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Modeling the Financial Crisis

A few examples: New York City, Ohio, and California

Presented by: Dr. Mark D’Amato and Rod Motamedi

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Where the Crisis Began

• Speculation in housing market• Creation of the Mortgage Backed Security

and the Credit Default Swap• Lack of government regulation in adjustable

rate mortgages, and poor underwriting standards

• Allowed MBS and CDS to continue unfettered

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Creation of Mortgage Backed Securities

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Spreading Contagion• Defaults in subprimes begin to increase, value of

MBS decline• Financial companies take huge losses, begin to

shore up new capital• Credit becomes scarce, lending slows, leveraged

institutions unwind at a loss• Fear of counterparty risk from holdings of Credit

Default Swaps and increased risk of default• Gov’t takes serious steps to prevent systemic

failure as assets decline in value

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Regional Impact

• Drop in employment• Decline in personal income • Decline in consumption expenditures• Decline in employment in industries that

supply consumption goods

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Regional Impact Cont.

• Decline in population– Due to loss of employment opportunities

economic migrants seek employment outside the region

• Decline of government spending

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Financial Sector Impact for NYC

Scenario• Taking out growth from 2004-2007 in the

financial sector for New York City

– Monetary Authorities 3,349 Jobs– Sec, Comm Contracts 10,146 Jobs– Ins Carriers, rel act 2,255 Jobs

Total 15,750 Jobs

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Total Impact for NYC

Job Loss• 2009 43.40 thousand jobs lost • 2013 44.96 thousand jobs lost

Gross Regional Product Loss • 2009 $9.311 billion• 2013 $10.55 billion

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2009 Financial Sector Impacts - NYC

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Motor Vehicle Manufacturing Sector Impacts for Ohio

Scenario• Taking out growth from 2004-2007 in the

motor vehicle manufacturing sector of Ohio.

– Over the four years there was a total of 3,013 jobs lost.

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Total Impact for Ohio

Job Loss• 2009 10.36 thousand jobs lost • 2013 11.39 thousand jobs lost

Gross Regional Product Loss • 2009 $934 million• 2013 $1.114 billion

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2009 Motor Vehicle Manufacturing Impacts - Ohio

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Construction Sector Impacts in California

Scenario• Taking out growth from 2004-2007 in

construction sector for California

– The total job loss in construction for 2004-2007 is 14,043 jobs.

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Total Impact for California

Job Loss• 2009 30.36 thousand jobs lost • 2013 32.85 thousand jobs lost

Gross Regional Product Loss • 2009 $2.015 billion• 2013 $2.425 billion

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2009 Construction Sector Impacts - California