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A ringside view of the economic crisis
David Fenton, Senior Economist
March 2012
Was the Greenspan “put” a shot in the foot?
Policy rates, UK and US
7
6
5
4
3
2
1
0
2000
2001
2002
2003
BoE
2004
Fed Reserve
2005
2006
2007
ECB
Slide 2
Source: Datastream
Goodbye dot-com bubble, hello housing bubble
Equity prices, house prices
5,500
5,000
4,500
220
Case-Shiller 20city Comp Index
RHS
Nasdaq Comp
LHS
200
4,000
180
3,500
3,000
160
2,500
140
2,000
1,500
120
1,000
Mar-12
Mar-11
Mar-10
Mar-09
Mar-08
Mar-07
Mar-06
Mar-05
Mar-04
Mar-03
Mar-02
Mar-01
Mar-00
Mar-99
Mar-98
100
Mar-97
500
Slide 3
Source: Datastream
(Taylor) rules are made to be broken?
Federal funds rate (%)
Housing starts (millions of units)
Source: “Housing and monetary policy”, Jackson Hole conference 2007
Slide 4
Signs of a property bubble – difficult to miss
Commercial property and gilt yields, %
9.0
8.0
Comm prop yield
7.0
6.0
5.0
4.0
3.0
10y gilt yield
2.0
1.0
0.0
2000
Normal
Nuts
Nasty!
(c200 bps)
(inverted!)
(c400bps)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Slide 5
Source: Datastream, IPD
The Great Moderation made us complacent
GDP % growth, standard deviation
4%
3%
2%
1%
0%
1965
1970
1975
1980
1985
US
1990
1995
2000
2005
2010
UK
Slide 6
Source: Datastream, RBS calcs
The price of risk fell sharply
RBS net interest margin (%)
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Slide 7
Source: Bloomberg
The loan to deposit ratio shot up
RBS loan to deposit ratio (%)
160
152
147
150
140
134
130
124
120
110
100
104
97
90
80
70
60
2000
2002
2004
2006
2008
2010
Slide 8
Source: Bloomberg
We saw it coming...sort of
“Unlike previous scenarios, the main source of
the economic downturn is in the banking
system...it is the resultant ‘credit crunch’ that
propagates this initial shock, and turns recession
into depression.”
RBS stress scenario, July 2006
Slide 9
Strange things afoot in the inter-bank market
Spread between 3m LIBOR and bank rate (bps)
300
250
200
150
100
50
0
-50
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Slide 10
Source: Datastream
Did we really think Greece was like Germany?
10y bond yields (%)
25
Birth
of
euro
Greece
joins
euro
1999
2001
Lehman
Brothers
fails
36%
20
15
10
5
0
1995
1997
Germany
Italy
2003
Spain
2005
Ireland
2007
Portugal
2009
2011
Greece
Slide 11
Source: Datastream
Where do we from here?
Strong demand
Goldilocks
Returns
“V”
Return of macro
instability
“W”
Not much
spare
capacity
Lots of
spare
capacity
Slow Grind
Higher
“U”
Deflation
“L”
Weak demand
Slide 12
The long road to recovery
120
1990s recession/recovery
115
110
105
Current recession/recovery
100
95
90
1
2
3
4
5
6
7
Years from start of recession
Slide 13
Fiscal rebalancing: a good start, but still far to go
Net borrowing, % GDP
12.0
10.0
8.0
6.0
4.0
2.0
0.0
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12*
2013-14
2015-16
Slide 14
Source: HM Treasury
“Plan A” requires a private sector response
Net financial surplus/deficit, % GDP (flow of funds)
10.0%
Households
8.0%
Non-financial
companies
6.0%
Government
4.0%
Rest of the world
2.0%
Financial
companies
0.0%
Deficit
Surplus
Slide 15
Source: Datastream, RBS calcs
Rates expectations fade into the distance
UK policy rate
7
6
5
4
3
2
Feb-10
Feb-11
Aug-11
Nov-11
1
Feb-12
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Slide 16
Source: Datastream, Bank of England
Are we turning Japanese?
Market expectations of policy rate (%)
1996
1998
Actual
Slide 17
Source: Fathom
Drastic times?
Increase demand (symptom)
Reduce debt (cause)

Massive fiscal stimulus

(Big) “bad bank”

QE max

Debt forgiveness

Liquidity unbounded

Financial repression

“Use it or lose it” deposit tax

Monetise debt

PFI v2.0

Raise interest rates

Beg to China

Outright default
Slide 18
The darkest hour is just before the dawn?
“Initial projections for a V-shaped recovery are
subsequently revised to a U-shaped recovery
and eventually to an L-shape just as the
recovery arrives.”
Blanchflower, Feb 2009
Slide 19
Keep in touch!
Internet
www.rbs.com/economics
E-mail
www.rbs.com/economics/registration
Social media
@rbs_economics
Slide 20
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