...HOUSING BUBBLE AND ITS IMPACT ON GLOBAL FINANCIAL CRISIS (2007) Housing bubble or real estate bubble is one of the basic problems that lead to global financial crisis in the late 2000s. When people’s wealth substantially increased, they will spend or consume more on everything, including houses. People demand for a better and bigger homes until in the late 90s, consumption boom occurred. The increased in demand has triggered housing bubble and makes the bubble became bigger. When demand on houses increased, of course the prices would be increased too. Until some point, the demand decreases or becomes stagnant, but the supply is still increasing, it will lead to sharp drop in the houses’ prices. At this point the bubble burst. Basically, the main reason that triggered the bubble and made it bigger was the policies of the Federal Reserve back in 2003. Referring to the reason, to avoid recession after the collapse of the tech bubble in 2000 and the 9/11 attacks in U.S during 2001, the Federal Reserve started to lower the interest rate from 6.5% to 1.75%. In 2003, the interest rate has been lowered to 1% and it remained there for a full year. However, the house prices were still growing up, higher than the interest rate. Even the house prices were growing at the rate of inflation, the Federal then encouraged people to buy houses. Federal has made an incentive so that people can go out and borrow at the rate of 1%. In addition, they created Fannie Mae and Freddie Mac, a privately...
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...The global economic recession has strongly created a lot of economics problems in world wide, such as consumer purchases fall, increase in unemployment and decline in house price . In the United Kingdom, housing prices also dropped, but during August the average cost for a home rose by 1.6%. This is, according to the article, mainly because of low interest rates and shortage of supply. Low interest rate, the rate at which interest is paid by borrowers (debtors) for the use of money that they borrow from lenders (creditors), would create a outward shift in demand, which means the willingness and ability of buying commodity goods would increase. This happens is because low interest rate encourage buyer(consumer) to borrow more, which lead to an increase of spending, therefore this makes the equilibrium moved to a new position, resulting in a increase in price. According the article, the problem of house price is also cased by the mortgage repayments. Low interest rates would lead to lower mortgage repayments, this means that homeowners, usually predicted to sell their homes during a recession, to refrain from doing so. This again create a inward shift in supply of home, the willingness and ability of providing a commodity decreases, as less owners decided to sell their house, which in result the position of the equilibrium would change and lead to a increase in price about 1.6%. As mentioned in the article, someone predicted that when there...
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...Initial Public Offering Sysorex Global Holdings Corp, a provider of IT services and technologies, is based in Santa Clara California and went public in 2014 at an initial public offering (IPO) price of $6 on April 10, 2014 for 3,333,333 shares (Nasdaq). An initial public offering (IPO) is the first time a private company offers its stock to the general public (Titman). When a global firm, such as Sysorex Global Holdings, decides to go public in order to raise capital funds for projects, many concerns must be addressed. Understanding the role of the investment banker and underwriter, the role of an originating house and a syndicate and how to price the issue most be mastered. In addition, it is important for companies going public to understand the risk involved, what foreign exchange concerns the company’s likely to face and possible ways to mitigate them. Prior to deciding to go public, Sysorex worked with investment bankers in order to determine the best way to raise capital. An investment banker describes both the firm itself and individuals work for it and the investment banker provides three basic functions: underwriting, distributing and advising (Titman). Investment bankers work in financial institutions and are primarily in the business of raising capital for companies, governments and other entities (Investopedia). The role of the underwriter is to assume responsibility of distributing a securities issue to the public. ...
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...Global Financial Crisis: Likely Impact on Bangladesh [Abstract: The current financial crisis that originated in the United States and quickly spread to Europe and Asia could be a global crisis soon. Reckless lending by banks and financial institutions and slack regulatory system were at the root of the crisis, which is perhaps the gravest since the Great Depression of the 1930s. Amid a severe credit crunch, the rich economies have entered into a deep recession. IMF economists predict the global economic growth to fall from 5.6% in 2007 to 3.9% in 2008, and to 3.0% next year. Billions of dollars pumped by the rich and the emerging economies to bail out the distressed banks or to boost their economies have failed to stop the rot. Bangladesh is apparently immune from the crisis, its economy not being very tightly linked with the rest of the world. It has been enjoying a relatively healthy growth of exports, industrial activity and remittances. Yet, a prolonged recession in the rich countries may cause a slowdown in exports, inflows of remittances, foreign aid and FDI, thereby hurting GDP growth. IMF has said that GDP growth in Bangladesh this year will be lower – 5.5% instead of the officially projected 6.5%, if the global recession lingers. Bangladesh policy makers will need to stay alert to the possibility of the economy being hit by the global slump and adopt appropriate mitigating measures.] Introduction The United States economy is now experiencing a severe credit...
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...evolution of house price in the UK and the factors affecting 3 supply and demand 3. The price and income elasticity of housing demand 9 4. Literature 11 1. Introduction The aim of this study is to explain the changes in the prices of houses by shedding light on factors affecting the demand and supply of houses in the UK. Firstly, we will look at the evolution of house prices in the UK since 2006 and examine relations between house prices and output, employment and mortgage interest rate. Also, supply of houses will be discussed by noting changes in the number of new houses and factors such as land cost, building cost. Then, in the next section we will proceed to examine the factors affecting the sizes of different elasticity of demand 2. The evolution of house price in the UK and the factors affecting supply and demand Over the last four decades, the UK housing market has been subject to boom/bust cycles and Stephens (2011) indicates that UK has one of the most persistently volatile markets in the world. Especially, since 1997 there has been a record growth in UK house prices. The above chart indicates that there are significant fluctuations the in UK housing market. House prices experienced steady growth during both 2006 and 2007 and reached their peak in late 2007. As the end of the 2008, the average house prices had fallen by around 15% (Osborne, 2008). In 2009 prices rebounded...
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... Many economics acknowledge the Great Recession to be the most devastating global economic crisis since the Great Depression in the 30´s. This crisis is based on some factors, worth to be emphasized, such as easy credit conditions that encouraged high risk lending and borrowing practices; international trade imbalances; the housing bubbles; the fiscal policy choices by the governments, related to their revenues and expenses or the position taken by some federal reserve banks, especially on the bailing out process of financial institutions. The first cause we can appoint it’s related to the risk or actual bankruptcy of the major financial institutions globally, starting with the collapse of the “Lehman Brothers” (September 2008), a global financial services firm. Some of these kinds of institutions highly invested in risky securities, which depreciate almost their entire value, when United States and European housing bubbles began to deflate during the 2007-2009 period. Consequently, as share and housing prices decreased, a major panic was installed on the inter-bank loan market, resulting on the failure of many others large and well established investment and commercial banks in the U.S. and Europe, such as the “American International Group”, which was later rescue by the U.S. Federal Reserve, or the “Fannie Mae and Freddie Mac”, a government-sponsored enterprise. Furthermore, the global recession had repercussions on the international trade, which presented a decreasing...
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...2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put unconditional stress...
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...2008 FINANCIAL CRISIS Name Course Date 1. Background The financial crisis commenced in August 2007 after the preceding inflation. The crisis became more defined throughout 2007 and gained momentum in 2008. This took place even after the financial regulators and the central banks’ tireless attempts to tame the situation. It is alleged that the main factors that influenced its manifestation include corruption, fraud, speculation, greed, bankers and bankers’ bonuses. However, the academic discourse, politics or media has been unable to solve the mystery surrounding the main causes of the crisis[1]. The mystery is academically relevant to the world of research just like the Great Depression, whose causes are still being discussed. Other sources believe that the crisis might have been as a cause of human failures especially following the refusal to bail out the Investment Bank Lehman Brothers. The housing bubble was the immediate trigger of the 2008 financial crisis. The following were the triggers under the housing bubble. I. Subprime lending A subprime mortgage is the mortgage that is readily acceptable without imposing strict measures of standard on it. Before the 2008 financial crisis, there existed a fierce competition between mortgage lenders. The competition between the mortgage lenders ensued from the struggle for market share and revenue. It also took place in tandem with limited supply of creditworthy borrowers which put unconditional stress...
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...department stores and mail-order houses used advances in telegraph and railroads to exploit the opportunity of economies of scale and scope while in 1990’s, the global retailers used modern technology and distribution system for the same purpose. The internet, scanner technology, market research, and data obtained from credit cards provide various opportunities for retailers such as economies of scale and scope. The retail stores like Tesco and Wal-Mart price the products lower as compare to their products and this is one of the reasons that people consider modern format retail stores and other reasons include: large variety of products, all ranges available under one roof, and opportunity of “one-stop shopping”. These modern stores have some drawbacks as well and the major one is that they are located far from the city centers. It is critical for both consumers and suppliers though rents of property are less...
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...Question 5. Find at least three countries or economies that have housing policies or measures to stabilize the housing markets. Provide your views or suggestions on the best measure to stabilize the housing markets that could be considered or used in Melbourne. In 2013, Melbourne’s population was 4.3 million. By the year 2030 Melbourne’s population is set to reach 6 million and by 2051 the population will jump to 7.8 million. With population growth of this magnitude the demand on housing will undoubtedly increase. In 2014, in his opening remarks at the Bundesbank/German Research Foundation/IMF Conference, Mr Min Zhu, Deputy Director of the International Monetary Fund (IMF) stated remarked: “Housing booms have different characteristics across countries and time periods. What is common is that when the bust comes, it very often damages financial stability and the real economy. The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate. The interactions of various policy tools can be complex. But all this should not be an excuse for inaction. The interlocking use of multiple tools might overcome the shortcomings of any single policy tool.” Indeed, as there are no magic bullets to ensure a stable housing market, it is prudent to therefore to review differing policies that are currently used by other countries to help stabilize their housing markets. In the paragraphs bellows are housing...
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...that may have led to this financial crisis. Some include Bush’s investment in the Iraq war, subprime lending awards mortgages to people with poor credit, defaults on loans force banks to raise equity, but most importantly, greed. Not only is there a crisis going on in the United States, but there is a crisis occurring globally also. Bush and his investment in the Iraq war could be a cause to this financial crisis. Prices of everything have gone up and people have to spend more money on items so this causes them to be unable to pay off debts of loans to the banks. When that occurs, banks take a low blow because they miss out on the money. So many people are losing their houses due to lack of income banks. They have to pay the remaining money to the town/government. So after paying the houses of so many people, the banks go bankrupt. If banks go bankrupt, there wouldn’t be anyone to lend money to businesses. There wouldn’t be any jobs if there aren't any businesses. This all leads to no income. The war in Iraq increased oil prices, which increased service prices because everything needs to be delivered in cars or trucks so people have to pay more for goods. But they aren't getting paid more money so they end up losing money. This graph is showing the real gross domestic product (GDP). GDP is one of the measures of national income and output for a given country's economy. GDP is defined as the total market value of all final goods and services produced within the country in...
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...ABSTRACT Almost everyone was affected by the 2007-2010 global financial crisis in one way or another. While there have been numerous studies that have explored the causes behind such global financial crisis, this subject proves to be a rather significant matter as it is still an ongoing crisis that had hit the Western countries directly causing massive layoffs. Indeed, many people have predicted such crisis would require a substantial amount of time for it to subdue. However, we do not know just how bad the current credit crisis will get. Therefore, this study attempts to rectify the whole scenario in the literature. This research aims to analyze the causes, implications and impact of this global financial crisis towards the world economy and through this information, we should be able to clear any doubts and discontent one has on this matter. TABLE OF CONTENTS ABSTRACT ………………………………………………………..………..…………………...ii ACKNOWLEDGEMENT……………………………………………….……………….………iii TABLE OF CONTENTS ………………………………………………………………………..iv CHAPTER 1: INTRODUCTION………………………………………………………………1 CHAPTER 2: RESEARCH ANALYSIS………………………………………………………2 2.1 THE GLOBAL FINANCIAL CRISIS OF 2007-2010……………………………………….2 2.2 CAUSES……………………………………………………………………………………....3 2.2.1 US HOUSING BUBBLE AND FORECLOSURES………………………………. 3 2.2.2 SUBPRIME LENDING……………………………………………………………..4 2.2.3 INACCURATE CREDIT RATINGS……………………………………………….5 2.2.4 MORTGAGE UNDERWRITING…………………………………………………..6 2.2...
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...Comment on the relative performance of the UK, France, Germany and the USA since 1997. Over the last 10 years the economic performance of the European countries and the US has varied a lot, due to the external shocks (terrorist attacks) and economic policies. While France and Germany do not have control over their monetary policy, the UK and the US do. Therefore the rest of this essay will analyse the difference in the economic performance of those countries over the last 10 year and provide some explanations for the difference that occurred. Graph 1. Relative GDP Performance Source: Euro State, 2007 From Graph 1, it can be seen that the UK has the most stable growth over the last 10 years, while Germany had the highest variation in its GDP performance. All of the countries saw a sharp decline in their GDP growth after the 9th September 2001, with the USA worst affected. However, such a sharp decline has also allowed the US to reshape its GDP the most by 2004. In comparison, Germany’s sharp decline in 2001 has led to a further GDP decline in 2002 and in 2003 the country saw negative economic growth. Over the last 10 years the US saw the highest overall growth in its GDP (28.9%), closely followed by the UK (28.5%) and France (22.8%). Germany struggled with only a 15.5% increase. Graph 2. Relative GDP performance of Germany and France against EU15 Source: Euro State, 2007 Graph 2 shows the performance of France and Germany relative...
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...consumers were being denied loans for mortgages and college tuition. After the nine-day U.S. stock market plunge, the head of the International Monetary Fund (IMF) had some sobering words: “Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” It has been maintained that huge economy inequalities coupled with low rate of profit in the US economy contributed to an increased capital flow to the financial sector and the increasing provision of credit to US workers whose real incomes had declined. Under auspices of financial innovations, debt was sold in complex new financial products to investors. Cheap and apparently riskless lending drove the rising leverage of investments. ‘Securitization’ helped to spread the risks to global financial markets and deficient government regulation facilitated these developments. A huge asset bubble developed in the US housing sector and burst as a result of high interest rate. Consequently, the world witnessed massive waves of defaults, institutional insolvency and a severe credit crunch. Introduction The global financial crisis led to the collapse of large financial institution, bailout of banks...
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...Outlining the major objectives of your essay • Analyse the major factors causing global financial crisis • Analyse the role of OTC derivatives in triggering the global financial crisis • Recommend the ways to control the OTC market in the future The origins of the global financial crisis There are several factors causing global financial crisis: 1. Growth of housing bubble & Subprime lending o particular advantage of low long-term interest rates was the US mortgage market. American households traditionally took out fixed-rate mortgages, often guaranteed by the government-sponsored enterprises, the GSEs. As rates fell, households refinanced in large numbers, but this extra origination business dried up once rates started to rise again. Rather than shrink their business, US mortgage lenders pursued riskier segments of the market that the GSEs did not insure, as Graph 4 shows. This included the sub-prime segment, but also so-called ‘Alt-A’ and other non-standard loans involving easier lending terms. At the time, this was considered a positive development, because it was thought that it allowed more people to become home owners. Products requiring low or no deposit, or with a low introductory interest rate were known as ‘affordability products’. They allowed households to pay the very high housing prices that their own stronger demand was generating. o http://www.rba.gov.au/Speeches/2009/_Images/150409_so_graph4.gif o As the US housing...
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