SayItVisually--US Financial Crisis 4 min 2008

SayItVisually--US Financial Crisis 4 min 2008 http://www.youtube.com/watch?v=h4Ns4ltUvfw http://www.youtube.com/watch?v=bYZdKNjTIzYhttp://www.youtube.com/watch?v=bYZdKNjTIzY sovereign bonds/debt 101- 16 min ( you can watch later) 2010 Derek BanasDerek Banas fin instruments – derivative- CDO –CDSwap – regulated market- deregulation-credit rating agencies 9 min 2011 http://www.youtube.com/watch?v=S3AXHQcXYMk

Equity http://www.youtube.com/watch?v=tcpW0mM4OD4 equity 7.5min (watch at home) http://www.youtube.com/watch?v=tcpW0mM4OD4 A stock or any other security representing an ownership interest. In finance, equity is ownership in any asset after all debts associated with that asset are paid off, e.g., a car or house with no outstanding debt is the owner's equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company. Interest Rate Swap financing involves two parties (MNCs) who agree to exchange loan payments (cash flows), results in benefits for both parties. Floating vs. fixed rate exchange Currency Swap - One party swaps the interest payments of debt (bonds) denominated in one currency (USD) for the interest payment of debt (bonds) denominated in another currency (BP), Currency swap is used for cost savings on debt, or for hedging long term currency risk.

CDS: The buyer of a Credit Default Swap receives credit protection, whereas the seller of the swap guarantees the credit worthiness of the product. By doing this, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. For example, the buyer of a credit swap will be entitled to the par value of the bond by the seller of the swap, should the bond default in its coupon payments.

Subprime Subprime is a classification of borrowers with a tarnished or limited credit history. Lenders will use a credit scoring system to determine which loans a borrower may qualify for. Subprime loans are usually classified as those where the borrower has a credit score below 640. Subprime loans carry more credit risk, and as such, will carry higher interest rates as well. Approximately 25% of mortgage originations in US are classified as subprime. Subprime lending encompasses a variety of credit types, including mortgages, auto loans, and credit cards.

Collateralized Debt Obligation (CDO) CDOs are a type of structured asset-backed security whose value and payments are derived from a portfolio of fixed-income underlying assets. CDOs are split into different risk classes, or tranches, whereby "senior" tranches are considered the safest securities. Interest and principal payments are made in order of seniority, so that junior tranches offer higher coupon payments (and interest rates) or lower prices to compensate for additional default risk. Note: Each CDO is made up of hundreds of individual residential mortgages. CDOs that contained subprime mortgages or mortgages underwritten because of predatory lending, were at greatest risk of default. They are blamed for precipitating the global crisis and have been called WMD “weapons of mass destruction.”

Credit Default Swap (CDS) A CDS is an insurance contract in which the buyer of the CDS makes a series of payments to the protection seller and, in exchange, receives a payoff if a security (typically a bond or loan or a collection of loans such as a CDO) goes into default. NOTE: CDOs are widely thought to have exacerbated the financial crisis, by allowing investors who did not own a security to purchase insurance in case of its (CDOs they did not own) default. AIG (American International Group of insurers) almost collapsed because of these bets, as it was left on the hook for tens of billions of dollars in collateral payouts to some of the biggest U.S. and European financial institutions. AIG paid Goldman Sachs $13 billion in taxpayer money as a result of the CDSs it sold to Goldman Sachs.

What caused the crisis? Market failure? Policy failure?

Policy failure US and EU government “populism” over-indebts lower-income groups US and EU fiscal low-interest policies fuelled asset bubble (including commodities) Global imbalances generated growing and unsustainable debts of US, EU, and Japan (G3)

Origins of current financial crisis Since 1990s deregulation of financial markets: risk pricing replaces prudential supervision. Rise of derivative “assets” with opaque markets and few players. Bank loans replaced by bonds, etc. Huge US fiscal deficit, monetary expansion (“Greenspan put”), low savings led to a US mortgage boom/bust (non traded sector) and a huge current account deficit (traded sector). Mortgage bubbles (e.g. 1992 in UK) are familiar with obvious political costs; join recurrent bubbles in past decade (dotcoms, Tequila etc); But 2008 crisis is by far the most serious systemically because it threatens the global banking system itself as creditor, and whole US electorate as debtor.

Financial Times, 20 Sept 2008 “… bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies.” “…a reward system that has granted huge bonuses to those who peddled toxic mortgage-related products….” “Almost as absurd has been the degree of leverage racked up by investment banks.”

Rapid (and massive) US & EU government response Monetary expansion by the country’s central bank, e.g. Fed Reserve in the US Fiscal expansion (Tax cuts, govt. spending, rebates) Bank bailouts (Govt. infusion of taxpayers’ money into banks that fail)

Topic 1: Global Impact of the 2008 Financial Crisis (FC): Comparing Canada and the Third World Countries.

Thesis based on WST: The endless accumulation of capital is the cause for financial crises in the global economy. Economic development through globalization is guided by the Washington Consensus: “privatization of state productive enterprises, reduction of state expenditures, opening of the frontiers to uncontrolled entry of commodities and capital, and the orientation to production for export (Wallerstein, 2011: 4)”. However, since 1970s, the capitalists’ shifted from production to financial speculation for their continued accumulation of capital As a result, the world-system went through a series of speculative bubbles of which the FC of 2008 is one, that has lead to serious global rise in indebtednesses.

Comparing AICs with DW: While the 2008 financial crisis that originated in the US, had severe economic and financial repercussions on the core countries (the US and the European), the regulatory regimes of the Canadian financial institutions limited Canada’s exposure to the crisis and minimized its adverse impact on the economy and employment. In contrast, the Third world countries where most people are already poor, faced worsening of poverty due to their declining GDP, loss of export trade and growing unemployment that led to greater poverty.

TheWorld Bank Global Monitoring Report 2010: The Millennium Development Goals (MDGs) after the Crisis (April 2010) WB projects the poverty impact of the crisis through the effect on growth; also for MDG targets “The crisis left an estimated 50 million more people in extreme poverty in 2009, and some 64 million more will fall into that category by the end of 2010 relative to a pre-crisis trend” (p. 102) That is 2% of the world population... http://www.imf.org/external/pubs/ft/gmr/2010/eng/gmr.pdf

Impact of the 2008 Financial Crisis (FC): Canada I.Economy and Finance II.Employment and Economic security III.Human Development and Poverty

Canada: Financial Crisis of 2008 (FC) I.Economy and Finance 1. FC: less impact than in other AICs. Credit has solid growth as Canada’s financial institutions are better capitalized and less leveraged than their international counterparts. Canadian financial institutions continue to be the healthiest in the world. World Economic Forum has ranked Canada’s banking system as the soundest in the world for 3 consecutive years. 2. Strong growth in world prices of most commodities produced in Canada since mid-2010 3. Canada’s sound fundamentals have made Canadian financial assets attractive to international investors

http://www.bankofcanada.ca/2011/03/speech es/great-recession-canada-perception-reality/

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html 2012:

http://www.budget.gc.ca/2011/plan/chap2- eng.html

24 September 2014 Remarks by Timothy Lane Deputy Governor of the Bank of Canada at Carleton University Ottawa, Ontario Are We There Yet? The United States and Canada After the Global Financial Crisis - graphs http://www.bankofcanada.ca/wp-content/uploads/2014/09/remarks-240914.pdf#chart5

2014 Canada’s Financial Troubles As Canada’s recovery unfolded, our economy became increasingly unbalanced. Our non – energy exports, after picking up quickly, stalled well below their Pre -recession level (Chart 4 ). Economic growth became increasingly reliant on building more and more Homes, mortgaged at rock - bottom interest rates and driving up the Indebtedness of Canadians to unprecedented levels (Chart 5 ). That source of growth was increasingly tapped out. And it built up vulnerabilities In our financial system, which could spell trouble down the road.

The six largest domestic banks hold > 90% of banking industry assets. This adds to the banking industry’s stability In 2006, sub-prime loans accounted for less than 5% of new mortgages in Canada, compared to 22% in the United States. While >50% of all mortgage debts outstanding in the US were sold to investors through securitization, >75% of Canadian mortgages were held by financial institutions on their balance sheet as traditional mortgages

However, the downside: (Canada) Stock markets registered their greatest drops in more than 75 years. As the contagion spreads, it directly affected our exports to the US. Three-quarters of our exports go to US markets. Sharp decline in exports - decrease by >16 % in 2010. Capital investments declined due to uncertainty in a weakening financial markets with shaken consumer and business confidence: 22 % downturn in business investments in 2010

www.bankofcanada.ca/wp.../2013/01/mpr- summary-2013-01-23.pdf

Canada: Employment losses were much less serious than during earlier recessions - jobs regained sooner But, only partial recovery of business investment (45%) and exports (67%) from the losses due to the recession. Jobs linked to these sectors have not come back.

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html 2012:

http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html 2012

III. Human Development and Poverty (Canada) In US, 2 of the Detroit-based auto companies received loan guarantees of $17 billion and $4 billion from the Canadian Federal and Ontario provincial governments. Ford received a line of credit. Without them, millions of workers would have lost their jobs in Canada. Feminized sectors & women workers were left out in job creation policies: Investment in ‘infrastructure’ for repairing and constructing roads, bridges and buildings, and bailing out the Detroit Three is job creation that amounts to ‘jobs for boys,’ as far fewer women work in such industries.

Human Development and Poverty: Canada (cont’d) Public Spending on the poorer families and children: Instead of assisting the unemployed, the poor on welfare and income supplement by not cutting them back in the govt budgets: 1.Canadian government helped Canada’s banks. – swapped hundreds of billions of dollars for questionable assets held by banks 2.$85-billion cumulative deficit over five years for the bail out - “Insured Mortgage Purchase Program” lists the $75-billion CMHC buyout 3.$ 45-billion is being provided to further backstop mortgage lending by banks

Impact of the 2008 Financial Crisis (FC): Developing World I.Economy and Finance II.Employment and Economic security III.Human Development and Poverty

World’s Risks Loom Large at Annual Meetings Oct. 2014 http://www.worldbank.org/en/news/feature/2014/10/11/worlds-risks- loom-large-at-meetingshttp://www.worldbank.org/en/news/feature/2014/10/11/worlds-risks- loom-large-at-meetings 2.2 min (watch at home) 2015 LDCs http://blogs.worldbank.org/futuredevelopment/node/194http://blogs.worldbank.org/futuredevelopment/node/194 (watch at home) http://www.worldbank.org/en/news/press- release/2014/10/08/cloudy-outlook-for-growth-in-emerging-europe- and-central-asia WASHINGTON, October 8, 2014 - Growth in the Emerging Europe and Central Asia (ECA) region remains tepid, with GDP growth for the region expected to be only 1.8 percent in 2014 and improving slightly up to 2.1 percent for 2015, the World Bank said during the 2014 World Bank/IMF Annual Meetings.

Developing Countries pursued autonomous policies - not dependent on those based on IMF strictures: Reserve accumulation to insure themselves after learning form 1990s crises Counter-cyclical macro-policies (fiscal, monetary and exch-rate) to stabilize their output More extensive safety nets (universal rather than targeted) to sustain demand

Financial stability in DW: The region’s financial sector had no complex new financial instruments (such as in US: Collateralized Debt Obligation (CDO) Credit Default Swap (CDS)) Effective financial supervision and prudent risk management Foreign exchange reserves have been built up in Asia based on export surpluses (e.g. China), and on capital inflows or remittances (e.g. in the cases of Bangladesh, India, Indonesia, and Viet Nam). However: FDI fell significantly. Banking stresses in low income countries e.g., non-performing loans (NPLs) to total assets ratio doubled in Zambia (7% to 13% during 2009.

Economy: (OXFAM study) Asia and the Pacific, especially in Central and South-East Asia GDP growth dropped in 2008 and 2009 in India, Indonesia, Thailand, Viet Nam, the Philippines, Pakistan, and Sri Lanka where the poor populations predominate. China: state control and high foreign exchange reserves have given greater flexibility to control the crisis. Newly industrialized countries: South Korea, Malaysia, Singapore, Taiwan, Hong Kong and Macau: high per capita incomes, high degrees of trade and investment integration with the world, highly export dependent. But, they have fiscal and social policies to deal with declining exports & increasing unemployment. Less developed countries :Bangladesh, Cambodia, Bhutan, Lao PDR, Mongolia, and Nepal: increasingly integrated with the global and regional economy through trade. Worsening economies 2010 GDP in sub-Saharan Africa : Fell 7% ($84 billion). (International Monetary Fund (IMF) data and forecasts, 2011 http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm)

e.g., India in 2014 https://www.youtube.com/watch?v=kdMeXutanMY 6min India's Economic Crisis: Prospects for 2014https://www.youtube.com/watch?v=kdMeXutanMY DW: However, income distribution has worsened and poverty risen in the DW Managed exchange rates maintain output/employment rather than wages/incomes in the formal sector. The burden falls on the informal sector – lower wages and spending by the poor. Remittances from abroad declined. World Bank estimates poverty rising due to deceleration in growth Decline in job creation while labour force continues to grow

Impact of the 2008 Financial Crisis (FC): DW I.Economy and Finance II.Employment and Economic security III.Human Development and Poverty

Employment: The greatest impact on employment was in the garment and mining industries. Jobs lost: In 2009. 25,000 to 30,000 garments workers’ jobs lost in Bangladesh. In 2009, Cambodia lost a third of garment workers (102,527 jobs) A third of Zambia ‘s mining jobs lost:10,000 Three quarters of miners in DRC (18,000 people) lost jobs Cambodia has been hit hard with job losses in garments, tourism, and construction industries. Philippines: most lay-offs in export processing zones (EPZs) - 75 % are women workers Thailand: 125,700 women (I in 4 export industries) laid off or lost regular work that turned temporary.

In Indonesia and Thailand: (Oxfam evidence) Using crisis as an excuse: Factories dismissed workers in order to hire younger, cheaper workers. In Serang, Indonesia, in one factory, 79 employees with 8 to 14 years seniority were dismissed Then, hired younger workers with flexible, lower paid short-term contracts, apprenticeships, and for outsourcing.

http://www.worldbank.org/en/topic/jobsandpoverty/publication/job-trends-june-2014 2014 : No Change in Unemployment Rates; Uneven GDP Growth in Developing Countries

Impact of the 2008 Financial Crisis (FC): DW I.Economy and Finance II.Employment and Economic security III.Human Development and Poverty

Human Development in DW: OXFAM 2010 Families : In Indonesia: If with jobs, give up meat or fish. Women now unemployed - only food twice a day instead of three times - eat less at each meal. Forego food to give food to their children or husbands Watered down the milk to babies and feeding children less No money for school meals For the first three months my kids found it very difficult to give up rice, tempe, and tofu and just eat soup and the cheapest thing. – (Dismissed worker in a focus group discussion, Indonesia) My husband and I skip meals to make sure our baby has milk. – (Woman in focus group discussion, the Philippines) Men deserve to eat more food because they are physically stronger, do hard work on the farm, and earn income for the family. – (Focus group discussion, Viet Nam)

Human Development: In Cambodia, 70% of the poor took out loans from relatives or friends, or bought food on credit. Parents in urban areas in Indonesia report eating less and selling assets to keep their children in school. “It is better for us not to eat than for our kids not to go to school.” – (Woman in a focus group discussion, Indonesia) 30 million people lost jobs since 2007 due to the ongoing crisis, taking the pool of globally unemployed to about 200 million in 2012.

http://www.iza.org/conference_files/FutureOfLabor_2013/grosh_m6958.pdf

Mexico does not have a national unemployment insurance program, but the Distrito Federal initiated an unemployment insurance program in Fall 2008 for city residents working for firms in the city for six months or more. Mexico set up a temporary Job Preservation Program in 2008. It provided subsidies of $110 Mexican Pesos per day (about US$8.23 with September exchange rate) for up to three quarters of the workers in participating firms, for up to a total of $5,100 Mexican pesos per worker (US$382). Mexico scaled up it Programa de Empleo Temporal (PET) as one of several labor market measures.

Mexico (cont’d) With the global crisis, it was scaled up, covering 285,000 beneficiaries in 2008, 682,000 in 2009 and 894,000 in 2010 (World Bank 2011; ILO/OECD 2011). Conditional cash transfer programs (CCTs) are meant to break the intergeneration transmission of poverty, by transferring cash to poor households on the condition that those household make prespecified investments in the human capital of their children (Fiszbein and Schady 2009).

Source: Understanding the Poverty Impact of the Global Financial Crisis in Latin America and the Caribbean -Part II: The role of social protection DRAFT 1/31/13 Margaret Grosh, Anna Fruttero, Maria Laura Oliveri, World Bank Global Financial Crisis, its Impact on India and the Policy Response Nirupam Bajpai Working Paper No. 5 July 2011

Social spending in India after the crisis:  The spending on social sector has been increased (US$ 30 billion) in 2010-11, which is 37 percent of the total plan outlay in 2010-11.  Another 25 percent of the plan allocations are devoted to the development of rural infrastructure. Education :  allocation for school education increased by 16 percent (US$ 6 billion) in 2009-10. US$ 7 billion in 2010-11.  In addition, States will have access to US$ 792 million for elementary education for 2010-11. Health  allocation to Ministry of Health & Family Welfare increased US$ 5 billion for 2010-11. The measures undertaken by government of India to counter the effects of the global meltdown on the Indian economy have resulted in shortfall in revenues and substantial increases in government expenditures,

Key Drivers to Recovery India - High Government Expenditure, funded largely through borrowings. - Increased incomes in rural areas due to greater social spending and high farm good prices; creation of wage employment are National Rural Employment Guarantee Programme (MGNREGA) in the rural areas and Swarna Jayanti Shahari Rozgar Yojana (SJSRY) in the urban areas. Food security  Livelihood security  Water security  Ecological Security  Flood risk reduction

India: Nearly 40 per cent of female respondents were the primary income earners in their household, and in other households, women’s income made crucial contribution to the sustenance of their household income. The above survey results indicated that the income-earning burden on women seemed to be intensifying, as 20 per cent of respondents reported recent retrenchments of household members during the previous six months, and 40 per cent reported a drastic reduction of income provided by one or more members of the household in the same period. An increased number of informal women workers were supporting the entire family on less income. (Source: Horn, Zoe Elena (2010), ‘Effects of the global economic crisis on women in the informal economy: research findings from WIEGO and the Inclusive Cities partners’, Gender & Development, 18:2, 263–276.)

National Rural Employment Guarantee Programme in India The main feature of the programme promoting women’s employment and income opportunities entails: - one third of jobs should be given to women; - equal wages for work of equal value; - requiring the provision of a crèche when there are more than five women on a programme. The national average of women’s participation was 49 per cent. In 20 States, women made up at least 30 per cent of participants in 2008. The programme reduced distressed migration, and improved income and nutrition in the workers’ households. Due to the wage payment at post offices or through banks, the programme has introduced some sections of the community to use formal financial institutions for the first time. Source: 2009, UN New York: World survey on role of women in development: Women’s control over economic resources and access to financial resources, including microcredit, pp. 74–75.

http://www.voxeu.org/article/india-s-economic-slowdown-and-what-should-be- done-about-it India

Population: 1.22 billion (2011) Yearly increase: 18 million Major group: 50% - 0 – 25 years More than 1.53 billion people by the end of 2030. Average life expectancy: 68.6 years Average fertility rate: 2.7 children per woman Male literacy rate at 75.96% and female at 54.28% LR 74.04% in 2011 from 65.38% in 2001 About 72.2% of the population lives in some 638,000 villages and the rest 27.8% in about 5,480 towns and urban agglomerations Homes without electricity: 25 per cent

In 2011, World Bank reported, 32.7% of Indians below the international poverty line of US$ 1.25 per day (PPP) while 68.7% live on less than US$ 2 per day.

India's banks are stable compared to those in richer countries. Bollywood is thriving as movies sell even in hard times. People in India save, not spend their earnings Every Indian tries to save for a house even if it takes 20 years to build own house. Seldom do they borrow to finance their lifestyle. The country’s domestic demand does not slump

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