Macroeconomics Final Report

VIETNAM NATIONAL UNIVERSITY HCMC

UNIVERSITY OF ECONOMICS AND LAW

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PROJECT TITLE:

Causes and Consequences of The 2008 Financial Crisis

Group 5:

Lý Mỹ Vân – K194071042

Nguyễn Thị Hồng Nhung –

K194071025

Đào Mạnh Hà – K194071014

Đào Trọng Giang – K19407101

Macroeconomics Report Professor: Huynh Thi Ly Na

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Group 5

Team Members:

TT

Họ tên

MSSV

Tasks

1

Lý Mỹ Vân

K194071042

· Government Actions

. Designing

2

Nguyễn Thị Hồng

Nhung

K194071015

· Introduction

. Causes

. Designing

3

Đào Mạnh Hà

K194071014

· The Beginning

. Conclusion

. References

4

Đào Trọng Giang

K1940710

· Consequences

Macroeconomics Report Professor: Huynh Thi Ly Na

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Abstract:

This report explains the main causes of the 2008 Financial Crisis and its influences

on the economic of the world and Vietnam in different aspects. Also, authors

analysis the world’s government actions to improve the worse performance and

some the actions of the Vietnam Central Bank.

Macroeconomics Report Professor: Huynh Thi Ly Na

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Table of Contents

Introduction ………………………………………………………………………. 5

Causes ………………………………………………………………………………. 5

The Beginning …………………………………………………………………… 6

Consequences ……………………………………………………………………. 7

USA ……………………………………………………….………………………… 7

The World …………………………………………………………………………. 13

Vietnam …………………………………………………………………………….. 13

Government Action ……………………………………………………………. 17

The US ……………………………………………………………………………… 18

Vietnam …………………………………………………………………………….. 20

The Action plans of Vietnam Government ……………………………. 21

The Action plan of The State Bank of Viet Nam ……………………. 22

Conclusion …………………………..…………………………………………….

References…………………………………………………………………………. 24

Macroeconomics Report Professor: Huynh Thi Ly Na

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Introduction:

Beginning in the mid-2007s, the US financial market began to fall into the worst

financial crisis since the early 1930s Great Depression. The domino effect of many

events and occasions resulted in a domestic recession in the United States, which

then spread worldwide. The key causes and consequences of the 2008 financial

crisis will be discussed in this term paper.

1. Causes:

The US government was responsible for establishing the new domestic economy as

well as creating new housing grounds after World war II. As a result, America

introduced a new lending scheme from England known as the mortgage, which is

described as a legal arrangement between two parties that transfers ownership of a

property to a lender as protection for a loan. A mortgage is a form of debt that

allows you to borrow money from a bank or other financial institutions to purchase

a house.

The most common features of mortgage loans are a set down payment, typically

between 3 and 20%, or private mortgage insurance to ensure repayment. The

minimum conditions for obtaining a mortgage loan are proof of employment and

wages. If a mortgage borrower fails to pay the monthly rates plus interest, the

mortgage lender takes ownership of the mortgage’s exchange value, which in this

case is the home. As a result, these loans were only available to people in the prime

market, excluding a large number of people from the American dream of

homeownership. So, in 1992, the US government began to implement a new lending

program with the aim of increasing “the homeownership rate of low and moderate

Americans.” (Warren Matthews, 2016). Traditional underwriting requirements such

as down payments were relaxed, resulting in the emergence of a second market for

so-called subprime mortgages. Under President Bush, the National Bank of

America – the Federal Reserve,lowered interest rates to 1% from 2001 to 2004,

allowing middle-class residents to reclaim their dream of homeownership while also

spurring economic growth and development and creating new employment during

the 2001 recession. The housing market then underwent a significant change. The

demand for mortgage loans grew dramatically as a result of low interest rates, as

Macroeconomics Report Professor: Huynh Thi Ly Na

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more people saw their chance to own a home. House prices were gradually

increasing at the time, and they were expected to continue to grow due to increased

demand in the real estate sector. Meanwhile, according to Raphael Bartmann

(2017), though supply for houses is somewhat inelastic because it takes time and

investment of resources to produce new homes for sale some counties in California

reduced potential building grounds, house prices increased even more.

Banks and other investors in the United States saw an opportunity to profit from the

housing market. Since interest rates were so low, it was simple and lucrative for

banks to borrow money at 1% to create mortgages. To exchange these mortgages,

the financial sector created its market. US banks sold these mortgages, also known

as mortgage-backed securities, to other banks and investors not only in the United

States but all over the world to make a profit. The demand for repayment plus

interest is passed to the buyer party against a specific charge. Since mortgage–

backed securities (MBS) have traditionally had low default rates due to high

underwriting standards and are also seen as stable due to increasing house prices,

banks, and investors, as well as pension and retirement funds, invested in MBS

because they promised steady (continuous) interest payments. The demand for these

new financial products grew rapidly, and banks soon found themselves unable to

meet the market’s demand. The maximum number of people who can get a prime

mortgage has been hit. As a result, US banks began to issue subprime mortgages to

borrowers who could not provide evidence of income or jobs, to increase the

number of mortgages available on the market. Low and adjustable interest rates,

reduced down payments, and sometimes multiple mortgages were subsidized by

banks, allowing low and middle-income Americans to borrow even more money for

larger homes they otherwise could not afford. In 2006, US housing prices peaked,

and “many buyers were buying not for shelter, but to resell at a fast profit,”

according to Raphael Bartmann (2017). The housing boom was created.

2. The Beginning

In 2007, the housing bubble burst. People no longer could pay for their expensive

houses or keep up with the expanding mortgages. Borrowers started defaulting,

which put more houses back on the market for sale at a time of which lacks the

buyers. As demand went down, the prices of homes dropped rapidly. As prices fell,

Macroeconomics Report Professor: Huynh Thi Ly Na

some borrowers had a mortgage for way more than their home was currently worth.

So more people stop paying which led to more defaults. People stopped investing in

real estate since it was no longer as profitable. Since the foreclosed houses were

now worth less money, financial institutions along with the homeowners lost

money. As a result, the housing market failed, banks collapsed and the Great

Recession began. As this was happening, the big financial institution stopped

buying subprime mortgages and subprime lenders were getting stuck with bad

loans. In February 27, 2007, The Federal Home Loan Mortgage Corporation

(Freddie Mac) announced that it will no longer buy the most risky subprime

mortgages and mortgage-related securities.

By 2017, big lenders had declared bankruptcy and many more filed for bankruptcy

protection. In April 2, 2007 New Century Financial Corporation, a leading subprime

mortgage lender, filed for Chapter 11 bankruptcy protection. The problem spread to

the big investors, who had poured funds into these mortgage backed securities and

CCDOs. There was another financial instrument that financial institutions had on