Transcript Who bears the costs of the financial crisis

Who bears the costs of the
financial crisis ?
Malcolm Sawyer
University of Leeds
Financial crisis and recession
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Recession generally starting mid 2008
Financial crises in USA and UK,
spreading to many other countries with
first effects August/Sept 2007,
intensifying Sept/Oct 2008.
Financial crisis and recession
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Assessing costs of financial crisis would require
construction a counter-factual
Make comparisons between 2008/2010 and 2006 and
2007.
A difficulty here : the years up to 2007 carried with
them the seeds of the crisis, and many of the factors
which fed into the financial crisis may have fed into
sustain booming expenditure.
Calculations here may overstate the costs of the
financial crisis in that there were prior benefits from
the factors which then helped to generate the crisis.
Costs of financial crisis
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Laeven and Valencia, 2008, reviewed 42
banking crises from around the world and
estimated that:
Gross Fiscal costs as share of GDP : 15.7 per
cent (ranging 0 to 56.8 per cent) ; net fiscal
costs: 13.0 per cent (range 0 to 55.1 per
cent)
Output (over 4 years) loss as share of GDP :
20.1 per cent ranging from 0 to 97.7 per cent.
Output gap
Output gap
2007
2008
2009
2010
USA
0.9
-0.5
-4.9
-5.4
UK
1.9
0.4
-5.4
-6.4
France
1.8
0.2
-4.1
-4.9
Germany
2.6
1.9
-5.4
-5.7
Japan
3.3
1.3
-6.1
-6.1
Euro area
1.8
0.4
-5.5
-6.0
OECD
1.7
0.3
-5.3
-5.8
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‘the world economy is projected to shrink by
2.3% this year, or nearly $1tn, a loss of
output shared by all citizens, but particularly
affecting the rising numbers of the
unemployed. If you take into account the fact
that the world economy normally grows by
more than 2% per year, then the loss of
output caused by the recession is almost $2tn
- although some of that may be made up in
future years.’ (BBC)
Potential output effects
2006-08
2009-11
2012-17
Shortfall
2017
USA
2.4
1.5
2.0
4.4
UK
2.2
1.3
1.7
5.1
France
1.7
1.2
1.4
3.0
Germany
1.2
0.8
1.1
1.5
Japan
1.0
0.6
0.8
2.2
Euro area
1.7
0.9
1.3
4.2
OECD
2.1
1.4
1.7
4.0
Unemployment rates
Unemployment rates (%)
male
female
youth
July 2008
July 2009
July 2008
July 2009
July 2008
July 2009
EA16
6.9
9.3
8.3
9.8
15.4
19.7
EU27
6.6
9.1
7.4
9.0
15.4
19.8
DK
2.8
6.4
3.7
5.4
7.9
11.2
DE
7.3
8.3
7.1
7.0
9.6
11.2
EE
7.3
16.6
5.6
10.1
14.2
24.1
IE
6.9
15.4
4.8
8.8
12.4
25.5
EL
5.0
6.2
11.2
12.3
21.9
24.2
ES
10.3
18.1
12.9
19.0
25.0
38.4
FR
7.3
9.2
8.3
10.4
19.3
24.2
LV
6.9
21.1
6.8
13.7
13.0
29.2
LT
6.3
21.9
5.4
11.2
14.9
30.9
UK
6.2
8.8
5.1
6.5
15.0
19.2
Unemployment rates
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Male unemployment rate generally increased
more than female rate (three exceptions)
Youth unemployment rate has risen faster
than total unemployment everywhere
Unemployment rate increases lowest in
Austria, Netherlands; fastest in three Baltic
States, Ireland and Spain
Budget deficits/GDP (%)
2007
2008
2009
2010
USA
2.9
5.9
12.2
11.2
UK
2.7
5.5
12.8
14.0
France
2.7
3.4
6.7
7.9
Germany
0.2
0.1
3.7
6.2
Japan
2.5
2.7
7.0
8.7
Euro area
0.7
1.9
5.6
7.0
OECD
1.4
3.2
7.7
8.8
Cost of bail-outs
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BBC reports its own calculations ‘based on
IMF data given to G20 finance ministers,
shows these countries have spent a total of
$10 trillion (£6tn). The UK and US spent the
most, with the UK spending far more, 94% of
its GDP compared to 25% in the US. …
Of course, most of this bail-out money was in
the form of guarantees to the banking
system, and as that system pulls out of the
crisis, governments stand to recover most but
not all of that money.’
Cost of bail-outs
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Comparison could be made with
Savings and Loans crisis in USA which is
estimated to have cost government
$150 billion.
Cost of bail-outs
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‘Almost half the world’s largest 20 banks received
direct government investment. …. Overall, the total
value of actual and contingent support in North
America and Europe rose to over US$14 trillion,
equivalent to about 50% of annual GDP in those
economies, although that does not equate to losses
as in some cases these obligations were offset by
holdings of assets’ (Bank of England 2009a, p.6)
This equates to over $2000 for every person on the
planet
Loss of ‘wealth’
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‘the market capitalisation of global
equity markets had fallen by US$20.2
trillion. So total losses in financial
wealth toward the end of 2009 Q1 were
equivalent to around 50% of world
GDP’ (Bank of England 2009).
Loss of ‘wealth’
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‘The BBC, in conjunction with the Halifax,
estimates that in the UK national wealth held
by individuals has dropped by £815bn in the
past year (comparing end 2007 with end
2008), with a 15% drop in the value of
people's homes and a 9% drop in the value
of their other financial assets. These figures
do subtract the value of debts, such as
mortgages, from the overall valuation.’
Loss of ‘wealth’
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This is a loss of ‘fictional’ wealth and
not of ‘real wealth’
Any loss of ‘real wealth’ ?
Inequality of wealth may have been
reduced in that holdings of monetary
assets retain worth
Musings on other issues
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Effects on income inequality
Effects on poverty
Effects on health
Pensions and the financial crisis
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Some immediate effects on pensions
and pensioners: interest rates and the
stock market
Pensions and the financial crisis
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Long-term implications of financial crisis
for privatisation of pensions
Pensions and the casino
Savings—investment and budget deficits
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Will savings be higher and investment
lower in the future ?
Implications for budget deficit
Imposing costs on ourselves