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Published byStewart Palmer Modified over 9 years ago
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paul.mason.01@bbc.co.uk
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THE GREAT MODERATION Good luck? Structure? Policy?
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BERNANKE In the United States a deep and liquid financial system has promoted growth by effectively allocating capital and has increased economic resilience by increasing our ability to share and diversify risks, both domestically and globally ” (15 June 2007)
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AS % OF GDP
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ASSET BUBBLES “where assets trade in high volumes at prices much higher than intrinsic value…”
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DOTCOM (NASDAQ)
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+ ASSET BACKED SECURITIES
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+ COMMODITY INDEX
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+ HEDGE FUND ASSETS 10x
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+ CREDIT DEFAULT SWAPS 2000$1 TRILLION 2008 $58 TRILLION (not to scale) 58x
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WHAT DROVE THE BUBBLES? American over-borrowing? Low interest rates? Asian over-saving?
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THE GLOBAL IMBALANCES USACHINA IMPORTS GOODSEXPORTS GOODS CONSUMER DEBTSAVINGS NATIONAL DEBTNATIONAL SURPLUS IMPORTS CAPITALEXPORTS CAPITAL
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US TRADE DEFICIT
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+ CHINA DOLLAR RESERVES 2008 = $2 TRILLION
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THE GLOBAL IMBALANCES “Capital now flows upstream, from the world’s poor to the richest country of all…” Martin Wolf
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A QUICK RECAP Low interest rates + Oversupply of savings (Asia) = Rising debt in USA 2001: Dotcom bubble bursts Asset backed security bubble begins Where to find new, high-risk, high-interest borrowers? …
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folks like these…?
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…folks like these?
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SUBPRIME Detroit, Michigan 2004: 75% of all new mortgages = subprime 2007: 65,000 homes foreclosed 1/5 homes empty “We buy homes for cash”
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US HOUSING COLLAPSE % change y-o-y Case Shiller 10x cities
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HOUSING + DOW JONES
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HOUSING + DOW + OIL $147
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THE RECKONING OCT 07-08 $2 TRILLION WRITTEN OFF BY BANKS $2 TRILLION MORE TO COME? (IMF) $12 TRILLION IN GLOBAL BAILOUTS (INC CREDIT GUARANTEES) $2.4+ TRILLION FISCAL STIMULUS $1 TRILLION IMF LENDING $32 TRILLION OFF EQUITIES GLOBAL GDP = $64 TRILLION GLOBAL FINANCE = $196 TRILLION
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WHERE ARE WE NOW?
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END OF Q109 US ECONOMY: -6.1% UK ECONOMY: -4%? CHINA: growth down from 12% to 6% WORLD ECONOMY: -2%? WBANK/11 JUNE -3% MFR EXPORTS: - 40% yoy Q1 IMF: 11% chance of global deflation (Jan)
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THE STATE Rescued freemarket capitalism Owns large chunks of banking system A generation of moral hazard? A generation of fiscal pain?
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CHINA $580 stimulus, 2/3 from banks Micro-level policy change Exports down 26% yoy Domestic investment up 30% End of export-led growth model?
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IDEOLOGY? Those of us who have looked to the self- interest of lending institutions to protect shareholders’ equity, myself especially, are in a state of shocked disbelief… I made a mistake in presuming that the self-interest of banks and others was such that they were best capable of protecting their own shareholders” Greenspan (23.10.08)
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THE DANGERS? Debt overhang = global lost decade Fiscal stimulus ‘borrows’ 2010 growth …or does not happen? (USA) Monetary stimulus = competitive devaluations Global trade doesn’t recover: national “pools” of capital UXBs: Germany? Sweden? China?
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