1. Transforming Crisis in Financial Markets against a Background of (Almost) Conventional Recession Prof. Dariusz Filar University of Gdańsk

2. Two parallel phenomenons began in the summer of 2007 In the realm of financial markets: The subprime mortgage crisis in the United States In the realm of the real economy and business cycle: The „normal” downturn in the economy, both in the United States and Europe

3. The two phenomenons continued in H2/2007 – H1/2008… In the realm of financial markets: The subprime mortgage crisis transformed into collateralized debt obligations (CDOs) crisis The CDOs crisis transformed into the money market (the interbank market) crisis In view of this situation, the central banks began to inject liquidity into the financial system In the realm of the real economy and business cycle: The significant lowering of credit to the private sector contributed to deepening of slowdown in the economic activity

4. Throughout H2/2008 the situation worsened in both of the realms … In the realm of financial markets: Despite the interventions of central banks, the interbank market crisis transformed into the crisis of financial institutions. The depreciation of the assets in these institutions balance sheets and the worsening of their capital ratios resulted in a series of bailouts and bankruptcies (Bear Stearns, Merrill Lynch, Lehman Brothers) In the realm of the real economy and business cycle: Blockage on world commercial credit caused the sharp contraction in world trade. Consumers making downward adjustment to their spending, were behind the weakness of domestic demand. The downturn of 2007 developed into full-grown recession

5. The double improvement of 2009 In the realm of financial markets: As the first financial institutions benefited from injection of public funds into their capital, the wholesale financial markets began to react favourably. It raised the issue of how and when the central banks should withdraw the exceptional expansionary measures applied to avoid catastrophe (exit strategies) In the realm of the real economy and business cycle: The deepness of drop in economic growth, led the authorities to design fiscal policy measures aimed at stimulating economic activity (fiscal stimulus policies). At the end of 2009, practically all countries were on start of recovery.

6. The Paradox of 2010 In the realm of financial markets: The fiscal stimulus policies raised doubts about fiscal sustainability of many countries. The continuing increase in return on government bonds implied that investors’ confidence had been undermined. Thus, the subprime mortgage crisis transformed finally into fiscal crisis and was about to transform into new crisis of financial institutions. The rescue once again came from central banks In the realm of the real economy and business cycle: The worst of the H1/2009 recession seems to be behind us. The recovery of the global economy is continuing …