2.  THE CAUSE OF AMERICAN FINANCIAL CRISIS IN 2008
 SHOCKS TO THEGLOBAL ECONOMY
 IMPACT ON USA ECONOMY
 IMPACT ON OTHER DEVELOPED COUNTRIES AND EMERGING
ECONOMIES.
 IMPACT ON DEVELOPING ECONOMIES
 EFFECT ON GLOBAL OUTPUT GROWTH
 AMERICAN FINANCIAL CRISIS AND TRADE
 EFFECTS ON INTERNATIONAL TRADE

3. The global Financial Crisis of 2008 is the most severe financial
crisis that the world has ever faced since the Great Depression of
the 1930s.
The ‘Financial Crisis of 2008’ , also called the US Meltdown, has
its origin in the United States housing sector back in 2001-02, but
gradually extended over a period of time and eventually brought
the entire world under its grip.

4. The financial crisis is characterized by contracted liquidity in the
global credit and housing market, triggered by the failure of mortgage
companies, investment banks, and government institutions which had
heavily invested in subprime loans. Though the crisis started in 2005-
06, but has become more visible during 2007-08, when many of the
renowned Wall Street firms collapsed
Globally, companies and individuals have an ever increasing demand
for capital for both personal and corporate investments.
This makes access to finance difficult for the majority of the people.

5. The Cause con’t
Banks and other financial institutions in the United States of
America have gone through a long period of inappropriate
lending.
Relaxation of lending terms for mortgages was as a result of
the boom in the housing sector.
Millions of Americans with poor credit history who might not
have bought their homes were granted sub-prime-mortgages.
Traditionally, banks have been very conservative and
stringent in their requirements.

6. Cause con’t
Traditionally banks finance lending using deposits from
customers.
With increasing demand for mortgage loans, banks moved to a
new model where mortgages were being issued on the bond
market.
This led to the growing of the mortgage bond market as
mortgage brokers focused on less than ideal clients.
This proved to be very profitable as banks earned a fee for each
mortgage sold and urged brokers to sell more and more.

7. SHOCKS TO THEGLOBAL ECONOMY
The effect of the global financial crisis was worsened by
rising global energy and commodity prices which pushed
up inflation.
Emerging and developing countries have particularly
experienced strong rises in prices reflecting the high
weight of food in their consumption baskets.

8. IMPACT ON USA ECONOMY
The banking industry has been badly hit as many of the
mortgage bonds backed by sub-prime mortgages have
fallen in value.
As a result of the bad debts banks became reluctant to
lend and this led to a credit crunch.
A slow down in the building industry which contributes
15 percent to US output has had a ripple effect on other
industries especially makers of durable goods.

9. IMPACT CON’T
Bailouts of financial entities
Before the financial crisis reached its peak in the US, the federal
government bailed out investment bank Bear Stearns with nearly
$30billion to avert a major financial default.
It invested as much as $200 billion in preferred stock of the loss-
plagued finance giants Fannie Mae and Freddie Mac and at least $5
billion in their mortgage securities;
It further provided an emergency loan of $85billion to American
International Group (AIG)Inc. in return for an ownership stake of as
much as 80% in the stricken insurance giant.

10. IMPACT CON’T
 The Collapse of Lehman Brothers
 Ranked among the world's top investment banks, the Lehman Brothers expanded
aggressively into property related investments including the sub-prime mortgages.
 The sub-prime crisis with the decline in value of housing forced the company to take
huge write downs on the value of those assets and led to the loss of about US$14
billion.
 This further led to Lehman’s prime customers pulling out their monies into much
safer investment avenues e.g. investing in government bonds.
 This contributed to the company’s filing for bankruptcy protection and hence its fall.
The collapse of the company put tens of thousands of jobs around the world at risk.
 The impact was also huge in other major economies considering the integration of
the financial markets and the global nature of business today.

11. IMPACT ON OTHER DEVELOPED COUNTRIES
AND EMERGING ECONOMIES
 Financial markets in the developed world have been adversely
affected by the financial crisis. This has weakened growth in
these economies.
 IMF projections show that by end of 2008 and early 2009 most
developed economies was on the verge of a recession.
 The emerging economies have to a great extent remained
resilient to the global financial turmoil(disorder).
 However the strong growth in these economies has been
affected by the global down turn in economic activity and the
growth has been moderate.

12. IMPACT ON DEVELOPING ECONOMIES
 The financial systems in developing economies however, have remained
resilient to the financial woes in the US because business has still been
done in the tradition way where individuals or companies need to have a
good track record to be given credit or loans in these countries as a result
the risk levels are very minimal.
 However, the impact would be felt in the real economy as a result of
reduced demand for imports. This is likely to affect international market
prices of such products.
 Banks in the developing economies will likely see their credit lines from
foreign banks squeezed and the increasing financial flows that
these economies have been experiencing are going to dry up.

13. EFFECT ON GLOBAL OUTPUT GROWTH
There was a global slowdown in economic growth.
Reduced demand has led to price deflations in other
countries.
Uncertainty in International investment opportunities.
Slowdown in International trade
Reduction in External borrowing among countries

14. AMERICAN FINANCIAL CRISIS AND TRADE
Trade and Finance:
There is a two way relationship between trade and financial
services.
A well developed financial system boosts trade through provision
of financing and reducing exposure to risk.
On the other hand, trade creates demand for various financial
services and therefore promotes the development of financial
systems.
It is no wonder that the world leading financial markets are the
leading trading places for goods and services.

15. AMERICAN FINANCIAL CRISIS AND TRADE
The financial sector supports international trade in four main
ways:
 It provides working capital;
 It ensures receipt of payments in a least cost and risk manner;
 It provides valuable information to investors and traders; and
 It provides insurance against certain risks.
Credit shortages reduce imports and may under certain
circumstances, render trade financing more difficult.
Declining growth reduces trading opportunities while
raising competitive pressure.
Devaluation and international financial support can stimulate
trade

16. EFFECTS ON INTERNATIONAL TRADE
The global slow down had an impact on International
economy.
Reduced capital inflows.
Reduced demand of imports by EU, which was the one of
the major trading partners in the developing countries like
India and African countries.
Reduced demand for imports affects their prices and
consequently the terms of trade.
Declining world output also depressed world trade.
Financial crisis possess risks on trade payments.
Worsening trade balance as imports increase due to
weakening of currencies of our major trading partners.