the great recession the crisis, the impact, the future june 2009
TRANSCRIPT
THE GREAT RECESSIONTHE GREAT RECESSION
The Crisis, the Impact, the FutureThe Crisis, the Impact, the Future
June 2009June 2009
SESSION ONE: SESSION ONE: The roots of the crisisThe roots of the crisis
The Great RecessionThe 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 RecessionThe Great Recession
Two key factors contributingto crisis:
1. Emergence of “Chimerica”
2. Bush administration’s response to 9/11
The emergence of “Chimerica”The emergence of “Chimerica”
CHINACHINA: export & save: export & save AMERICAAMERICA: borrow & spend: borrow & spend
The Great RecessionThe Great Recession
Bush administration response 9/11Bush 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 9/11Bush administration response 9/11
Goldilocks and the “savings glut”Goldilocks and the “savings glut”
Era easy money, two crucial consequences:1 – US shifts from production to financing2 – Creates the “bubble economy”
Easy money: production to financeEasy money: production to finance
Easy money: production to financeEasy money: production to finance
Easy money: the “bubble economy”Easy money: the “bubble economy”
Stock market House prices
Wealth illusion encouraged accumulation of debt
Easy money: “affluenza” emergesEasy 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 ATMsRole of consumer: the home ATMs
US more dependent on consumer, more reliant on debt
Government debt: a war of choiceGovernment debt: a war of choice
America: a nation in debtAmerica: a nation in debt
78m baby boomers: eligible Social Security and MedicareADD war on terror and financial market bail-outs
America: a nation in debtAmerica: 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
SOURCE: The Washington Post
* OECD 2008 estimate
The American dream unravelsThe American dream unravels
The dream unravels: crisis timelineThe dream unravels: crisis timeline
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
Major losses emerge at banks: UBS, Citigroup & Merrill Lynch
Despite further central bank intervention, crisis spreads to bond insurers – monoline insurers
Apr 07
Aug 07
Oct 07
Dec 07
The dream unravels: crisis timelineThe dream unravels: crisis timeline
UK government announces Northern Rock to be nationalised
Bear Stearns, America’s 5th largest bank, sold to rival JPMorgan Chase supported by $30bn state loan
IMF warns credit crunch spreading to other sectors
US government steps in to save Fannie Mae and Freddie Mac,owners or guarantors of $5 trillion worth of home loans
Feb 08
Mar 08
Apr 08
Jul 08
The dream unravels: crisis timelineThe dream unravels: crisis timeline
SEPTEMBER 2008: EYE OF THE STORM
US government bails out Fannie Mae and Freddie Mac, one of the largest bailouts in US history
Lehman Brothers files for Chapter 11 and Merrill Lynch is bought out by Bank of America
Fed announced $85bn rescue package for AIG
Washington Mutual closed and sold to JPMorgan Chase
European banking and insurance giant, Fortis, is partly nationalised
UK mortgage lender Bradford & Bingley is nationalised
7th
15th
16th
25th
28th
29th
The dream unravels: crisis timelineThe dream unravels: crisis timeline
The dream unravels: crisis timelineThe dream unravels: crisis timeline
OCTOBER 2008: Governments fight back
US passes $700bn plan to rescue the US financial sector
UK announces $88bn rescue plan for banking sectorMajor central banks announce emergency interest rate cuts
G7 finance ministers issue 5-point plan to unfreeze credit markets
3rd
8th
11th
Crisis timeline: crisis hits economyCrisis timeline: crisis hits economy
Oct’08 Acknowledge that financial crisis has become an economic crisisMajor global stockmarkets plunge
Crisis hits the real economyCrisis hits the real economy
4Q’08 Official figures confirm US, UK and Europe in recession
Crisis goes global: decoupling theoryCrisis goes global: decoupling theory
Crisis goes global: decoupling theoryCrisis goes global: decoupling theory
Crisis goes global: decoupling denied!Crisis goes global: decoupling denied!
SOURCE: IMF World Economic Outlook, April 2009
Crisis goes global: decoupling denied!Crisis goes global: decoupling denied!
Export-orientated manufacturers Commodity producers
Crisis goes global: European crisisCrisis 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 crisisCrisis 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
• 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
AUSTRIA: - $300bn loans to E Europe- 70% of economy- 10% default bankrupt banking system
Global crisis: where to from here?Global crisis: where to from here?