U.S.

Economy

Part I.

The economic crisis:

Why?

(American) Capitalism
1)

Take a risk!

2)

Borrow money

3)

Invest it

Economic growth in modern

society

investment= growth
[GDP]

Finance

* Finance is using money to make money..

Investment banks
Commercial banks
Other kinds of special banks
Securities

 Finance has taken over the world!

Now, instead of profits coming from making
things (manufacturing), a large part of GDP
comes from banking.
But banks dont make anything!

 If

many banks
start failing,
the whole
economy will
sink.

Because
companies
need banks to
borrow money
for investment.

I. The Subprime Mortgage Problem

~After 9/11 the Federal

Reserve Bank put interest
rates- - (to 1%)

Low interest rates led to increase in

sales of new homes.

Housing prices started

to rise

So, mortgage companies started to

relax their lending policy.

Many people started taking

advantage of the booming
property market.
Since housing prices were going
up, buying a house or land was a
good investment.

The sub-prime market

Mortgage

companies/banks
now tried to sell house loans to
people who normally could
never get such a loan

people

with bad credit, low

incomes---- often immigrants.

II. 2006 inflationary pressures

As the U.S. economy improved in 2006,
interest rates went up (to 4%).

.and many people who had mortgages with

large mortgage payments, had trouble making

payments.

So many people
started defaulting in
their loans.

FALLING HOUSING PRICES!

As

people started
defaulting on their loans,
housing values started
falling.

[demand

started falling]

To much supply, not enough

demand
There had been a boom in housing
construction up until 2007.so too much
supply and not enough demand means

BIG TROUBLE!!!

Falling house values--If house prices are going up no

problem.

if house values are falling, they will

lose money when they sell.

And the bank doesnt

really want to get a
house if the housing
market is falling!

But why did this start a world wide

economic crisis?

This problem spread

across the whole
financial system
because

Lots of banks had bought lots of these

bad loans. (subprime mortgages)

The insurance company AIG also

made money by insuring these loan
debts.

Remember:
if the economy is contracting,
[the bubble breaks]
..and the banks have a lot of
bad loans and assets.

Then everything starts to spiral

down very quickly

III. THE FREEZING OF MONEY

MARKETS

Banks stopped lending!

Many banks found that they

did not have enough capital
to cover their debts.

Little capital reserves

So businesses started to
slow down.

So

the economy
started to slow down.

..when the economy is good,

and companies are making money,
people are generally
happybut.

Stock
market--share prices
*of course banks share
prices started falling
*other businesses started
losing value
*people started losing
confidence

Falling house prices

and a shortage of
finance caused the
whole economy to
decline.

Conclusion-Dangers!

Unregulated capitalism

The shift from manufacturing to finance in

America

Three main ways to control

capitalist greed:

Government regulations

Labor unions

Consumers [purchasing power]