FINANCIAL CRISIS

Content

3. Title4. Introduction5. Effects of economic

recession6. Sectors of economic

recession7. Banking sector8. Problem of banking

sector9. Capitalism10. Capitalism- history

11. Capitalism in the crisis12. Capitalism business cycle

13. Credit card

14. UK’s capitalist economy

15. Capital destruction

16. Oil sector

17. Oil sector’s effect

18. UK’s economic situation

19. Conclusion

DID PEOPLE ISSUE CAUSED THE FINANCIAL CRISIS

Presented by: Octoblue group( Salima Punjwani, Disha Thakkar, Poonam

Arora, Teeruth Junglee, Jaspreet Kheri , Shahgir Mir, Sameera Herath and Supraja

Ravula)

Introduction

Financial crisis also known as ‘credit crunch’.

Brought panic and turmoil in summer of 2007 to world’s financial markets.

Result: housing market went burst. World financial system undergoing ‘global

economic recession’ of staggering proportion.

Effects of economic recession

Unemployment levels shoot up.

Large companies start giving depressing profit figures.

Borrowers start defaulting.

Credit card purchases shoot up.

Prices of essential commodities shoots up.

Companies stop filling vacancies.

Prices of property and stocks decreases, but nobody buys them.

Country's GDP goes down.

Currencies of different countries diminishes.

Sectors of Economic CrisisFinancial meltdown caused by:

Banking sector

Capitalism Oil sector

Banking Sector

Main reason was massive speculation on housing and housing-related securities.

1. Bankers sold to people willing to own their homes adjustable-rate and interest-only mortgages.

2. These mortgages were then sold to commercial and investment banks.3. The banks used a process called securitization that converted the

mortgages into complex securities and these were then sold to investors.

4. After a year or two, the rate of the mortgages increased and homeowners could not afford the new payments or refinancing schemes. This results to most of them defaulting.

5. As this occurs, the complex securities began to fall in value, forcing investors and banks to take losses.

6. Banks no longer had enough money to lend (invest). 7. Banks and investors stopped lending (investing), as they feared other

banks and investors would not be able to pay them back leading to the credit crunch.

Problem of Banking sector

Greed and competition to win business drove banks and investors to ignore warning signs and take greater risks.

Potential problems of Banks Most bank’s liabilities have shorter maturity period than assets

This can be a potential cause of bank failure in case all depositors take out money at once (bank run)

Credit risk Possibility that borrowers will be unable to repay their loans More risk in prosperity period as lending terms tends to be relaxed

Interest rate risk Most deposits at floating rate Loans at fixed rate If floating rate is more than fixed rate bank loses ( S&LI ,America

1979)

Capitalism

Capitalism [economic liberalism] has been credited for generating wealth that has been unprecedented in history.

Resulted in free markets, free trade, financial markets and the removal of state intervention in the economy becoming prerequisites for the 21st century economies.

In more simpler terms it can be defined as: An economic system in which the means of production and distribution are privately or corporately owned and government intervention is minimal.

Capitalism: history of crisis

Karl Marx and Friedrich Engels referred the capitalistic system to the capitalist mode of production in Das Kapital (1867).

Capitalism has been credited with generating vast amount of funds for the economy but on the other hand, it has been associated with numerous crisis: US saving and loan scandal, 1985 The crash of 1929 ‘black Thursday’ - sent US and global economy into

a tailspin, contributing to the great depression. The crash of 1987- US stock markets suffered their largest 1day fall

since the great depression. Long term capital management,1998 – The collapse of hedge fund

long term capital market (LTCM) - occurred during the final stage of the world financial crisis that began in Asia in 1997.

The dot.com crash,2000 – stock market became beguiled by the rise of internet companies - ushering in a new era for the economy

Capitalism in the crisisThe effect of capitalism;

Lending and investment

seize up

Bank go bust

Companies in crisis

Workers are laid-off

Plants are closed/

bankruptcy

Capitalism businesscycle

Ref. http://www.optimist123.com/optimist/2008/10/who-will-modula.html

Credit card issue

Introduction of the ‘credit card’, allows people to spend more than what they usually earn monthly.

On the other hand banks were reaping profits, by extending the payback period as it would be more profitable for the bank if people did not pay back in full immediately, but instead pay smaller parts because of the interest that would be added.

Debt has come to play a central role in the mechanics of the capitalism economy.

‘UK’s Capitalist economy’

Capitalism resulted in banks being free to lend out money than what they had in possession.

Problem that this creates can be seen with Britain’s current dilemma.

Money being lent are not being recovered effectively.

Resulting in the UK currently facing a crucial macroeconomic problem, that is with personal debt now more than £1.4 trillion [more than the actual economy].

Capital destruction

Over $7 trillion has been wiped off the U.S. stock market. Indeed $1.1 trillion was wiped off on a single day i.e.15th October.

In mid of October $27trillion has been erased from stock market worldwide.

Housing value have been declined by $5 trillion Pension funds by $2.5 trillion Banks write offs are at $600 to $700 billion and is also expected to

be $1.4 trillion Large companies such as Lehman Brothers which had been

capitalized at $30 to $40 billion, has gone bankrupt AIG, which until a few months ago was capitalized at between $150

and $200 billion, required a $123 billion lifeline from the government to survive.

Oil sector

Periods of recessions have followed dramatic increases in the price of oil.

Industries that depended on energy prices suffered a sharp decrease in business and subsequently, reduced output and staff.

An economy-wide decline in demand and reduction in real is influenced greatly by the higher cost of oil imports and a stringent monetary policy.

Influencing factors slow down overall demand, and lead to subsequent recessions.

Economic recession is the outcome of the impact on the economy by drop in demand, role of aggregate forces and the allocative forces.

Oil sector’s effect

By January 2008 the price of oil passed the mark of $100 a barrel.

By May 2008 the price of oil reached an unprecedented $135 a barrel.

Oil has risen by 25% since January 2008 and by nearly 400% since the beginning of the 21 century.

Oil plays a key role in the functioning of the western economies, rising prices led to an unprecedented crisis with key sectors on the verge of disasters

UK’s Economic situation

Conclusion

There should be no doubt that Capitalism caused credit crunch crisis and oil crisis.

The issue will continue to cause the periodic crash, depression, collapse and recession as its fragile nature is to continually create a speculative bubble which drives the economy to continually produce.

As long as public are duped to continually consume every boom will be followed by a bust.