Global Crisis

International Economics

Aguilera, Andres (2009470062)

Kim, Hyo Young (2009470010)
Lee, Kye Whan (2008470004)

Table of Contents
1. Introduction Global Crisis
2. Why? Economic Response to the Crisis

3. How? Policy Response to the Crisis

4. Conclusion - Whats Next?

INTRODUCTION

Global Crisis

Definition of Global Crisis

-

Began in July 2007

Loss of confidence by investors in the value of
securitized mortgages in the United States
Liquidity crisis prompted of capital into
financial markets by the United States Federal
Reserve, Bank of England, and the European
Central Bank
Stock markets worldwide crashed in September,
2008
Meltdown

Timeline towards Global Crisis

July, 2007
Bear Sterns
Hedge Funds

March, 2008
Bear Sterns
Bailout

September, 2007
Federal Slashes Rates

August, 2007
Subprime Mortgage
problems Go Global

September, 2008
Lehman Brothers Collapse

January, 2008
Real Estate Fears

Blueprint for a downfall?

Source: A Tales of Two Depression The Economist (2009)

WHY?

Economic Response to the Crisis

Nouriel Roubini Forecast

1. Roubinis Forecast
- Once-in-a-lifetime housing bust
- Oil shock
- Sharply declining consumer confidence
- Deep recession
2. Greed
- Spent far more than they made.

Similar Signs to Asian Crises in 1990s

Excessive borrowing &

reckless lending
Poorly regulated
banking systems
Weak corporate
governance
Cronyism in
abundance

Shoddy underwriting
Negligence on the part
of the credit rating
agencies
Lax government
oversight
Sub-prime financial
system

Imbalances between Savings and

Investments
Analogy of U.S. and Japan
debate in 1980:
Excess saving vs. declining private
saving in the U.S.
Current Account vs. large public
surplus
sector deficit
Excess of saving large capital inflow to the U.S. low
interest rate declining private savings housing price bubble
C/A deficit-not addressed taking advantage of r/a issuer

U.S. Trade Deficit

U.S. Government Deficit

Structural Causes
GlassSteagal Acts

Investment
Bank

Commercial
Bank

Gramm-

Growing
Capital

LeachBliley Act

Investment
Bank
=
Commercial
Bank
Financial Liberalization

Bubble
Economy
Emerging
economies

Real-estate
industry:

Sub-prime
Mortgage loan

Derivatives
Products: MBS

Structural Flaws
-

U.S. deregulation Competitiveness low lending

standards

- EU & Japan
Structural changes in product & labor markets.
- China
Sterilized intervention in the money market.

Other Contributing Factors

-

Low interest rates-wrong timing

Human greed-Wall street greed
CEO corruption
Lack of International cooperation
Protectionism

HOW?

Political Response to the Crisis

Policy Response to the Economic Crisis:

G-20

Cuts in Interest Rates

FED Oct 2007 5.25%
Today
0.25%
BOE Oct 2008 5%
Today
0.5%
ECB Oct 2008 4.25
Today
1%
BOJ Historically low!

Source: Goldman Sachs Effective Regulation Part 1. March 2009

Lower federal-funds rate are

usually a powerful tool to boost
economic growth, though the
impact tend to lag by several
months
Wall Street Journal, Oct 30 2008.

US TARP Troubled Asset Relief Program

Emergency Economic
Stabilization Act of 2008
(known as the bail-out)
US$700 Billion to buy:
1.

2.

Toxic Assets (especially

mortgage-backed
securities)
Recapitalize banks

Cash for Trash Paul Krugman

NYTimes, Sept 21, 2008.

Stimulus Plan
Known as the
American Recovery and
Reinvestment Act
(Feb09) $787 Billion
Infrastructure, Health
Care, Energy,
Education, Social
Security
Govt deficit calculated
to 1.84 Trillion. (NYTimes
May 11, 2009)

Source: KALs cartoon, The Economist, Feb 26th 2009

China: The World Banker

China stimulus plan of
4 Trillion Yuan ($586B)
Housing, Rural Dev,
Infrastructure, Education,
Environment, Industry and Tech.
(WSJ May 22 09)
Chinas Shopping Spree
Commodities (Oil, Iron Ore,
Copper and Aluminum)
Source: Goldman Sachs. Effective Regulation Part 1.

Sept 08 China became U.S.

largest creditor. (Now it holds
$767.9 Billion in Treasuries)

G-2 at a glance: Chimerica

For addtional information: The End of Chimerica, HBS. Online at: http://www.hbs.edu/faculty/Publication%20Files/10037.pdf

Competitive Devaluation or Currency Collapse?

Source: Lessons of the Financial Crisis. CFR Special Report No. 45 March 2009

G-20s Six Pledges

1.Reform the Global Banking
System (Shadow banking system)
2. No Tax Havens (Bank Secrecy)
Cooperation with OECD standards.
3. International Growth
4. $750B to troubled economies +
$250B in swaps of SDRs for dollars
or euros. (Other funds)
5. International Accounting Standards
6. Regulate Credit Rating Agencies
(Oligopoly, conflicts of interest,
inaccurate risk models)

Source: http://www.telegraph.co.uk/finance/financetopics/g20-summit/5094824/G20-summit-Gordon-Brown-unveils-1.1trn-globalrecession-fight-back.html

Quantitative Easing
Lower interest rates encourage
people to spend, not save. But when
interest rates can go no lower, a
central banks only option is to pump
money into the economy directly []
this is by buying financial assets such
as government and corporate bonds.
BBC News Q&A: Quantitative Easing.
In advanced economies, scope for
easing monetary policy further should
be used aggressively to counter
deflation risks.
World Economic Outlook, April 2009.

CONCLUSION

Whats Next?

Whats Next?

From Market Capitalism to Managed Capitalism

1) Market Capitalism:

Reliance on market system;

Creation of venture capital and Initial Public Offering
(IPO) markets

2) Managed Capitalism:

Much less reliant on market system;

Much more reliant on the government system to

regulate and manage economy;

Minimize the excess observed in current crisis

Whats Next?

From Market Capitalism to Managed Capitalism

- The Re-emergence of the State?
Regulations? and Protectionism?
the end of liberal era?
- A crisis of the financial system
rather than a crisis within the
financial sector
- Main theme in the future: debt and
necessary government measures and
regulations

Whats Next?

The Threat to Protectionism

-

A rise in number of trade restricting measures

Devastating outcome?
Global demand will be negatively affected
Danger to the path to recovery

Ex. United States clause: Buy American

EU: imposed temporary anti-dumping duties
India: raised import tariffs on imported goods

Whats Next?

Developed Economies are Losing Ground

- If savings rates rise, inflation
occurs and higher taxes are
implemented to meet rising fiscal
debt
- A Possible Negative Outcome:
Developed economies competitive
position vis--vis cash-rich
developing economies
- Expect the unexpected

Whats Next?

Developed Economies are Losing Ground

Inflation or Deflation?
Inflation is distant and containable
Deflation is at hand and pernicious
-

Expectations on inflation remain stable at status quo

Pay freeze and wage cuts
-

Deflation is more likely

Demand is weak
Households and firms are burdened by debt
-

Whats Next?

Innovation is Immune to the Crisis

- Technologies can grow even in the
deepest recessions
In 1930s, fridges had double digit
growth
In 1970s faxes had double digit
growth
-smaller/faster/cheaper
smarter/smarter/smarter
- Technological developments affect
providers of financial services

Thank You