Us Liquidity Crises

8/8/2019 Us Liquidity Crises

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Group 3-

1. Shailesh Patel

2. Sunil Patidar

PRESENTATION

ONTHE RECENT FINANCIAL CRISIS

(LIQUIDITY & DEBT)

IN

USA


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INTRODUCTION

U.S. economy is largest in the world.

U.S. GDP is $14,093 billion.

Its 22.73% of world economy.

United States is a market-oriented economy.


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Causes of financial crisis

U.S. housing bubble and foreclosures.

Sub-prime lending.

Consumer and household borrowing. Housing speculation.

Corporate risk-taking and leverage.

Financial product innovation.

Interest rates.

Trade deficits.


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U.S. housing bubble and foreclosures


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Sub-prime lending


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The value of U.S. subprime mortgages wasestimated at $1.3 trillion as of March 2007,with

over 7.5 million first-lien subprime mortgages

outstanding.

It rise to 25% in 2008 as compare to 10% till 2004.


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Consumer and household borrowing

USA household debt as a percentage of annual

disposable personal income was 127% at the end of

2007 as compare to 77% in 1990.

U.S. home mortgage debt relative to GDP increased

from an average of 46% during the 1990s to 73% during

2008, reaching $10.5 trillion.

In 1981, U.S. private debt was 123% of GDP; by the

third quarter of 2008, it was 290%


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Housing Speculation

During 2006, 22% of homes purchased (1.65 million units)

were for investment purposes.

An additional 14% (1.07 million units) purchased as

vacation homes.

A record level of nearly 40% of homes purchases were

not intended as primary residences.

Collateralized debt obligations(CDO) &Credit default

swaps (CDS) was $405 bn out of which $305 bn were

formally defaults.


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Interest rates


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Trade deficits


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Between 1996 and 2004, the USA current account

deficit increased by $650 billion, from 1.5% to 5.8% ofGDP.

Financing these deficits required the USA to borrow

large sums from abroad.

USA households used funds borrowed from

foreigners to finance consumption or to bid up the

prices of housing and financial assets.

USA housing and financial assets dramatically

declined in value after the housing bubble burst.


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Household bubble formation

lending decision by institutesBorrowing decision by institutes

Govt. obj. regarding low income

household

Capital & credit available

Bank lending practices

Expected that refinancing available

A safe investment

Having speculation & over building


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Excess housing inventories

Housing price decline

Inability to refinance the

mortgage

Mortgage delinquency &

foreclosure

Mortgage cash flow

decline

Bank capital level

depleted

Bank failure

Liquidity crunch for

business

Negative effect on

economy

Central bank action

Fiscal stimulus packages

Stabilization of economy

Housing market Financial market


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THANK YOU

Us Liquidity Crises

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