(Instructors’ name) (Date)

(Insert surname)

(Instructors’ name)


Part I

Inside the meltdown

The main issue that is brought out in the PBS Frontline episode of“The Meltdown” is the reason why there was economic recession inUnited States in 2007. The main causes of thecrisis were due to overvaluation that was done on housing marketingUnited States in 2006 and the subsequent crush. In the overvaluation,the prices of housing were rises because of easy obtaining of creditand false belief that housing prices should be on an upward trend(Chinoy, 56). Initiate rates on adjustablerate mortgages, which were low and low down payment requirements ledto short term speculation with the focus of selling at morefavourable terms and prices. After there was a period of rise in theprice of homes, there was a change in 2006 where the prices startedto decline. This was due to rise in interest rates, which in turncreated a poor refinancing environment. After the poor refinancingenvironment, there was a follow in default activities as prices ofhomes failed to rise as it was expected. There was inability ofrefinancing the initial rates.

The main reason for the increase in the prices ofhomes was due to increase in the demand for the homes. Over thedecade that ended in 2006, there was approximation in increase inhouses by a percentage of 124 (Chinoy, 109).The growth that was on the home prices was much that that which wason income of individuals. During the peak of the house price rise,the house prices were estimated to be 4.2 times the household income.Through this, it implies that those that bought new houses tooklarger loans from financial institutions, which were relatively morethan what they earned. Those who already had homes also were affectedas they increase their paper wealth by taking out a second mortgageto improvement of their homes and increased consumer spending(Doyran, 14).

The prices of homes were also pulled up byinvestors who though this was the opportunity for getting exposed tohigher yields in united states market over the low yielding unitedstates treasury. The flow of foreign money that was entering UnitedStates increased leading to outpacing of growth in supply of assetsin which the money could be invested. The investment banks usedhighly rated securities to meet the demand, which was high at thetime. The investors overlooked the drop in the lending rates due tothe complexities of the origination, aggregation and the process thatwas used in securitization (Doyran, 78).Mortgage obligations acted as ways through which many underlyingmortgage loans payments were put pooled together and then paid out toa sequence of priority, which was referred to as cash flow waterfall.

There was rumour that was started in 2008 thatstated that Bear Steans was having a problem in liquiding and theywere running out of cash. There was a drop that was observed in theirshares and the people that had their money in the company neededtheir money out. The force that was behind the company forced the CEOto go to the press to appear the investors of the company but insteadthe appearance made the company to look more untrustworthy. Thesituation led to more investors refusing to deal with the company.There are other companies and banks that are brought out thatsuffered from the crisis. Lehman brothers suffered from the crisis.Misrepresentation of the financial statements and the misuseof accounting practices was the main reason for the Collapse ofLehman Brothers. It was said that upper administration dishonored theSarbanes-Oxley Act by using questionable and unprincipled accountingobserves, more specifically by applying Repo 105 transactions.

Part II

Section 2

Analysis of data percentage changes and graph

Personal consumption expenditure as used in the analysis of theperiod is a measure that was given to the price changes in consumergoods and services. The approach consists of the imputed andexpenditures of households (Macdonald, 70). The use of the aspect inanalysis of economic status is due to the data that is obtained fromthe measure pertaining non-durables and also the durables.

Personal savings rate that was examined is the amount of money asexpressed as the percentage that one deduct s from personal incomeearned. These data sets were chosen to gain some insight as towhether recession was due to real changes in available income orconsumer spending habits. The two data sets being analyzed were bothgathered from the Federal Reserve Economic Data website (Macdonald,209).

From the graph, it is observed that there were changes that occurredin the PCE and PSR with some months having more changes than theother months. The reasons that led to the changes will be discussedwith consideration of the points that are highlighted in the graph.The general trend observed in the graph is that there was that therewas a general increase in personal consumer spending over the periodof seven years studied with a percentage of 25. The personal savingrate of the consumers however decreased with a percentage of 5. Thefirst point in the graph highlighted shows a percentage increase of125 in PSR (Markham, 234). The increase was in 2008 when the UnitedStates started to experience checks reaching the citizens of thecountry. The money that the citizen received from the checks is whatleads to the increase as there was more savings from the checks. Thesecond part that is highlighted in the graph is that shows a decreasein PSR that mounted to 29.11. The reason for decrease in the time wasdue to auctioning that was done to toxic assets by Federal Reserves. The point that is highlighted in 2009 shows an increase of 1.29 thenfollowed by a decrease of 0.87 in PCE. The reason for the decrease inPCE at the time when there was a decrease in the price of gas andthere was saving of money as a result of low confidence that theconsumers had (Markham, 287). The decrease in the spending that wasmade by the consumers is what led to the drop by 0.87%.

Another point noted in the graph was that in 2013 when there was adecrease of 57.14%. The decrease was due to reduction in spendingthat was made by the consumers so that they were able to save to useduring the holiday.

Trends in the two indexes

The graph shows similar trends in PSR and PCE. The fall and rise inthe indexes occur in a predictable manner the trends are brought outby the reasons that have been analyzed in the seven years period. Inthe start of the recession in 2007, there was nothing that was simpleand when there was a concept that there was risk in the economy,there was no much spending by the people as the consumers had thefear that the economy would continue to be worse that it was at thetime. The saving of the economy through checks gave the consumersmore disposable income. The increase that occurred in spending wasalso together with a decrease in the savings that the consumers made(Verma,78). This resulted to increase in the confidence of consumersand there were willing to spend more on holidays that led to gain inthe fourth quarter. Change in the habits and the attitudes that theconsumers had was as a result of perception of the economy. Thereduction in the saving rates of the consumers was as a result ofunwillingness to spend the money that they had in the last half ofthe period that was covered in analysis. The unwillingness indicatesthat the consumers were gradually getting over the belief that theyhad that the economy was at a risk. the main cause of the trendobserved of fall and rise in the indices was a result of perceptionof what the consumers had on the state of the economy (Verma, 146).These are the reasons that lead to the huge changes that occurred inthe graph during the economic recession period.

Works cited

Batten, Jonathan, and Peter G Szilagyi. The Impact Of The GlobalFinancial Crisis On Emerging Financial Markets. Bingley, U.K.:Emerald, 2011. Print.

Chinoy, Mike. Meltdown. New York: St. Martin`s Press, 2008.Print.

Doyran, Mine Aysen. Financial Crisis Management And The Pursuit OfPower. Burlington, VT: Ashgate, 2011. Print.

Lewis, Michael. The Big Short. London: Allen Lane, 2010.Print.

Macdonald, Roderick. Genesis Of The Financial Crisis.Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2012. Print.

Markham, Jerry W. A Financial History Of The United States.Armonk, N.Y.: M.E. Sharpe, 2002. Print.

Ovanhouser, Raymond T. Financial Crisis In America. Hauppauge,N.Y.: Nova Science Publishers, 2009. Print.

Verma, N. M. P. Recession And Its Aftermath. India: Springer,2013. Print.