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THE GREAT MODERATION
Good luck?Structure?
Policy?
BERNANKE In the United States a deep and
liquid financial system has promoted growth by effectively allocating capital and has increased economic resilience by increasing our ability to share and diversify risks, both domestically and globally”
(15 June 2007)
AS % OF GDP
ASSET BUBBLES
“whereassets trade
in high volumesat prices much higherthan intrinsic value…”
DOTCOM (NASDAQ)
+ ASSET BACKED SECURITIES
+ COMMODITY INDEX
+ HEDGE FUND ASSETS
10x
+ CREDIT DEFAULT SWAPS
2000 $1 TRILLION2008 $58 TRILLION(not to scale)
58x
WHAT DROVE THE BUBBLES?
American over-borrowing?Low interest rates?Asian over-saving?
THE GLOBAL IMBALANCES
USA CHINA
IMPORTS GOODS EXPORTS GOODS
CONSUMER DEBT SAVINGS
NATIONAL DEBT NATIONAL SURPLUS
IMPORTS CAPITAL EXPORTS CAPITAL
US TRADE DEFICIT
+ CHINA DOLLAR RESERVES2008 = $2 TRILLION
THE GLOBAL IMBALANCES
““Capital now flows Capital now flows upstream, from upstream, from the world’s poor the world’s poor
to the richest to the richest country of all…”country of all…”
Martin WolfMartin Wolf
A QUICK RECAP
Low interest rates + Oversupply of savings (Asia) = Rising debt in USA 2001: Dotcom bubble bursts Asset backed security bubble begins Where to find new, high-risk, high-interest
borrowers? …
folks like these…?
…folks like these?
SUBPRIME
Detroit, Michigan 2004: 75% of all new mortgages = subprime 2007: 65,000 homes foreclosed 1/5 homes empty “We buy homes for cash”
US HOUSING COLLAPSE% change y-o-y Case Shiller 10x cities
HOUSING + DOW JONES
HOUSING + DOW + OIL
$147
THE RECKONING OCT 07-08
$2 TRILLION WRITTEN OFF BY BANKS $2 TRILLION MORE TO COME? (IMF) $12 TRILLION IN GLOBAL BAILOUTS
(INC CREDIT GUARANTEES) $2.4+ TRILLION FISCAL STIMULUS $1 TRILLION IMF LENDING $32 TRILLION OFF EQUITIES GLOBAL GDP = $64 TRILLION GLOBAL FINANCE = $196 TRILLION
WHERE ARE WE NOW?
WHERE ARE WE NOW?
END OF Q109 US ECONOMY: -6.1% UK ECONOMY: -4%? CHINA: growth down from 12% to 6% WORLD ECONOMY: -2%?
WBANK/11 JUNE -3% MFR EXPORTS: - 40% yoy Q1 IMF: 11% chance of global deflation (Jan)
THE STATE
Rescued freemarket capitalism Owns large chunks of banking system A generation of moral hazard? A generation of fiscal pain?
CHINA
$580 stimulus, 2/3 from banks Micro-level policy change Exports down 26% yoy Domestic investment up 30% End of export-led growth model?
IDEOLOGY?
Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief… I made a mistake in presuming that the self-interest of banks and others was such that they were best capable of protecting their own shareholders”
Greenspan (23.10.08)
THE DANGERS?
Debt overhang = global lost decade Fiscal stimulus ‘borrows’ 2010 growth …or does not happen? (USA) Monetary stimulus = competitive
devaluations Global trade doesn’t recover: national
“pools” of capital UXBs: Germany? Sweden? China?