1. The Financial Crisis
Dr. Shuler· Notre Dame Preparatory · World History
Based on a David Jensen PPT

2. The Great Recession: What happened?

3. What happened? It is an historical event because…
Worst financial crisis since the Great Depression
$20 trillion of financial assets owned by U.S. households were destroyed
housing prices plummeted
stock portfolios crashed
unemployment soared
especially among young people

4. What happened?

5. What happened?
Just as the 1920s had seen prosperity before Black Tuesday, the years after 9/11 gradually saw an uptick in the economy
Housing prices climbed and climbed: “Bubble”
More than double between 1998 and 2006
Easy Credit: Families who couldn’t afford mortgages were offered them with no money down
Homeowners borrowed $1 trillion from
But, what goes up must come down…
Home prices increased 124% between 1998 and 2006
To make these higher priced homes more affordable, banks eased credit restrictions
Instead of putting 20 percent down, you could put little to no money down
After all, the bank could always repossess your home if you didn’t pay
Homeowners borrowed $1 trillion from

6. Effects: Economic Catastrophe
“Underwater Homes”: now worth less than your mortgage (what you owe the bank)

7. What happened?
MBS=Mortgage-Backed Securities (bad loans become traded like stocks)

8. Effects of the crisis
Financial institutions started crumbling…
Bear Stearns, one of New York’s oldest investment banks, went bankrupt
Lehman Brothers went out of business (4th largest)
Merrill Lynch was bought by Bank of America
Major consumer banks defaulted (but FDIC protection)
Wachovia
Washington Mutual
AIG, one of the biggest insurance companies in the world, teetered on the brink of bankruptcy
U.S. taxpayers provided $180 billion in government support to keep AIG afloat
Meanwhile, job losses soared
Unemployment above 10%

9. Big 3 automakers teetered
Obama beats McCain in the presidential election: Nov. 2008
Bush/Obama administrations approve $80.3 billion in loans to prevent General Motors and Chrysler from going out of business. Only Ford wouldn’t take the loan.
Government also passes a “stimulus” package, paying for road construction, new industries, and other ways of injecting money into the economy

10. The Global Picture
IMF estimates that U.S. and European banks lost more than $1 trillion on toxic assets and from bad loans from January 2007 to September 2009
The contagion spread to Europe where it continues to this day in some countries
Europe favors “austerity” rather than government stimulus with limited success
Unemployment in Greece is still 23% and in Spain is 19%
Youth unemployment in Greece has declined from 60% to around 48%

11. Why Did It Happen? Immediate Causes
Speculation in real estate & easy loans
Bank financial speculation in mortgage-backed securities
Long-Term Causes
Deregulation in the 1980s and 1990s
Glass-Steagall Act (1933) largely repealed by 1999
Business ethics and culture change to emphasize unlimited profits and duty to shareholders… but not consumers or employees
Government promotion of home ownership

12. Recovery
AIG, General Motors, and Chrysler repaid their loans…with interest
Although millions lost their homes and their jobs, no bankers and no federal regulators went to jail
Regulations are passed to protect (slightly) against this financial speculation hurting the economy (Dodd-Frank Reforms)… but some critique them for making loans harder to get or for not going far enough and subsidizing risk-taking in “too-big-to-fail” corporations
The U.S. economy recovers and keeps growing, but many think it is an “ugly” recovery

13. Recovery
Only 11% unemployment vs. 25% in the Great Depression

14. The Good News Since the Dodd-Frank Act was signed into law in 2010…
The U.S. economy has created 16 million jobs
Business lending has increased 75%
Banks of all sizes pulled in profits in 2016 of $171 billion
But the banking industry is opposed to so much regulation and small businesses have sometimes complained too
The Brookings Institution provides a thorough evaluation:

15. Now Voters No Longer Seemed Concerned…
Trump has appointed a number of former Goldman Sachs officials, which before would have been politically toxic but now saw only muted concern.
On Thursday (5/5/2017), the House Financial Services Committee voted in favor of the Financial Services Act, which if approved by Congress and the President would…
Repeal Dodd-Frank, diluting bank regulations
Eliminate the Consumer Financial Protection Bureau (previous oversight of Wall Street was paid for BY Wall Street)
Allow high-interest, high-fee loans ( so-called “predator financing” but profitable for banks) *