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How did the 2008 Financial Crisis start??

9/11 Incident & Military expense for Iraq war: Increase in Money Supply
Fed reduces interest rates to 1%
Tax cuts by government
Investments in assets like real estate industry whose prices were increasing
Price rise due to more demand and limited supply
And the Housing Bubble forms
Home Start
Commission
HOME
BROKERS LENDERS searching
Demand for
OWNERS for home
Commission Mortgage mortgages
owners
Sells
Money
Mortgages
Instalments
INVESTMENT
BANKERS

Collateral Debt
Obligation formed
On The Basis Of
Ratings : Safe, Okay,
Greed for Risky
more
money Investment in
arises!!!! securities backed by Credit Default
Mortgages for Return Swaps formed
INVESTORS by Insurers:
AAA,BBB,Unrated
HOME And the Housing Bubble BURSTs
Home
OWNERS
Prime LENDERS
Mortgage
Sub Prime
Sells
Money
Mortgages
Instalments
INVESTMENT
BANKERS

Investment in
securities backed by
Mortgages for Return
This led to the frozen
INVESTORS
economy
Effects of 2008 Crisis
Sharp decline in the prices of real estate by approx. 25%
Bankruptcy of banking institutions like Lehman Brothers, Freddie Mac, Fannie
Mae, HSBC etc.
Decrease in nominal GDP by approx. $5800 per capita
Unemployment increased in Europe and it reached a peak of 10% in the US.
Decline in Manufacturing activities.
In India, the FIIs wiped out Rs.250,000 crores in a single day leading to a
decrease in Sensex by 1000 points
Measures taken by US government
Bail Out Money to the bankrupt to retain public confidence
Fannie Mae-$91 billion
AIG-$ 23 billion
Freddie Mac-$ 51 billion
Fed guaranteed Bear Stearns liabilities to facilitate takeover by JP
Morgan
Subsequently Merrill Lynch was acquired by Bank of America to
stabilize the economy
Included non banking financial institutions to borrow from the Fed