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?