Market Meltdown: Global Trends and the Cyclical Turn Dr. Mark Mullins Executive Director Fraser Institute April 21, 2009

“Prosperity, boom, crisis, slump, and recovery succeed each other with a regularity that suggest(s) inevitability” Professor T. S. Ashton Economic Fluctuations in England

“If a panic were to pass a certain height, that system, which rests on confidence, would be destroyed by terror” Walter Bagehot Lombard Street: A Description of the Money Market 1873

History Market Meltdown

Past Episodes Year StocksEvent %Spanish Succession South Sea Bubble South Sea Bubble French Invasion Recession South America Foreign Investments Railways Bank Collapse Depression Gold Standard Recession Rich Man’s Panic Bankers’ Panic War Threat WWI Post War Bust Post War Bust Crash Depression Sterling Depression War Threat War Threat WWII WWII WWII Post War Bust JFK and Steel Credit Recession Oil Shock Stagflation Recession Crash Recession Asian High Tech Credit Source: Mullins

Leading Stock Markets Source: S&P 500, Various Historical Indices

Causes Market Meltdown

“A previous record of delinquency, foreclosure or bankruptcy; a credit score of 580 or below … and a debt service-to-income ratio of 50 percent or greater” Professor Paul Mizon The Credit Crunch of Federal Reserve Bank of St. Louis Review Subprime Borrower

US Housing Prices and Rates Source: S&P/Case-Shiller, HSH Associates, US Federal Reserve Board

Scale Market Meltdown

US Housing Value Source: Mortgage Bankers Association, Author’s Calculations

Global Stock Markets Source: World Federation of Exchanges, Mortgage Bankers Association, Author’s Calculations

Credit Crisis Market Meltdown

Interbank Lending Rates Source: British Bankers Association

Stock Market Comparison: I Source: Dow Jones; MSCI

Stock Market Comparison: II Source: Dow Jones; MSCI

Stock Market Comparison: III Source: Dow Jones; MSCI

Economic Conditions Market Meltdown

US Production and Jobs Source: US BEA, Federal Reserve

Leading Economic Indicators Source: OECD

Leading Economic Indicators Source: Conference Board; Statistics Canada

Indicators of Coming Stability Source: US Federal Reserve Board, British Bankers Association

US Manufacturing Source: NAPM

Dr. Copper Source: Federal Reserve; CRB

US Real Bill Rate Prediction Source: Federal Reserve

US Yield Curve Prediction Source: Federal Reserve

The Real Leading Indicator Source: MSCI Barra

Global Trends Market Meltdown

Economic Freedom Global Trend I

Economic Freedom of the World n n Size of Government: Expenditures, Taxes, and Enterprises n n Legal Structure and Security of Property Rights n n Access to Sound Money n n Freedom to Trade Internationally n n Regulation of Credit, Labor, and Business Based entirely on objective, third party data or independent surveys for 141 countries

Economic Freedom Over Time

Top 10 Economic Freedom Source: The Fraser Institute

Economic Freedom of Canada n n Size of Government: Expenditures, Taxes, and Enterprises 53 n n Legal Structure and Security of Property Rights 14 n n Access to Sound Money 6 n n Freedom to Trade Internationally 52 n n Regulation of Credit, Labor, and Business 11 Based entirely on objective, third party data or independent surveys for 141 countries

China Global Trend II

World Economy Source: Maddison; Conference Board and GGDC; Others; Author’s Calculations

China’s Per Capita GDP Source: Maddison; Conference Board and GGDC; Others; Author’s Calculations

China’s Marketization Progress Source: NERI

China’s Business Cycle Source: Wu and Maddison; OECD

Chinese Stock Markets Source: MSCI Barra

Public Policy Global Trend III

Interventions Source: Author’s Calculations

Policy Summary Social housing policy, Freddie and Fannie: regulation and underwriting standards The monetary policy cycle 21 st century bank runs: Lehman Brothers and others Central Banks: lend freely to solvent entities at penalty rates Prudential regulation: leverage, maturity matching and risk pricing Market insurance Social banking policy Exit strategy – not “stimulus”

Numbers to Ponder Global Wealth$254 Tr Bank Assets $85 Debt Markets $80 Stock Markets $65 OTC Derivatives $15 Global GDP $55 US GDP $15 Central Bank Expansion $2.7 US Treasury “Bailout” $0.8 Obama “Stimulus” $0.8 US Baseline Deficit $1.2 Expected Canadian Deficit$0.03 Source: IMF Global Financial Stability Report, Davies et al, Author’s Calculations

Market Meltdown: Global Trends and the Cyclical Turn Dr. Mark Mullins Executive Director Fraser Institute April 21, 2009