Prospects for the future – policy options Seminar „Geography of the Financial Crisis and the Policy Response” Warsaw, 22 September 2009 Prof. dr hab. Krzysztof Rybiński Warsaw School of Economics and Ernst & Young Blog:

Rybinski.eu Two visions of the crisis 1. Markets’ failure creates a risk of depression, hence government intervention is necessary to restore equilibrium 2. Crises and recessions are market-driven corrections of series of failed government policies in the past, so it should be allowed to work Before designing policy options one has to understand what happened. Today we are in the dark alley. Before designing policy options one has to understand what happened. Today we are in the dark alley. 2

Rybinski.eu Who is this man? 3

Rybinski.eu A creator of copula formula on default correlation 4

Rybinski.eu When knowledge is on the dark side of the force Never in the human history has one working paper had such a massive impact on our lives Never in the human history has one working paper had such a massive impact on our lives And cost so many trillions of dollars And cost so many trillions of dollars 5

Rybinski.eu It contributed to credit derivatives bubble 6 Swaps and options (LHS), CDS (RHS), USD trillion Źródło: ISDA.

Rybinski.eu And spilled all over the world Cross-border bank claims, as percentage of GDP. Source: BIS

Rybinski.eu Derivatives markets growth far outpaced other markets 8 % of nominal global GDP Global bond market capitalization government debt securities private debt securities Global equity market capitalization Global bank deposits Global derivative markets (notional outstanding)n.a Source: Rybinski K., Opala P., Holda M. (2008) „Gordian knots of the 21st century”, book published by Ministry of Regional Development and Rewasz, June 2008

Rybinski.eu Fourteen families – concentration of power Fourteen global financial institutions account for 95% of financial markets turnover (from US, UK, Germany, Switzerland and France) Fourteen global financial institutions account for 95% of financial markets turnover (from US, UK, Germany, Switzerland and France) They get invited by Fed to solve problems They get invited by Fed to solve problems Goldman Lloyd Blankfein refers to them as „fourteen families” Goldman Lloyd Blankfein refers to them as „fourteen families” No Asian institution is a member of the family No Asian institution is a member of the family „Nearly all men can stand adversity, but if you want to test a man’s character, give him power” „Nearly all men can stand adversity, but if you want to test a man’s character, give him power” Abraham Lincoln 9 Source: Rothkopf D. (2008), “Superclass: The Global Power Elite and the World They Are Making by”, Farrar, Straus and Giroux, March 2008

Rybinski.eu Concentration on financial markets 10 Source: BIS, 2007, Triennial Central Bank Survey, December 2007 To big to fail, to interconnected to fail !!!

Rybinski.eu What happened? From banking to leveraged, originate-to-distribute banking, unregulated shadow banking From banking to leveraged, originate-to-distribute banking, unregulated shadow banking Risk originator sold it entirely, bought back opaque risk Risk originator sold it entirely, bought back opaque risk Too complicated instruments, nobody understood the risk that was created Too complicated instruments, nobody understood the risk that was created Tightly coupled systems Tightly coupled systems Huge leverage Huge leverage Huge, not managed liquidity risk Huge, not managed liquidity risk

Rybinski.eu What reaction is needed? o Simplify o Reduce leverage o Introduce circuit breakers o Introduce speed limits o Learn risk management from the very best R.Bookstaber „Demon of our own design”

Rybinski.eu 13 Are we heading in the right direction? More regulation? More complexity!!!

Rybinski.eu First global recession since 2nd WW Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, Jan. 2009; World Economic Outlook, Międzynarodowy Fundusz Walutowy, Kwiecień 2009 World GDP growth IMF forecasts, April 2009

Rybinski.eu What growth prospects? LUVW 15

Rybinski.eu 16 The age of turbulence has begun 3-5% 1-3% Great moderation Age of turbulence ????

Rybinski.eu Post crisis challenges Aging Debt mountain Inflation Commodity price surge Dollar scare Accelerated core migration to Asia Lack of global strategic management

Rybinski.eu EU demographic challenge is coming

Rybinski.eu CEE has 20 years to catch up Source: European Commission, May 2008

Rybinski.eu 20 My name is Obama Barack Obama

Rybinski.eu 21 Wo jiao Jintao Hu Jintao.

Rybinski.eu 22 Ich heisse Merkel Angela Merkel

Rybinski.eu Global strategic management 23 Source: Rybiński et al. „Gordian knots of the 21st century”, Warsaw, Examples of global public goods: Good climate Clean air Low poverty Health Peace Financial stability Low and stable inflation

Rybinski.eu Global strategic management 24 Source: Rybiński et al. „Gordian knots of the 21st century”, Warsaw, 2008.

Rybinski.eu 25 Lisbon strategy Cohesion policy Stop simplifying, start simple

Rybinski.eu Next steps From massive regulation complexity to simplicity From massive regulation complexity to simplicity From „Commission as police force” to „strategic leadership” From „Commission as police force” to „strategic leadership” From GDP to intellectual capital From GDP to intellectual capital –Countries –Regions –Cities New horizontal Knowledge Commissioner needed New horizontal Knowledge Commissioner needed Propose Global Strategic Council, EU with one seat Propose Global Strategic Council, EU with one seat