Global Crisis

International Economics

Aguilera, Andres (2009470062) Kim, Hyo Young (2009470010) Lee, Kye Whan (2008470004)

Table of Contents
1. Introduction 2. Why? 3. How? Global Crisis

Economic Response to the Crisis Policy Response to the Crisis

4. Conclusion - What s Next?

INTRODUCTION

Global Crisis

Definition of Global Crisis - - - - Began in July 2007 Loss of confidence by investors in the value of securitized mortgages in the United States Liquidity crisis prompted of capital into financial markets by the United States Federal Reserve. Bank of England. 2008 Meltdown . and the European Central Bank Stock markets worldwide crashed in September.

2007 Subprime Mortgage problems Go Global January. 2007 Federal Slashes Rates August. 2008 Real Estate Fears . 2008 Bear Sterns Bailout September. 2008 Lehman Brothers Collapse September.Timeline towards Global Crisis July. 2007 Bear Sterns Hedge Funds March.

Blueprint for a downfall? Source: ³A Tales of Two Depression´ ± The Economist (2009) .

WHY? Economic Response to the Crisis .

Oil shock .Deep recession 2.Once-in-a-lifetime housing bust . Roubini¶s Forecast . Greed . .Spent far more than they made.Nouriel Roubini Forecast 1.Sharply declining consumer confidence .

Similar Signs to Asian Crises in 1990s     Excessive borrowing & reckless lending Poorly regulated banking systems Weak corporate governance Cronyism in abundance     Shoddy underwriting Negligence on the part of the credit rating agencies Lax government oversight Sub-prime financial system .

S. and Japan debate in 1980: ‡ Excess saving vs. declining private saving in the U.S.Imbalances between Savings and Investments ‡ Analogy of U. ‡ Current Account vs. large public surplus sector deficit Excess of saving large capital inflow to the U. low interest rate declining private savings housing price bubble C/A deficit-not addressed taking advantage of r/a issuer .S.

U. Trade Deficit .S.

S.U. Government Deficit .

Structural Causes GlassSteagal Acts Growing Capital GrammLeachBliley Act Bubble Economy Emerging economies Investment Bank  Commercial Bank Investment Bank = Commercial Bank Real-estate industry: Sub-prime Mortgage loan Financial Liberalization Derivatives Products: MBS .

.EU & Japan Structural changes in product & labor markets. deregulation standards Competitiveness low lending .S.China Sterilized intervention in the money market. .Structural Flaws - U.

Other Contributing Factors Low interest rates-wrong timing Human greed-Wall street greed CEO corruption Lack of International cooperation Protectionism .

HOW? Political Response to the Crisis .

Policy Response to the Economic Crisis .

FED Source: Goldman Sachs Effective Regulation Part 1.Cuts in Interest Rates Oct 2007 5.25 Today 1% BOJ Historically low! Lower federal-funds rate are usually a powerful tool to boost economic growth.25% BOE Oct 2008 5% Today 0. March 2009 .25% Today 0. Oct 30 2008.5% ECB Oct 2008 4. though the impact tend to lag by several months Wall Street Journal.

.US TARP Troubled Asset Relief Program Emergency Economic Stabilization Act of 2008 (known as the bail-out ) US$700 Billion to buy: 1. 2. Toxic Assets (especially mortgage-backed securities) Recapitalize banks Cash for Trash Paul Krugman NYTimes. Sept 21. 2008.

Health Care.Stimulus Plan Known as the American Recovery and Reinvestment Act (Feb 09) $787 Billion Infrastructure. (NYTimes May 11. Energy. The Economist. 2009) Source: KAL¶s cartoon.84 Trillion. Education. Social Security Gov t deficit calculated to 1. Feb 26th 2009 .

Rural Dev.China: The World Banker China stimulus plan of 4 Trillion Yuan ($586B) Housing. Infrastructure. Industry and Tech. largest creditor. Environment. Sept ¶08 China became U. (Now it holds $767. Iron Ore.S. Effective Regulation Part 1.9 Billion in Treasuries) . Copper and Aluminum) Source: Goldman Sachs. Education. (WSJ May 22 ¶09) China¶s ³Shopping Spree´ Commodities (Oil.

G-2 at a glance .

CFR Special Report No.Competitive Devaluation or Currency Collapse? Source: Lessons of the Financial Crisis. 45 March 2009 .

International Growth 4.uk/finance/financetopics/g20-summit/5094824/G20-summit-Gordon-Brown-unveils-1.1trn-globalrecession-fight-back. $750B to troubled economies + $250B in swaps of SDR s for dollars or euros. (Other funds) 5. 3.G-20 s Six Pledges 1. conflicts of interest.co. inaccurate risk models) Source: http://www. No Tax Havens (Bank Secrecy) Cooperation with OECD standards.telegraph.html . International Accounting Standards 6. Regulate Credit Rating Agencies (Oligopoly.Reform the Global Banking System (Shadow banking system) 2.

Quantitative Easing Lower interest rates encourage people to spend. not save. . scope for easing monetary policy further should be used aggressively to counter deflation risks. April 2009. World Economic Outlook. BBC News Q&A: Quantitative Easing. But when interest rates can go no lower. a central bank s only option is to pump money into the economy directly [ ] this is by buying financial assets such as government and corporate bonds. In advanced economies.

CONCLUSION What s Next? .

Creation of venture capital and Initial Public Offering (IPO) markets 2) Managed Capitalism:  Much less reliant on market system.What s Next?  From Market Capitalism to Managed Capitalism 1) Market Capitalism:   Reliance on market system.  Much more reliant on the government system to regulate and manage economy.  Minimize the excess observed in current crisis .

Main theme in the future: debt and necessary government measures and regulations .What s Next?  From Market Capitalism to Managed Capitalism .The Re-emergence of the State? Regulations? and Protectionism? the end of liberal era? .A crisis of the financial system rather than a crisis within the financial sector .

What s Next?  The Threat to Protectionism - A rise in number of trade restricting measures Devastating outcome? Global demand will be negatively affected Danger to the path to recovery Ex. United States clause: Buy American EU: imposed temporary anti-dumping duties India: raised import tariffs on imported goods .

A Possible Negative Outcome: Developed economies competitive position vis-à-vis cash-rich developing economies .If savings rates rise.What s Next?  Developed Economies are Losing Ground . inflation occurs and higher taxes are implemented to meet rising fiscal debt .Expect the unexpected .

What s Next?  Developed Economies are Losing Ground - Inflation or Deflation? Inflation is distant and containable Deflation is at hand and pernicious Expectations on inflation remain stable at status quo Pay freeze and wage cuts - Deflation is more likely Demand is weak Households and firms are burdened by debt - .

Technologies can grow even in the deepest recessions  In 1930¶s.What s Next?  Innovation is Immune to the Crisis . fridges had double digit growth  In 1970¶s faxes had double digit growth -³smaller/faster/cheaper´ ³smarter/smarter/smarter´ .Technological developments affect providers of financial services .

Thank You .

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