Transcript Presentation_Foucault_Ecoleete

2008 CRISIS : COLD OR CANCER?
MARTIAL FOUCAULT
Université de Montréal
28 juin 2010
1
Plan of the talk
• Crisis: what does it mean?
• The American financial crisis followed by a
worldwide economic crisis
• Market and State
• Lessons for capitalism
2
Plan of the talk
• Crisis: what does it mean?
• The American financial crisis followed by a
worldwide economic crisis
• Market and State
• Lessons for capitalism
3
Financial crisis
• Banking Crises
– Bankruptcy
• Inability
t o p ay
debts.
OR
• Run on the
Bank , Credit
Crunch
Financial crisis
• Economic Crises
– An economic crisis can
take the form of a
recession
or
a
depression.
– Economic Crisis will
most likely experience
a falling GDP, a drying
up of liquidity and
rising/falling
prices
due to inflation /
deflation
Financial crisisS
• Capital Market
Bubbles/Crashes
– Market Price of stocks
are
higher
than
present
value
of
future Cash flows.
– A dramatic decline of
stock prices in a
market. Crashes are
driven by panic as
much as by underlying
economic factors
Financial crisis
• Currency Crisis
– A currency crisis
occurs when the
value of a currency
changes
quickly,
undermining
its
ability to serve as a
Medium
of
exchange or a Store
of value.
Financial crisis
A Short History
Stock Market Crisis
• 1910: Shanghai rubber stock market crisis
Bank Crisis
• 1980: Latin American debt crisis; beginning
in Mexico
• 1929: Wall Street Crash
• 1989-91: United State Saving & Loan Crisis
•1980: Japanese property bubble
Economic Crisis
• 2001-2: Argentine economic crisis
[breakdown of banking system]
• 1994-5 Economic Crisis in Mexico,
speculative attack and default on Mexico
Debts
Currency Crisis
•1992-3: Speculative attacks on currencies in
the European Exchange Rate Mechanism
A short crisis ?
9
28.500.000 hits for "recession is over“
Jul 25, 2009
The Recession Is Over
Slate
The Recession Is Over!
What America's best economic forecaster is saying.
By Daniel GrossPosted Tuesday, July 14, 2009
Sept. 15, 2009
Bernanke declares 'recession is very likely over'
Unfortunately, unemployment will come down
slowly
The roots of the crisis
• Easy access to cheap borrowing combined
with:
– low interest rates (since the collapse of the internet bubble)
– null regulation (Glass-Steagall Act in 1999)
• Fundamentals of the US economy
– Low level of savings rate
– Unbalanced international trade
– Excessive private consumption
• Financial sector oriented economy
– Last transformation of the “American dream” capitalism
– Risk value: new sources of profit
11
Water in the dam…
• Asset price bubbles are not rare in history (tulip speculation in
Netherlands, share prices in the 1920s, « dotcom » bubble…)
• Low US interest rates
• Low Japanese interest rates
• Impact of China and sovereign wealth funds (state-owned
investment fund composed of financial assets such as stocks,
bonds, property, precious metals or other)
12
Why low interest rates?
• Economic boost?
• Laxist monetary policy?
• Stop increasing Wages ?
-European responses different from
the US policy:
- Competition race?
- More cautious Euro zone?
13
Easy mortgage: subprimes
• A myriad of actors
• Subprime borrowing
– Credit score (good borrower vs. bad borrower)
– Adjustable-rate mortgages
– Expectations that house prices would rise faster than
loan rates…
• Subprime crisis once mortgages securitized
– RMBS (Residential Mortgage Backed Security)
– SPV (Special Purpose Vehicle)
– Things can go wrong…
14
Explosion in mortgage assets, USA
2004:
beginning of
the end
15
Housing market
16
The crisis goes on…
17
Why did banks create these securities?
• How banks work?
• Is there a risk for not getting back my money?
– Basel capital rules (Basel I in 1998 and Basel II in 2004)
• In the 1990s, they changed their core business
– Trading income
– Increasing fees from mortgage securitization
• A new financial capitalism is born
18
Explosion in mortgage assets, USA
2004:
beginning of
the end
19
Financial (De)regulation
• New US policies to encourage home
ownership
• Changes to Fannie Mae and Freddie Mac rules
• Changes to rules on investment banks
• Publication of Basel II proposals
20
Consequences
A US CREDIT CRUNCH
followed by an
ECONOMIC CRISIS
21
22
23
Bad times for the economy
•
•
•
•
Macroeconomic consequences
Microeconomic consequences
Financial consequences
Political consequences
24
Macroeconomic consequences
•
•
•
•
GDP growth
Public Debt
Unemployment
Income inequalities
25
GDP impact
More recently…
27
GDP decrease in developped countries
Table 1.1 The global outlook in summary
(percentage change from previous year, except interest rates and oil price)
Real GDP growth 5
World
Memo item: World (PPP weights) 6
High income
OECD Countries
Euro Area
Japan
United States
Non-OECD
countries
Developing countries
East Asia and
Pacific
China
Indonesia
Thailand
Europe and Central
Asia
Russia
Turkey
Poland
Latin America and
Caribbean
Brazil
Mexico
Argentina
2008
2008
2009e
2009
2010f
2010
2011f
2011
2012f
2012
1,7
1,3
0,4
0,3
0,4
-1,2
0,4
-2,1
-0,4
-3,3
-3,4
-4,1
-5,2
-2,4
3,3
4,2
2,3
2,2
0,7
2,5
3,3
3,3
4,0
2,4
2,3
1,3
2,1
2,9
3,5
4,3
2,7
2,6
1,8
2,2
3,0
3,0
-1,7
4,2
4,2
4,5
5,7
1,7
6,2
6,0
6,0
8,5
7,1
8,7
7,8
7,7
9,6
6,0
2,5
8,7
4,5
-2,3
9,5
5,9
6,2
8,5
6,2
4,0
8,2
6,3
5,0
4,2
-5,3
4,1
4,2
4,5
5,6
0,7
4,8
-7,9
-4,7
1,7
4,5
6,3
3,0
4,8
4,2
3,7
4,7
4,7
4,0
4,1
-2,3
4,5
4,1
4,2
5,1
1,8
7,0
-0,2
-6,5
-1,2
6,4
4,3
4,8
4,5
4,0
3,4
4,1
4,2
4,4
28
Public debt levels
29
Confidence erroded
30
Bank lending growth
31
Labor still prime affected
32
Crisis and unemployment
33
Crisis and income inequalities in the US
34
How the crisis affected global trade?
Growth in World merchandise exports trade by region
(Year to year % change in dollar values)
Volume of world merchandise
exports, 1965-2009 (Annual %
change)
35
Microeconomic consequences I
Bank
Failures
36
Microeconomic consequences II
37
Time-lags: Schematic comparison of stock markets, employment,
public revenues and public debt
Stock markets
Public revenues
Employment
Public debt
?
? uncertainties
?
?
?
?
?
?
?
Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar
2008
2009
2010
G20
G20
G20
To sum up…
• Basic story of the crisis:
– Causes of mortgage bubble
• Role of the financial sector
– Manage risks
– Allocate capital
– Run payment mechanisms
• Regulators
– Insufficient regulations
– Special interests
– Economics as a not so credible science
39
Lessons for Capitalism
• Permanent sources of crisis:
– Information
– Confidence
– Corporate governance
• Market and States
• Capitalism and self-regulation
• Governments are strongly exposed
40
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