PRESENTATION

ON
THE 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.

 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.
U.S. housing bubble and foreclosures
 The value of U.S. subprime mortgages was
estimated 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.

 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%
 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.
Corporate risk-taking and leverage.
Interest rates
Trade deficits
 3etween 1996 and 2004, the USA current account
deficit increased by $650 billion, from 1.5% to 5.8% of
GDP.

 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.
 Household bubble formation

lending decision by institutes 3orrowing decision by institutes

Govt. obj. regarding low income

household Expected that refinancing available

Capital & credit available

A safe investment

3ank lending practices Having speculation & over building

 Housing market Financial market

Mortgage cash flow

Excess housing inventories decline
Central bank action

Housing price decline

3ank capital level
depleted
Fiscal stimulus packages
Inability to refinance the
mortgage 3ank failure

Mortgage delinquency & Liquidity crunch for

foreclosure Stabilization of economy
business

Negative effect on
economy
THANK YOU