The history of the 2006 economic crisis
This presentation is the property of its rightful owner.
Sponsored Links
1 / 25

The History of the 2006- ? Economic Crisis PowerPoint PPT Presentation


  • 75 Views
  • Uploaded on
  • Presentation posted in: General

The History of the 2006- ? Economic Crisis. Three Parts: 1) Government Intervention; 2) Federal Reserve Policies; and 3) Corruption. Time Line. 1938 Fannie Mae as government agency 1967: LBJ spins the Fannie off as GSE 1970: Freddie Mac created 1977: CRA enacted –

Download Presentation

The History of the 2006- ? Economic Crisis

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -

Presentation Transcript


The history of the 2006 economic crisis

The History of the 2006- ? Economic Crisis

Three Parts: 1) Government Intervention; 2) Federal Reserve Policies; and 3) Corruption


Time line

Time Line

  • 1938 Fannie Mae as government agency

  • 1967: LBJ spins the Fannie off as GSE

  • 1970: Freddie Mac created

  • 1977: CRA enacted –

  • 1992: Congress pushes FF to provide low income loans

  • 1995: CRA strengthened

  • 1996: HUD required that 12% of all mortgages purchased by FF be special affordable loans -- income less than 60% of the median in the area – then 20% in 2000, 22% in 2005 and 28% in 2008. HUD also gives FF target for affordable loans of over 50%.


The history of the 2006 economic crisis

FF with implicit govt guarantee can offer product at lower prices: gap between AAA and 10 yr Treasury 1.46% whereas between FF and 10 yr Treasury .5%


Given fannie freddie are as good as us govt can attract funds from around the world

Given Fannie/Freddie are “as good as US govt” can attract funds from around the world


Fannie freddie dominate housing market over 80 of all mtg

Fannie/Freddie dominate housing market – over 80% of all mtg


Looser standards

Looser Standards

  • In the 1980s, groups such as the activists at ACORN began pushing charges of "redlining" - claims that banks discriminated against minorities in mortgage lending.

  • In 1989, Congress amended the Home Mortgage Disclosure Act to force banks to collect racial data on mortgage applicants;


Looser standards1

Looser Standards

Larger percentage of NINJA loans included in securities

  • A 1995 strengthening of the Community Reinvestment Act required banks to find ways to provide mortgages to their poorer communities

  • the Boston Fed ruled that participation in a credit-counseling programshould be taken as evidence of an applicant's ability to manage debt.


Securitization

Securitization

  • 1. A borrower – sometimes working with a broker, gets a loan from a lender.


Securitization1

Securitization

  • 2. The lender bundles a number of home loans and sells bundle to an investment bank

Security A


Securitization2

Securitization

  • 3. The investment bank takes pools of home loans worth billions of dollars and places them in a trust. The trust issues bonds secured by the mortgages.


Securitization3

Securitization

  • 4. The investment bank divides the loans into bond risk groups - “tranches”. Rating groups indicate the risk.

Medium risk

Low risk

High risk


Securitization4

Securitization

  • 5. Bonds are sold to bigger investors

  • 6. Potential risk of default is solved by credit default swap


Part 2 fed policies

Part 2: Fed Policies


In response to 2002 stock market collapse fed funds is lowered

In response to 2002 stock market collapse, Fed Funds is lowered.


The history of the 2006 economic crisis

Subtracting the averaged trailing 12 months median CPI (SOURCE: Cleveland Fed) from the average of the monthly Fed Funds rate (SOURCE: Federal Reserve).


Mortgage rates fell

Mortgage Rates Fell


Us housing bubble

US Housing Bubble


Fed funds rate versus case shiller home price index robert murphy mises org

Fed funds rate versus Case Shiller home price index: (Robert Murphy, Mises.org)


Root cause

Root Cause

  • The bubble is a combination of “affordable housing” and the Fed's boom-bust policies.

  • The NINJA loans meant that the investors looking for homes to buy and resell got no down, interest only, ARMS also. It was not just poor people.


Is it due to lax regulation were regulators sleeping

Is it due to lax regulation? Were regulators sleeping?

  • NO regulators relaxed lending standards - at the behest of community groups and "progressive" political forces.


Securitization5

Securitization

  • 4. The investment bank divides the loans into bond risk groups - “tranches”. Rating groups indicate the risk.

AAA

Medium risk

Low risk

High risk


The crunch

The Crunch

  • Federal funds rate was kept at 2 percent or lower from November 2001 right through to the end of 2004.

  • Greenspan used the housing market to prop up the economy after the 9/11 attacks.

  • In 2002 he called mortgage markets a "powerful stabilizing force" because they allowed people to extract equity from their homes.

  • In 2004 he said that homeowners should consider using adjustable-rate mortgages to save on interest and prepayment costs.

  • In 2005 Fed Funds rate increased tremendously– from less than 2% to more than 5%


When fed pops bubble ff have to write off bad debt

When Fed pops bubble, FF have to write off bad debt


Much of the bad debt had been securitized

Much of the Bad Debt had been securitized


Ohhhh nooooo credit crunch

Ohhhh Nooooo – Credit Crunch


  • Login