The Great Global Crisis

1. 1
The Great Recession of 2008-2009:

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• The headlines of 2008 were about falling housing prices, rising default and
foreclosure rates, failure of large investment banks, and huge bailouts
arranged by both the Fed and the Treasury.
• The crisis reduced the wealth of most Americans and generated widespread
concern about the future of the economy.
• This crisis and the response to it may be the most important macroeconomic
event of our lives.
The Crisis of 2008

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• Boom and bust in housing prices
• Rising default and foreclosure
rates
• Sharp downturn in the stock
market
• Soaring prices of crude oil and
other energy sources believe.
Key Events Leading Up to the Crisis

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• Housing prices were relatively stable during the 1990s … but
began to rise toward the end of the decade.
• Between Jan. 2002 and mid-year 2006, housing prices increased by a whopping
87%.
• In late 2006, the boom turned to a bust and housing prices declined later.
• By year-end 2008, housing prices were approximately 30% below peak.
Change in Housing Prices, 1987-2008
Mortgage Default Rate, 1979-2008
• Prior to 2006, the default rate fluctuated within a narrow range (around 2%).
• It increased only slightly during the recessions of 1982, 1990, and 2001.
• The rate began increasing sharply during the 2nd half of 2006
• It reached 5.2% during the 3rd quarter of 2008.

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• The foreclosure rate followed a similar path as the default rate
• Prior to mid-2006, the foreclosure rate fluctuated between 0.15% and 0.50%
• But in 2007-2008, it increased sharply and moved to the highest level in decades
Housing Foreclosure Rate, 1979-2008
Changes In Stock Prices, 1996-2009
• The S&P 500 (Standard & Poor's (S&P) is a company well known around the world
as a creator of financial market indices) fell by more than 55% between October
2007 & March 2009
• This collapse eroded the wealth and endangered the retirement savings of many
Americans

6. 6
Housing, Mortgage Defaults and the
Great Recession
Continuing Impact of the Great
Recession
• Regulations that eroded lending
standards, the Fed’s interest rate policy, imprudent
leverage lending by banks with the help of security
rating firms, and the growth of household debt
combined to create the 2008 financial crisis.
• Mortgage-backed securities were
marketed throughout the world, and as default
rates rose, the value of the securities plummeted
and the crisis spread around the world.
• Default and foreclosure rates rose well
before the recession started in December 2007,
indicating that it was the housing crisis that caused
the recession, not the other way around.
• With the Treasury takeover of Fannie Mae
and Freddie Mac, the mortgage lending market
has, essentially, been nationalized. 90% of the new
mortgages for housing are currently financed by
the Federal Government.
• The housing crisis and Great Recession
were a reflection of perverse incentives generated
by public policy. Examples include: tax-
deductibility of mortgage interest, low-down
payment loans, and failure to hold loan originators
responsible for the quality of their loans. While
corrective action is needed, to date little has been
done.

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Will be back soon ….
Thank-you !