up to 800 billion USD
is announced.
- January 13, 2009: U.S. President-elect Obama asks Congress to disburse another
$350 billion from the $700 billion TARP Relief Program to help the U.S. cope
with the financial crisis.
- Early February 2009: U.S. Treasury Secretary Timothy Geithner unveiled a
comprehensive bank bailout plan worth at least $1.5 trillion with goals that would
reheat credit markets, strengthen banks and actively support homeowners and
small businesses; and at the same time with this implementation is the adoption
of new and higher standards of transparency and accountability.
- Launch quantitative easing packages QE1, QE2, QE3.
3. Foreign trade policy: impact on trade balance, balance of payments through
exchange rates, import and export taxes, quotas
- Obama adopts a "Weak Dollar" policy, which is the main driver of the transition
from a high import economy with a low savings rate to an export-oriented
economy with a high savings rate. The goal is to increase exports, reduce imports.
IV.
Regulatory changes to prevent possible similar crises in the future.
- Good management of the economy and financial system
Eachcountry's economy must ensure macroeconomic stability, which is a
prerequisite for mitigating the impact of the crisis. The more open an economy is,
the stricter the monitoring of the market and financial institutions because an open
market economy also means a high risk of business failure accompanied by great
risks of credit institutions and investors carrying out investment and lending
activities with those businesses.
- There must be strong financial institutions and strong and continuous policies.
Past crises show that the response involves.
Government policies in the face of financial market problems are essential to
compensate for the shortcomings of the economy and prevent deflation.
- Flexible exchange rate adjustments extend the effectiveness of monetary policy
in dealing with financial crises.
- Pay attention to imbalances in the financial system The severe global financial
crisis is also partly due to the imbalance of the financial systems of some
countries.
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