GREAT DEPRESSION AND SUBPRIME MORTGAGE CRISIS

SEHER HAKAN

CONTENT

How Great Depression started? Causes of Great Depression Causes of Subprime Mortgage Crisis How Crisis Spread All Over The World Basic Differences Conclusion

How Great Depression Started?

Black Thursday on 24th of October 1929 Started with Great Crash of Stock Market

Numbers of Crisis

Real GDP fell 30% Industrial production declined 47% Wholesale price index fell 33% Unemployment rate increased 25%

Table

Causes of GDP

Stock Market Crash Banking and Monetary Contraction Gold Standard International Lending and Trade

Stock Market Crash

In 1929, US stock price tripled Panic selling October 1929, stock price decreased by 33%

Stock Market Crash

Aggregate demand decreased. Business investment decreased. People feel poorer.

Banking and Monetary Contraction

Banking panic

Money supply decreased

Lose confidence

Banking and Monetary Contraction

20% of the banks went bankrupt Interest rates increased

Gold Standard

The UK abandon the gold standard. The Great Depression widen to the world

because of gold standard.

International Lending Trade

Lending rate decreased

Trade decreased

Mortgage Types

Prime Subprime

Causes of Subprime Mortgage Crisis

Boom and burst in US housing market Speculation Securitization Financial innovation

Boom and Burst in US Housing Market

Housing prices decreased. Value of mortgage back asset decreased.

Speculation

Interest only adjustable rate mortgage Easily given up houses NINA people

Securitization

Distribute risk Issue new securities

Financial Innovation

Offsetting risk exposure

How Crisis Spread All Over the World?

Credit Channel (Narrowed Economic Activity) Portfolio Investment Channel (Global

Liquidity)

How Crisis Spread All Over the World?

Foreign Trade Channel (Tourism, Real Estate Sale)

Negative Impacts of Expectation (Panic, Demand)

Basic Differences

Gold Standard

1. Credit-portfolio investment

2. Foreign trade

3. Globalisation

4. Negative expectation

Basic Differences

In 1929 - Tax and tariffs increased. In 2008 - Recapitalization

Conclusion-What we learnt?

Interest rates fall during crisis. There must be harmony between fiscal and

monetary policy.

Any Questions?

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