1. The Great Moderation, the Great Panic and the Great Contraction Charlie Bean Deputy Governor, Bank of England Barcelona, 25 August 2009

2. 1. International credit expansion Financial liabilities of household and business (% of GDP) Source: Federal Reserve, Flow of FundsSource: OECD

3. 2. Financial innovation Source: Dealogic. Source: Bank for International Settlements. (a) Notional principal of outstanding credit default swaps. Off-balance-sheet issuance Stock of CDS outstanding

4. 3. Real house prices Source: Bank for International Settlement

5. 4. The Great Moderation Output and inflation volatility in the G5 Source: ??

6. 5. The Great Moderation and risk perceptions Implied volatilities from options – standardised to zero mean and unit variance Source: Bloomberg and Bank calculations

7. 6. Overly Loose Monetary Policy? Deviation of policy rates from Taylor rule Source: OECD

8. 7. Global imbalances Current accounts (% of GDP, 5-year rolling average) Source: IMF and national sources

9. 8. Long-term real interest rates Real 8.5 year government forward rates Source: Bloomberg and Bank calculations

10. 9. Real house prices & current accounts Source: Bank for International Settlements

11. R K = (1+λ)R L – λR D

12. 10. Defaults on US sub-prime mortgages Default rate by cohort of origination

13. 11. Pay-offs & prices on CDO tranches

14. 12. CDS spreads for major financial institutions Source: Markit. (a) Five-year senior CDS premia.

15. 13. The Great Panic: the flight to quality Spread between US Treasuries and Eurodollar rates Source: Bloomberg

16. 14. Expected losses get bigger & bigger… Financial sector writedowns on US originated assets

17. 15. The Great Contraction Source: IMF World Economic Outlook

18. 16. UK financial network in 2007 Gross bilateral exposures

19. 17. International financial network in 2005 External assets + external liabilities Source: BIS, IMF, OECD, UNCTAD and Kubelec and Sa (2009)

20. 18. Total output loss in slowdowns & recessions Medians, % GDP -5 -4 -3 -2 0 Not preceded by financial stress Preceded by financial stress Not preceded by financial stress SlowdownsRecessions Source: IMF WEO October 2008

21. 19. Central bank balance sheets Source: Federal Reserve, ECB and Bank of England Central Bank total liabilities (index: Aug. 2007 = 100)

22. The Great Moderation, the Great Panic and the Great Contraction THE END www.bankofengland.co.uk