The Global Financial Crisis (GFC) is a one-off event; - It will not

happen again. (Against)

I. Intro
II. Objectives
1. “Bubble”
- Asset price bubbles, or episodes in which prices rise and then fall by
substantial amounts.
1.1. What happened at that time
● In the years leading up to the GFC, economic conditions in the United
States and other countries were favorable. Economic growth was
strong and stable, and rates of inflation, unemployment and interest
were relatively low. In this environment, house prices grew strongly.
● Expectations that house prices would continue to rise led households,
in the United States especially, to borrow imprudently to purchase and
build houses. A similar expectation on house prices also led property
developers and households in European countries to borrow
excessively. Many of the mortgage loans, especially in the United
States, were for amounts close to (or even above) the purchase price
of a house. A large share of such risky borrowing was done by
investors seeking to make short-term profits by ‘flipping’ houses and by
‘subprime’ borrowers (who have higher default risks, mainly because
their income and wealth are relatively low and/or they have missed
loan repayments in the past).
● As mortgage banks no longer care about customers’ ability to pay,
loans become risky with more lenient standards. Investment banks,
instead of spending profits to hedge risks, spend billions of dollars to
reward leaders and members for sudden short-term profits. Credit
rating agencies for CDOs equate mortgages differently, most of which
are rated AAA - the same level of creditworthiness of US government
bonds. Insurers believe new financial instruments are "insolvent".
● With no one interested in loan quality, the outstanding balance of US
real estate mortgage loans has increased at breakneck speed. From
$160 billion in 2001, mortgage balances rose to 540 billion in 2004 and
exploded to $1.3 trillion in 2007. It is estimated that by the end of the
third quarter of 2008, more than half of the US housing market's value
was borrowed money, with one third of these being bad debts.
● The machine's first gears started to fail a year later. Homebuyers are
willing to leave the property when it can no longer be paid for since the
loan-to-home value ratio might go up to 99%. Millions of residential
properties were put up for foreclosure, the market was frozen, and
housing values were steadily declining.
1.2. Link to the present
● The go-to line this year from analysts and economists alike is that “the
Fed will push until something breaks.” Increasingly, it's looking like that
"something" might be the weakening U.S. housing market.
● Las Vegas is one of the leading indicators for home price action in the
housing market, like we saw in 2008 and the recent frenzy. The buyer
pool has, for the most part, dried up.
● But it's not just bubbly markets like Las Vegas and Boise that are
feeling the pain: This housing downturn is picking up steam nationwide.
In fact, as of last week, mortgage purchase applications are down 38%
on a year-over-year basis. That marks the lowest reading since 2014.
Simply put: Housing activity is crashing.
● The 2008 housing crash, of course, was a different story. Unlike 1981
(nineteen eighty-one), the 2000s housing downturn was brought on by
a housing bubble. That slowdown started in 2005 after a series of Fed
rate hikes. Over the subsequent years, it would escalate into a full-
blown housing bust that brought on the Great Recession. Unlike 1981
(nineteen eighty-one), the 2000s housing crash was underpinned by a
perfect storm of rampant overbuilding, deteriorating household
finances, historic levels of overvaluation, and toxic subprime
mortgages.
● While the 2022 housing market downturn doesn't fit squarely into either
the 1981 nor 2008 camp, it does share traits from each. Just as in
1981, the 2022 housing market has deteriorated in the face of a historic
mortgage rate shock. And similar to 2008, the 2022 housing market
has once again become detached from underlying economic
fundamentals.
● The Pandemic Housing Boom—which saw U.S. home prices climb
43% in just over two years—coupled with 7% mortgage rates has
simply pushed affordability beyond what many would-be borrowers can
afford. Relative to incomes, it's actually more expensive to buy now
than it was at the height of the housing bubble.
● Whenever mortgage rates rise, some would-be borrowers—who must
meet lenders' strict debt-to-income ratios—lose their mortgage
eligibility. When mortgage rates spike from 3% to 7%, it translates into
millions losing their ability to purchase.
● The housing market entered into a downturn back in the summer. That
said, the economic contractions aren't yet at the level you'd expect to
see before a Fed-induced recession.
● On one hand, single-family housing starts are down 18.5% (eighteen
point five) on a year-over-year basis. On the other hand, homebuilders
remain busy. A combination of supply-chain constraints and an
eagerness to cash in on the Pandemic Housing Boom led
homebuilders to massively ramp up production over the past two years.
That backlog is so big, they are still working through it. And as long as
 builders and contractors remain busy, it will slow down the spike in
construction job cuts that normally come before a Fed-induced
recession.
● This year, Wells Fargo projects sharp declines in new-home sales (-
10.5%) - for nearly eleven percent, existing-home sales (-7.4%), single-
family housing starts (-7.3%), and housing GDP (-10.1%). Then, in
2023, Wells Fargo expects another drop in new-home sales (-6.5%),
existing-home sales (-13.1%), single-family housing starts (-12%), and
housing GDP (16%).
● If Wells Fargo's forecast—which also predicts a 5.5% decline in U.S.
home prices in 2023—comes to fruition, it would mean that the housing
market downturn reaches a level that historically occurs only during
recession.
● Heading forward, we believe the housing market will continue to
deteriorate.

2. Governments are standing on debt

● Countries rushed to borrow during the pandemic, causing the global
public debt to reach a record $71.6 trillion this year.
● Sri Lanka declared a default on April 12, with $51 billion in foreign debt,
as the country faced its worst economic crisis since independence in
1948. Last month, inflation here. hit 18.3% - double the rate in the US.
Prices of all essential products skyrocketed.
● Sri Lanka defaulted on its debt in the context that the whole world was
also burdened with a huge debt, which had accumulated significantly
over the past two years of Covid-19. According to the "Public Debt
Index" report released earlier this month by asset management firm
Janus Henderson Foundation (UK), global public debt is expected to
increase by 9.5% to a record $71.6 trillion this year.
● Public debt increased largely because the US, Japan and China
boosted borrowing. Among them, China's debt grew the fastest and the
most, with $650 billion last year. Among the large developed
economies, Germany's debt grew the fastest at 15%, almost double the
global average.
● Previously, in 2021, the report said that global public debt reached a
size of 65.400 billion USD, up 7.8% compared to 2020. That was the
time when every country increased borrowing when interest rates fell to
record lows. , to $1.010 billion, with a real interest rate of only 1.6%.
However, debt servicing costs are expected to increase 14.5% this
year to $1.160 billion.
● However, the debt volume was very high before Covid-19 appeared.
During the pandemic, deficits and debt grew much faster than in the
early years of other recessions, including the Great Depression of the
1930s and the 2008 financial crisis.
 ● According to the IMF's Global Debt Database, global debt has grown
by 28%, to the equivalent of 256 percent of GDP in 2020. Public debt
accounted for about half of this increase, with the rest coming from
non-financial companies and families. Public debt now accounts for
nearly 40% of total global debt, the highest in nearly six decades.
● In developed countries, economic activity, spending and revenue are
likely to return close to pre-pandemic projections in 2024. However, the
situation in developing countries is far more worrisome. Both emerging
and low-income economies face persistent revenue declines.
● Rising food and energy prices are adding pressure to the poorest and
most vulnerable. Food accounts for 60% of the consumption needs of
households in low-income countries. For low-income countries
dependent on imported fuel and food, an inflation shock may require
more subsidies.
● "Now, the economic shocks from Covid-19 and the war in Ukraine are
adding to the debt challenges facing low-income countries, at a time
when central banks are starting to raise interest rates. ", assessed by
the IMF.
● The credit crisis was further aggravated by the decline in China's
offshore lending. Because they are facing solvency concerns in the real
estate sector. This creditor also faced many other challenges and
changes such as the anti-epidemic blockade, the transition to a new
growth model; and issues related to existing loans to developing
countries.

3. Signs
3.1. Appreciation of USD currency
- The US greenback has a great influence on the global economy and
international finance. Currently, the dollar price is at its highest level in
two decades and the main reason lies in the decisions of the Fed (Fed
hiked interest rate in response to high inflation). As the Fed began its
tightening cycle in March, the dollar became more attractive to
investors around the world.
- In all economic conditions, the USD is seen as a safe store of value. In
uncertain economic conditions - such as during the Covid pandemic or
war in Eastern Europe, investors have more incentive to buy USD.
While a stronger dollar is a significant benefit for Americans traveling
abroad, it makes most countries around the world wobbly.
- The exchange rate of the pound sterling, the euro, the yuan, the yen
and many other currencies against the dollar all plummeted, causing
countries to import essential goods, such as food and fuel, at more
expensive prices.
 ● In China, which tightly controls its currency, Beijing pegged the
yuan to a two-year low while taking steps to control the
currency's depreciation.
● In Nigeria and Somalia, where the risk of poverty is already
lurking, a strong dollar is pushing up prices for imported food,
fuel and medicine. A strong dollar also pushes Argentina, Egypt
and Kenya, which are heavily indebted, close to default, and it
could slow foreign investment in emerging markets like India
and South Korea. again.
- In response to the situation, the central banks of the countries
simultaneously raised interest rates and took drastic measures to save
the local currency. All of this comes at a time when economies are
under pressure from inflation and rising energy prices due to the
Russo-Ukrainian war.
- On the US side, a stronger dollar is causing uncertainty on Wall Street
as many of the companies in the S&P 500 do business around the
world. According to an estimate by Morgan Stanley, every time the
Dollar Index, which measures the strength of the dollar against a
basket of six other major currencies, increases 1%, the profits of
companies in the S&P 500 fall 0.5%.

3.2. The US economic dynamic failure

- The number one driver of the world's largest economy is consumption.
However, American consumers are facing many difficulties. After more
than a year, almost every commodity has increased in price while wage
growth has not kept pace, consumers in this country are having to
tighten their wallets.
- In addition, another reason for American consumers to reduce
spending stems from the Fed. Interest rates in the US are rising faster
than ever before. This sent home mortgage rates to their highest levels
in more than a decade and pushed many homebuyers into trouble.
Americans are suffering two blows at the same time: Borrowing rates
and rising prices for goods, especially essential goods and services like
food and housing.

3.3. War and policy conflicts

- Another sign of an impending global recession is inconsistencies in
monetary and fiscal policy in several major economies. Nowhere in the
world is the economic, financial and political conflict more evident than
in the UK.
- Like much of the rest of the world, Britain is grappling with rising prices
caused mainly by the pandemic shock, followed by trade disruptions
due to the Russo-Ukrainian war. As the West reduces purchases of
 Russian natural gas, energy prices in Europe skyrocket, and supply is
squeezed.
- The situation got worse when the government of British Prime Minister
Liz Truss announced the biggest tax reduction plan in 50 years. The
plan has drawn criticism from economists because it comes at a time
when inflation in the UK is hitting record levels.
- The decision caused panic in global financial markets, leaving the Bank
of England (BOE) in a deadlock between the Government's growth
stimulus plan and its mandate to fight inflation. British bonds have sold
off globally, pushing the pound against the dollar to the lowest level in
nearly 230 years - the period since 1792, when the US Congress made
the dollar the currency of this country.
- For British people, the situation is even more difficult when they both
have to endure a cost-of-living crisis with 10% interest rates - the
highest in the group of 7 industrialized countries (G7) - and also face
higher borrowing rates. Millions of homeowners in the country are
paying off their mortgages by hundreds, if not thousands, of pounds.

III. Thus
As central banks across the world simultaneously hike interest rates in response to
inflation, the world may be edging toward a global recession in 2023 and a string of
financial crises in emerging markets and developing economies that would do them
lasting harm.