2008 Crisis and Turkey
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Transcript of 2008 Crisis and Turkey
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The Economic Crisis of 2008Causes and Aftermath
HOPE IS NOT A STATEGY
New York Federal Reserve PresidentTimothy Geither
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Key Events Leading up to theCrisis
Housing price increase during 2000-2005, followed by alevelling off and price decline
Increase in the default and foreclosure rates beginning in
the second half of 2006
Collapse of major investment banks in 2008
2008 collapse of stock prices
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Exhibit 1: House Price Change
Housing prices were relatively stable during the 1990s, but they began to rise toward the endof the decade.
Between January 2002 and mid-year 2006, housing prices increased by a whopping 87percent.
The boom had turned to a bust, and the housing price declines continued throughout 2007and 2008.
By the third quarter of 2008, housing prices were approximately 25 percent below their 2006peak.
Annual Existing House Price Change
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
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Exhibit 2: The Default Rate
The default rate fluctuated, within a narrow range, around 2 percent prior to 2006.
It increased only slightly during the recessions of 1982, 1990, and 2001.
The rate began increasing sharply during the second half of 2006
It reached 5.2 percent during the third quarter of 2008.
1979
1980
1981
1982
1984
1985
1986
1987
1989
1990
1991
1992
1994
1995
1996
1997
1999
2000
2001
2002
2004
2005
2006
2007
0%
1%
2%
3%
4%
5%
6%
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Exhibit 3: Stock Market Returns
As of mid-December of 2008, stock returns were down by 37 percent since the beginning ofthe year.
This is nearly twice the magnitude of any year since 1950.
This collapse eroded the wealth and endangered the retirement savings of many Americans.
S&P 500 Total Return
1950
1953
1956
1959
1962
1965
1968
1971
1974
1977
1980
1983
1986
1989
1992
1995
1998
2001
2004
2007
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
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Key Questions About the Crisis of2008
Why did housing prices rise rapidly and then fall?
Why did the mortgage default and housing foreclosure rates begin to increase more
than a year before the recession of 2008 started?
Why are the recent default and foreclosure rates so much higher than at any time
during the 1980s and 1990s?
Why did investment banks like Bear Stearns and Lehman Brothers run into financial
troubles so quickly?
Four factors provide the answers to all of these questions.
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What Caused the Crisis of 2008?
FACTOR 1: Beginning in the mid-1990s, government regulations began toerode the conventional lending standards.
Fannie Mae and Freddie Mac hold a huge share of American mortgages.
Beginning in 1995, HUD regulations required Fannie Mae and Freddie
Mac to increase their holdings of loans to low and moderate incomeborrowers.
HUD regulations imposed in 1999 required Fannie and Freddie to acceptmore loans with little or no down payment.
1995 regulations stemming from an extension of the CommunityReinvestment Act required banks to extend loans in proportion to theshare of minority population in their market area. Conventional lendingstandards were reduced to meet these goals.
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Exhibit 4: Subprime, Alt-A, and HomeEquity
Like subprime, Alt-A and home equity loans have increased substantially as a share ofthe total since 2000.
In 2006, subprime, Alt-A, and home equity loans accounted for almost half of themortgages originated during the year.
Subprime, Alt-A, and Home Equity as a Share of Total
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0%
10%
20%
30%
40%
50%
Subprime (FRB) Subprime (JCHS) Subprime + Alt-A Subprime + Alt-A + HomeEquity
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What Caused the Crisis of 2008?
FACTOR 2:The Feds manipulation of interest rates during 2002-2006
Fed's prolonged Low-Interest Rate Policy of 2002-2004 increased demand for, and price of, housing.
The low short-term interest rates made adjustable rate loans with low down payments highlyattractive.
As the Fed pushed short-term interest rates upward in 2005-2006, adjustable rates were soon reset,monthly payment on these loans increased, housing prices began to fall, and defaults soared.
1995
1995
1996
1996
1997
1997
1998
1999
1999
2000
2000
2001
2002
2002
2003
2003
2004
2004
2005
2006
2006
2007
2007
2008
0%
1%
2%
3%
4%
5%
6%
7%
8%
Federal Funds 1 year T-bill
Federal Funds Rate and 1-Year T-Bill Rate
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Exhibit 5: ARM Loans Outstanding
Following the Fed's low interest rate policy of 2002-2004, Adjustable Rate Mortgages(ARMs) increased sharply.
Measured as a share of total mortgages outstanding, ARMs increased from 10% in 2000to 21% in 2005.
ARM Loans Outstanding
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
0%
5%
10%
15%
20%
25%
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What Caused the Crisis of 2008?
FACTOR 3: An SEC Rule change adopted in April 2004 led to highly leverage lending practices by investmentbanks and their quick demise when default rates increased.
The rule favoured lending for residential housing.
Loans for residential housing could be leveraged by as much as 25 to 1, and as much as 60 to 1,when bundled together and financed with securities.
Based on historical default rates, mortgage loans for residential housing were thought to be safe.
When default rates increased in 2006 and 2007, the highly leveraged investment banks sooncollapsed.
Credit unions
Commercial banks
Savings institutions
Brokers/hedge Funds
Fannie Mae
Freddie Mac
0 20 40 60 80
67.9
21.5
31.6
9.4
9.8
9.1
Leverage Ratios (June 2008)
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What Caused the Crisis of 2008?
FACTOR 4: Doubling of the Debt/Income Ratio of Households since the mid-1980s.
The heavy indebtedness of households meant they had no leeway to deal with unexpectedexpenses or rising mortgage payments
1953
1955
1958
1960
1963
1965
1968
1970
1973
1975
1978
1980
1983
1985
1988
1990
1993
1995
1998
2000
2003
2005
2008
20%
40%
60%
80%
100%
120%
140%
Household Debt to Disposable Personal Income Ratio
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Exhibit 6: Debt Payments as aShare of Income
Today, interest payments consume nearly 15 percent of the after-tax income of Americanhouseholds, up from about 10 percent in the early 1980s.
Interest on household debt also increased substantially.
Because interest on housing loans was tax deductible, households had an incentive to wrapmore of their debt into housing loans.
Interest Payments to Disposable Personal Income Ratios
1980
1981
1982
1983
1985
1986
1987
1988
1990
1991
1992
1993
1995
1996
1997
1998
2000
2001
2002
2003
2005
2006
2007
6%
8%
10%
12%
14%
16%
Total Debt Mortgage
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Exhibit 7a: Foreclosure Rates onSubprime
Compared to their prime borrower counterparts, the foreclosure rate for subprime borrowers isapproximately 10 times higher for fixed rate mortgages and 7 times higher for adjustable ratemortgages.
There was no trend in the foreclosure rate prior to 2006 for adjustable rate or fixed rate mortgages.
Starting in 2006, there was a sharp increase in the adjustable rate mortgage foreclosure rate.
Foreclosure Rates on Subprime Mortgages
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
0%
1%
2%
3%
4%
5%
6%
Fixed Adjustable
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Exhibit 7b: Foreclosure Rates on Prime
While the foreclosure rate on fixed rate mortgages was relatively constant, theforeclosures on adjustable rate mortgages began to soar in the second half of 2006.
This was true for both prime and subprime loans.
Foreclosure Rates on Prime Mortgages
1998
1998
1999
1999
2000
2000
2001
2001
2002
2002
2003
2003
2004
2004
2005
2005
2006
2006
2007
2007
0.0%
0.2%
0.4%
0.6%
0.8%
1.0%
1.2%
Fixed Adjustable
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Fixed vs. Adjustable Rate Mortgages
Default and foreclosure rates on fixed interest rate mortgages did not rise much in2007 and 2008. This was true for loans to both prime and sub-prime borrowers.
In contrast, the default and foreclosure rates on adjustable rate mortgages soared
during 2007 and 2008 for both prime and sub-prime borrowers.
The combination of lower lending standards, adjustable rate loans, and the Fed's
interest rate policies of 2002-2006 was disastrous.
Incentives matter and perverse incentives created the crisis of 2008.
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Impact on US stock market
The US stock market peaked in October 2007, when the Dow Jones Industrial Average index exceeded14,000 points. It then entered a pronounced decline, which accelerated markedly in October 2008 ByMarch 2009, the Dow Jones average had reached a trough of around 6,600. It has since recovered muchof the decline, exceeding 12,000 during most of 2011, and occasionally reaching 13,000 in 2012.
http://en.wikipedia.org/wiki/Dow_Jones_Industrial_Averagehttp://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average -
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Impact on Financial institutions
Initially the companies affected were those directly involved in homeconstruction and mortgage lending.
Over 100 mortgage lenders went bankrupt during 2007 and 2008.
The financial institution crisis hit its peak in September and October
2008. Several major institutions either failed, were acquired under duress,
or were subject to government takeover.
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Impact on Credit markets
There was the equivalent of a bank run on the money market mutual funds.
Withdrawal from money markets were $144.5 billion during one week, versus $7.1 billion the week prior.
This interrupted the ability of corporations to rollover (replace) their short-term debt.
September 18, 2008: $700 billion emergency bailout. Bernanke reportedly told : f we don't do this, we maynot have an economy on Monday.
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Global effects
The crisis rapidly developed and spread into a globaleconomic shock, resulting in a number of
European bank failures
Declines in various stock indexes
Large reductions in the market value of equities
At the end of October 2008 a currency crisis developed.
A report in 2009 by Bloomberg states that $14.5 trillion ofvalue of global companies has been erased since the crisisbegan.
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U.S. economic effects
Real gross domestic product (GDP) began contracting in the third quarter of 2008.
GDP GROWTH RATE
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U.S. economic effects
For the majority, income levels have dropped substantially. And, unemployment rateincreased substantially.
UNEMPLOYMENT RATE
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Impact on Turkey
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Impact on turkey
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Turkey and Other Developng Countres
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Bond Return Performance
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Growth Rates in Turkey and Other Countries
Countries 2009 2010 2011
World Average -2.2 2.7 3.2
High Income Countries 3.3 1.8 2.3
Euro Zone -3.9 1.0 1.7
Developing Countries 1.2 5.2 5.8
Turkey -5.8 8.0 4.2
USA - 2.5 2.5 2.7
Japan -5.4 1.3 1.8
China 8.4 9.0 9.0
India 6.0 7.5 8.0
Mexico -7.1 3.5 3.6
Argentina -2.2 2.3 2.4
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Currency Market
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Concludng Remarks
On March 2009, U.S. Fed Chairman Ben Bernanke said that he felt that ifbanks began lending more freely, allowing the financial markets to return tonormal, the recession could end during 2009.
However, this Recession is likely to be lengthy.
It will take time for the malinvestments to be corrected and for households toimprove their personal financial situation.
The IMF has been trying to lead goverments and warn them because:
Unlike the Great Depression, this recession was synchronized by global integration ofmarkets: last longer, have slower recoveries.
Recovery has began, but it depends crucially on the right policies being adopted today.
Governments should expand social safety nets and to generate job creation Rising inequality within Western economies.
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The END: Which one is more likely?
What is next?