1. The 2007 Financial Crisis
Who is to blame?

2. Today’s Objective After today’s lesson, students will be able to…
Explain the causes of the 2007 Financial Crisis and the response of President Obama
Essential Skill:
Reflect upon the impact of actions on others

3. Prior to the Crisis
Dot.com bubble and 9/11 terrorist attack create fears of a economic collapse.
President George W. Bush reduces taxes to spur consumer spending
Federal Reserve reduces interest rates from 6% to 1% to encourage consumer loans
Consumer Debt Rises
Housing prices rise consistently from

4. The Subprime Mortgage Crisis
What is a subprime mortgage?
Subprime Mortgage: a loan made out to borrowers with lower credit ratings
These mortgages have higher interest rates than normal mortgages because the banks are taking on more risk
Banks, desperate to create liquid capital (make money), start offering more subprime mortgages in the early 2000’s

5. The Subprime Mortgage Crisis
Commercial Banks, with an understanding that their mortgages were risky, bundle them and sell them to investment banks
Investment Banks then sell them back to homeowners on the stock market
Real Estate thought to be a sure fire investment
Investment Banks leverage these mortgages in order to make more money
Example:
Real Worth = $1,000
Loan = $500,000

6. The Bubble Bursts Market Plummets
Real Estate Prices Drop
Fed Raises Interest Rates to 5-6%
Homeowners cannot pay their mortgage and homes cost less than mortgage
Foreclosure leads to banks not collecting money
The “sure fire” stocks quickly fall
Investment banks with $500,000 loans are unable to pay back because they were counting on mortgages.

7. 2008 Election

8. President Obama’s Response
One of the first actions Obama takes is to introduce a stimulus package
$830 billon to bail out the banks and keep unemployment from rising over 8%
TARP: Troubled Assets Relief Program
Additional regulations to hold regulators accountable