Transcript Credit Crunch - Vincent Hogan

Credit Crunch
Overview
• Current crisis is more than a credit crunch
in Ireland
• 4 Aspects or causes with effect on AD
– Asset market Bubble: I
– Government Budget: G
– Banks: C+I
– International Credit Crunch: C+I, NX
• Solutions
– General: shift in AD
– Special: unusual aspects of current crisis
Bubbles
• Bubbles can occur in asset markets in general
– US, UK, Ireland have housing market bubble
• Examine evidence to prove this
– Obvious now but clear signs before: Not just a price
increase
– Soft landing
• Psychology
– Shiller “Irrational Exuberance”
– Makay “Madness of Crowds”
• Consequence was huge Investment (20% GDP)
– GDP Boom
– Inv cut-off: huge shock to AD
Budget
• We have already seen how budget went
from surplus to deficit
• Bubble generated boom covered up a
huge underlying deficit
– Evidence of the structural position
• A fiscal contraction now makes things
worse
– Shift AD to left
– EFC?
Discretionary changes in taxes and expenditure
NT2
Natural GNP
G, NT
NT
1
NT
3
€ billions
B
GNP 1
A
C
GNP *
GNP 2
Government
expenditure (G)
Nominal GNP
 Leddin and Walsh Macroeconomy of the Eurozone, 2003
Banks
• Massive amounts of foreign borrowing
– Through banks to housing market
• Weakens banks
– Highly leveraged: lots of assets, lots of
liabilities; small cushion
– Asian currency crisis: Iceland vs Ireland
– US: Shadow banks
• Banking crisis is another shock to
economy
– Shortage of funds (controversial)
Credit Crunch
• Originated in the US not Ireland
• Direct Consequnces
– Hit directly two major markets for our exports (NX)
– Rise in interest rates (C+I)
– Would have burst bubble anyway
• Makes dealings with with our banks more
difficult
–
–
–
–
Government guarantee
Borrow for deficit
Borrow for banks
Fear of upsetting bond markets
Overview of the Overview
costs
Foreign
Borrowing
Banks
Inv
budget
NX