2007/2008 Economic Collapse

By: Imaad Zia

Thesis

• With the mixture of deregulation and bills inducing free and open trade on a corporate global scale without government oversight is what triggered the greatest economic collapse since the Great Depression.

What Happened?

• The economic crash of 2007/2008 which has had lasting effects up till current 2011 was the greatest economic recession seen since the stock market crash in 1929.

• There was too much speculation using imaginary money being played and used in the market as physical assets. Once people started to foreclose on their homes due to high interest rates and costs, banks were not able to acquire and handle all the of new mortgages responsibly.

• Once banks were completely consumed by debt, they started to default on payments, declare bankruptcy and in essence, tear down the US economy.

What caused it? (Large Investment Insurance and Banking Deregulation)

• Deregulation was a huge crisis that occurred and was essentially what triggered the economy to collapse in the late 2000’s.

• Deregulation of the markets can easily be traced back to a bill that was passed in December 2000 by Republican Senator Phil Gramm.

The Commodity Futures Modernization Act of 2000

• The bill that Senator Phil Gramm helped pass was the Commodity Futures Modernization Act of 2000 which essentially deregulated the entire marketing and banking industry from government oversight. Because of the passage of this bill, major corporations were able to “manipulate” and take advantage of the market and consumer. However this all came crashing down

Deregulation

• Because corporate giants were not regulated, these companies gained great power and became limitless in what they could do, how they would do it, and most importantly, how to make a huge profit.

• Examples of major corporations that took advantage of the deregulated market are seen on the next slides.

Merrill Lynch is the worlds largest financial insurance and banking company. The company's value, (including assets) is worth around $2.2 trillion.

Goldman Sachs is a large investment global security financial service management trading company which deals primarily with investments through stock market trading.

AIG is a major insurance company that was liquidated but eventually bailed out because of practices such as selling bad subprime loans and securities .

Morgan Stanley is a financial service company which focuses on investment and subprime loan insurance subsidies in global markets.

FannieMae is a foreclosure prevention and mortgage assistance company which focuses on packing and re-selling mortgage-backed securities back into the market.

FannieMae is another foreclosure prevention and mortgage assistance company which focuses on packing mortgage-backed securities.

Lehman Brothers was a large investment bank that focused on global interests and growth through trading.

Mortgage-Backed Securities

• An MBS basically is a mortgage that is spliced up countless times, repackaged as a security or “stock” and then sold into the market as a real-estate trust.

Overseas impact of US economic recession in Iceland

• Iceland was a huge market where mortgage-backed securities where being bought in mass quantities.

• After people started to default on their mortgages, Iceland took a big hit because of the massive amount of mortgage backed securities that were bought and held there.

Impact domestically of the US recession

• Unemployment shot up to 9.3% forcing millions of people to loose work.

• Many small business were forced to shut down as consumer spending was drastically reduced.

• Banks were also unwilling to give out loans due to the economy which was falling apart left and right fearing that they would not get a return on their lending.

Impact domestically of the US recession (cont.)

Consumer Confidence• As the economy deflated

and drained out, so did consumer confidence, purchasing power went down as people saved their money rather than spend it to stimulate the economy

Outsourcing• Many companies found it

more viable to outsource labor and work to foreign countries such as China and India due to high wages in the US. Higher profits could have been made in foreign countries while paying workers lower wages.

Relation to pre-21st century, Great Depression

• The economic collapse in the recent years is shockingly close to what happened in the 1930’s. The most relatable aspects of the two are both the collapse of the stock economies at the time and also the massive spikes in unemployment rates in the country during the time.

US Economy’s FutureThe future looks bright for the US’s economy for a few reasons. Two of them are here.

• On July 2010, President Barack Obama passed the Dodd–Frank Wall Street Reform which basically regulates the market and giant corporations. A “watchdog” has been created so that oversight on operations of the economy and the market are possible.

• Under the Obama Administration, The Consumer Financial Protection Bureau is in the works of being created. The Bureau’s main goals are to supervise banks, credit unions, and financial companies while gathering and analyzing data in order to better understand consumer financial service providers and markets.

Question 1

• How was Senator Phil Gramm a key component in allowing the US economy to fail?

• Phil Gramm passed the The Commodity Futures Modernization Act which deregulated the market and investment firms, this allowed giant corporations to take advantage of the market for their own benefit which eventually led to the crash of the economy.

Question 2

• What caused the economic crash of the European country of Iceland?

• Iceland was a huge player in buying Mortgage-Backed Securities and operating on Credit Default Swaps which basically ran on the insurance that the borrower would pay back the lender. When loans were not paid and insurances defaulted on, Iceland took a huge blow as their economy was heavily dependent on this.

Question 3

• How would companies react to the passing of the Dodd–Frank Wall Street Reform?

• Overall, companies might not like the reform because it brings in regulation. These giant conglomerates were able to make huge profits under an era where deregulation was at a high point. However since government regulation has now been instituted, predictably, profits for massive companies will shrink because of the reduction of loopholes that companies would have used to boost profits.

Question 4

• Will the implementation of the The Consumer Financial Protection Bureau revive the economy?

• In short, probably, in combination of regulation, promotion of consumer spending and confidence through inspection of large investment banking traits, the economy should have a good chance of revival.

Bibliography (Information)• http://banking.senate.gov/public/_files/070110_Dodd_Frank_Wall_Street_Reform_co

mprehensive_summary_Final.pdf• http://www.realclearpolitics.com/articles/2010/09/08/obamas_economic_speech_in_c

leveland_107070.html• http://www.businessweek.com/bwdaily/dnflash/content/apr2009/db20090414_84934

9.htm• http://www.whitehouse.gov/the_press_office/Remarks-of-President-Barack-Obama-Ad

dress-to-Joint-Session-of-Congress/• http://www.huffingtonpost.com/2008/12/05/bush-very-concerned-over-_n_148724.

html• http://www.bls.gov/home.htm• http://www.independent.co.uk/news/world/americas/usa-2008-the-great-depression-

803095.html• http://www.consumerfinance.gov/• http://www.fdic.gov/• http://www.npr.org/templates/story/story.php?storyId=89338743

Bibliography (Pictures)• http://en.wikipedia.org/wiki/File:OMX_Iceland_15_SEP-OCT_2008.png (Iceland)• http://www.instablogsimages.com/images/2007/09/30/sensex-financial-terrorism_26.jpg (Bull)• http://1.bp.blogspot.com/_HhRCm3g619U/TAkEvbmIN3I/AAAAAAAAADA/AN6Go6sBZUA/s1600/bull%

2Bbear.jpg• (Bull and Bear)• http://www.china-inno.com/reading• Lehman_Brothers_Times_Square_by_David_Shankbone.jpg(Lehman Brothers)• http

://www.freddiemac.com/news/images/fmstock/freddiemac_campus_HQ1_3.jpg?type=popup(FreddieMac)

• http://assets.nydailynews.com/img/2009/03/16/alg_aig-building.jpg(AIG)• http://www.americanhousingcrisis.com/wp-content/uploads/2011/03/fannie-mae.jpg(FannirMae)• http://www.businesspundit.com/wp-content/uploads/2008/07/morgan-stanley2.jpg(Morgan Stanley)• http

://4.bp.blogspot.com/_wM_OZdOMR_Y/RxXihmfaRNI/AAAAAAAAAKc/aO3qra7kT9o/s320/Goldman-Sachs-Hedge-Fund.jpg(Goldman Sachs Logo)

• http://media.glassdoor.com/m/2800/goldman-sachs-office.jpg(Goldman Sachs)• http://cbsphilly.files.wordpress.com/2011/01/merril-lynch.jpg?w=420(Merrill Lynch)• http

://www.urbandigs.com/mortgage-backed-securities-cdo-cmo-bonds.jpg(Mortgage-Backed Security)• http://3.bp.blogspot.com/_nSTO-vZpSgc/SWdo9WtosRI/AAAAAAAAFKk/8jxAzk606iM/s400/Unemploy

ment+Rate-2008-12.png(Unemplyment rate 2008) http://www.uri.edu/artsci/newecn/Classes/Art/INT1/Mac/Measure/Lab/LM1.E_7.jpg(Unemplyment rate Great Depression)