The Causes of Global

Economic Crisis of 2008

A Powerpoint Presentation by
Priyadarshi Soumya Prakash
UM14272 (BM)

Decline in rates of profit: leaving the

golden age of US capitalism
After the post-war boom, with the entry of
expensive industrial machines and increase in
ratio of unproductive to productive workers,
the rate of profit fell from 22% in 1950s to

14% in 2002.
The government reduced taxes, interest rates
while the capitalist firms started raising prices
faster instead of increasing output and
employment.

Growing disparities
1974-2006: 91% of all income growth
went to top 10% of income groups.
1991-2003: Wealthiest 1% of the
Americans increased their share of
corporate wealth from 38.7% to 57.5%
1979-2007: Real profits in corporate
sector increased by 4.6% while real
employee compensation grew by only
2%

Growing disparities
The wealthy: expanding volume of funds
that sought high-return, high-risk financial
instruments to maximise profit in a lowprofit environment. Thus funds poured
into real estate creating favourable
conditions for a bubble to develop.
The working class: Easy credit(in the form
of mortgages) became the substitute for
decent wages.

Formation of new financial

instruments:
Securitisation of mortgages into
Mortgage backed securities(MBSs) and
Collateralised debt obligations(CDOs).
This was done so that competing lenders
can sell off mortgages and have more
funds for lending. Also, as pointed out
earlier, there was a high demand for
such high-return financial instruments.

Formation of new financial

instruments:
The growing investor demand for
high yield mortgage products led
banks to sell mortgages to people
who couldnt afford them.

Low interest rates, cheap loans and

rising leverage of instruments:
Asset-to-equity ratio increased from
23 in 2004 to 30 by 2007.
Thus a ratio of 30 meant for every
dollar of equity the banks had 30
dollars of assets funded by lending; it

also meant they had 29 dollars

worth of liabilities.

Negligible government regulation of

the financial sector:
Government deregulation of financial
activity: (e.g. Repealing of Glass-Steagall
provisions in 1999.)
Lack of regulation of the so-called shadow
banking system.
Failure of Federal Reserve Chairman, Alan
Greenspan to supervise the financial
activities and apprehend the looming crisis.

Bubble Burst of 2007-08

The house bubble became
unsustainable when the house prices
increased faster than workers incomes.
The bubble burst in 2006 as rising
interest rates reduced house-prices and
increasing amount of people began
defaulting on their mortgages.

Credit crunch:
As people defaulted on their
mortgages, the value of their assets
declined, as the institutions holding the
assets were threatened with
insolvency.
Institutions were unwilling to lend freely
anymore and the flow of credit to real
economy threatened to dry up.

Thus started the Global

Financial Crisis of 2008.
Thank you.