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Anthony Budiawan Rektor Institut Bisnis dan Informatika Indonesia Jakarta, Auditorium Kampus IBII, December 21, 2011
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
Discussion points
Global financial crisis 2008
o Subprime mortgage loan: how it works, how it creates bubble, and how it creates financial instability o Global trade imbalances: how it works, how it creates bubble, and how it creates global financial turbulences o What factors determine the global trade imbalances?
Exchange rate policy of the surplus countries: currency manipulation?
Conclusion
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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GLOBAL FINANCIAL CRISIS 2008 Subprime mortgage crisis how it works, how it creates bubble, and how it creates global financial instability
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Investment Banks
Insurance Companies
(R)MBS (C-R)MBS Structured Investment Vehicles (SIVs) Funding Credit Default Swap (CDS)
CDO (Synthetic) CDO CDO CDO CDO CDO
Households
Funding
Worldwide Investors
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
Investment Banks
Insurance Companies
(R)MBS (C-R)MBS Structured Investment Vehicles (SIVs) Funding Credit Default Swap (CDS)
CDO (Synthetic) CDO CDO CDO CDO CDO
Households
Funding
Worldwide Investors
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Crude oil and euro price index moved in the same direction as home and gold price index
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Discussion points
Global financial crisis 2008
o Subprime mortgage loan: how it works, how it creates bubble, and how it creates financial instability o Global trade imbalances: how it works, how it creates bubble, and how it creates global financial turbulences o What factors determine the global trade imbalances?
Exchange rate policy of the surplus countries: currency manipulation?
Conclusion
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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GLOBAL FINANCIAL CRISIS 2008 Global trade imbalances how it works, how it creates bubble, and how it creates global financial turbulences
Ben S. Bernanke: In my view it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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US GDP
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Global trade imbalances: how it contributes to financial and subprime mortgage crisis
Real Sectors United States
Current Account Deficit Goods & Services Dollar
Assets Bubble: i.e. mortgage crisis (2008) Stocks Bubble: i.e. dot com crisis (2000)
Financial Sectors
Dollar Securities
United States
Financial Account Surplus
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The U.S. current account deficits continued steadily since 1980s: why is it possible?
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Current Account Deficit 1971 2006: $ 5.98 trillions 1990 2006: $ 5.12 trillions
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The impact of China s economic development on the U.S. current account deficit
China s fourth and last phase economic reform & globalization China s first economic reform China Adopt Fixed Exchange Rate: 1 USD = 8.27 Yuan Current Account Deficit 1971 2006: $ 5.98 trillions 1990 2006: $ 5.12 trillions
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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1990 2006: $ 5.04 trillions Financial Account Surplus 1971 2006: $ 5.65 trillions
Current Account Deficit 1971 2006: $ 5.98 trillions 1990 2006: $ 5.12 trillions
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Discussion points
Global financial crisis 2008
o Subprime mortgage loan: how it works, how it creates bubble, and how it creates financial instability o Global trade imbalances: how it works, how it creates bubble, and how it creates global financial turbulences o What factors determine the global trade imbalances?
Exchange rate policy of the surplus countries: currency manipulation?
Conclusion
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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What factors cause the global trade imbalances? Currency manipulation imposed by surplus countries?
Ben S. Bernanke: the causes of the U.S. foreign deficit, and therefore its cures, were primarily external to the U.S.
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Another view of the cause of the global trade imbalances: fiat money
After WWII, dollar is fully convertible to gold with a fixed value All other currencies were fixed to dollar Surplus countries can convert the dollars into the U.S. gold Conversion will provide an automatic adjustment in the domestic money supply (in the U.S. as well as in its trading partner country) As a result, the price level of the deficit country (U.S.) will go down, while the price level of the surplus country will go up, which will restore the trade balance Therefore, the current account deficit cannot widen forever, as exclaimed by Alan Greenspan in 2005 However, after 1971, following the collapse of the Bretton Woods, the U.S. current account deficit can widen for an extended period Instead of surrendering gold in exchange for the deficit dollar, the U.S. is surrendering the financial instruments (shares, bonds, CDO, etc.), which provokes an assets bubble, but is not reflected in the price level
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
Discussion points
Global financial crisis 2008
o Subprime mortgage loan: how it works, how it creates bubble, and how it creates financial instability o Global trade imbalances: how it works, how it creates bubble, and how it creates global financial turbulences o What factors determine the global trade imbalances?
Exchange rate policy of the surplus countries: currency manipulation?
Conclusion
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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It will happen anyway, just wait for a right time (and now, it is the time)
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Percent
1000
LHS
0 -2 -4 1995 1997 1999 2001 2003 2005 2007 2009 US Deficit/GDP Ratio
200 0
RHS
-200 -400
US Federal Deficit
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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In any case, the response from the EU leader must be very fast to prevent the financial chaos in other regions that could lead to a double dip recession
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Inflation in the non-euro member states is more varied than in the eurozone
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Discussion points
Global financial crisis 2008
o Subprime mortgage loan: how it works, how it creates bubble, and how it creates financial instability o Global trade imbalances: how it works, how it creates bubble, and how it creates global financial turbulences o What factors determine the global trade imbalances?
Exchange rate policy of the surplus countries: currency manipulation?
Conclusion
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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CONCLUSION
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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Conclusion
Global financial crisis is triggered by subprime mortgage crisis resulting from global imbalances in trade Global imbalances is a result from an international fiat money monetary system adopted since 1971, which will cause turbulences in world financial sectors that lead to crisis Sovereign debt deficits increase during the crisis: this is a natural event and unavoidable Eurozone sovereign debt crisis is mainly due to an inherent problem of the common currency concept itself (mission impossible?) To save euro, eurozone need to be restructured, only consists of advanced countries of Western Europe
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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THANK YOU
The Global Financial and Sovereign Debt Crisis: causes, effects, and preventions
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