Transcript Fasset
THE GREAT RECESSION The Crisis, the Impact, the Future June 2009 SESSION ONE: The roots of the crisis The Great Recession SOURCE: IMF World Economic Outlook, April 2009 Recession or Depression? Greenspan: once in a century event IMF repeatedly revised growth forecasts The Great Recession Two key factors contributing to crisis: 1. Emergence of “Chimerica” 2. Bush administration’s response to 9/11 The emergence of “Chimerica” CHINA: export & save AMERICA: borrow & spend The Great Recession Bush administration response 9/11 “As we … chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century, we must also work together to achieve important goals for the American people here at home. This work begins with keeping our economy growing … And I encourage you all to go shopping more.” – President George W Bush To revive slowing economy: - slashed interest rates - promised tax cuts - urged to “go shopping” Bush administration response 9/11 Goldilocks and the “savings glut” Era easy money, two crucial consequences: 1 – US shifts from production to financing 2 – Creates the “bubble economy” Easy money: production to finance Easy money: production to finance Easy money: the “bubble economy” Stock market Wealth illusion encouraged accumulation of debt House prices Easy money: “affluenza” emerges Affluenza: “a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more.” Role of consumer: the home ATMs US more dependent on consumer, more reliant on debt Government debt: a war of choice America: a nation in debt 78m baby boomers: eligible Social Security and Medicare ADD war on terror and financial market bail-outs America: a nation in debt Rank Country Debt % GDP 1 Zimbabwe 241.2% 2 Japan 170.4% 14 India 78.0% 17 America 73.2%* 35 Argentina 51.1% 41 Britain 47.2% 50 Brazil 40.7% 74 South Africa 29.9% 101 China 15.7% SOURCE: CIA The World Factbook * OECD 2008 estimate SOURCE: The Washington Post The American dream unravels The dream unravels: crisis timeline Apr 07 Aug 07 New Century Financial files for bankruptcy Fears of bank losses triggers wider credit crunch, prompting global central banks to pump billions into market to improve liquidity Oct 07 Major losses emerge at banks: UBS, Citigroup & Merrill Lynch Dec 07 Despite further central bank intervention, crisis spreads to bond insurers – monoline insurers The dream unravels: crisis timeline Feb 08 UK government announces Northern Rock to be nationalised Mar 08 Bear Stearns, America’s 5th largest bank, sold to rival JPMorgan Chase supported by $30bn state loan Apr 08 IMF warns credit crunch spreading to other sectors Jul 08 US government steps in to save Fannie Mae and Freddie Mac, owners or guarantors of $5 trillion worth of home loans The dream unravels: crisis timeline SEPTEMBER 2008: EYE OF THE STORM 7th US government bails out Fannie Mae and Freddie Mac, one of the largest bailouts in US history 15th Lehman Brothers files for Chapter 11 and Merrill Lynch is bought out by Bank of America 16th Fed announced $85bn rescue package for AIG 25th 28th 29th Washington Mutual closed and sold to JPMorgan Chase European banking and insurance giant, Fortis, is partly nationalised UK mortgage lender Bradford & Bingley is nationalised The dream unravels: crisis timeline The dream unravels: crisis timeline OCTOBER 2008: Governments fight back 3rd US passes $700bn plan to rescue the US financial sector 8th UK announces $88bn rescue plan for banking sector Major central banks announce emergency interest rate cuts 11th G7 finance ministers issue 5-point plan to unfreeze credit markets Crisis timeline: crisis hits economy Oct’08 Acknowledge that financial crisis has become an economic crisis Major global stockmarkets plunge Crisis hits the real economy 4Q’08 Official figures confirm US, UK and Europe in recession Crisis goes global: decoupling theory Crisis goes global: decoupling theory Crisis goes global: decoupling denied! SOURCE: IMF World Economic Outlook, April 2009 Crisis goes global: decoupling denied! Export-orientated manufacturers Commodity producers Crisis goes global: European crisis European banks: - aggressive lenders to EM, notably E Europe - nearly 75% loans to countries now in deep recession Crisis goes global: European crisis European banks face two problems: 1 – IMF estimates 50% more highly leveraged than US banks 2 – banking sector far larger proportion of their economies than US AUSTRIA: - $300bn loans to E Europe - 70% of economy - 10% default bankrupt banking system • Banks too expensive to bail-out • EU has no framework to deal with situation • Difficult to resolve regional crisis, when each governments faces local crises • Europe at far greater risk than US, regional crisis could dwarf sub-prime Global crisis: where to from here?