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Global Crisis
International Economics
Aguilera, Andres (2009470062)
Kim, Hyo Young (2009470010)
Lee, Kye Whan (2008470004)
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Table of Contents
1. Introduction Global Crisis
2. Why? Economic Response to the Crisis
3. How? Policy Response to the Crisis
4. Conclusion - Whats Next?
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INTRODUCTION
Global Crisis
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Timeline towards Global Crisis
July, 2007Bear Sterns
Hedge Funds
September, 2007
Federal Slashes Rates
August, 2007
Subprime Mortgage
problems Go Global
January, 2008
Real Estate Fears
March, 2008Bear Sterns
Bailout
September, 2008
Lehman Brothers Collapse
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Blueprint for a downfall?
Source: A Tales of Two Depression The Economist (2009)
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WHY?
Economic Response to the Crisis
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1. Roubinis Forecast
- Once-in-a-lifetime housing bust
- Oil shock
- Sharply declining consumer confidence
- Deep recession
2. Greed
- Spent far more than they made.
Nouriel Roubini Forecast
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Similar Signs to Asian Crises in 1990s
Excessive borrowing &reckless lending
Poorly regulated
banking systems Weak corporate
governance
Cronyism inabundance
Shoddy underwriting
Negligence on the partof the credit rating
agencies Lax government
oversight
Sub-prime financialsystem
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Imbalances between Savings andInvestments
Excess of saving large capital inflow to the U.S. low
interest rate declining private savings housing price bubble
C/A deficit-not addressed taking advantage of r/a issuer
Analogy of U.S. and Japandebate in 1980:
Excess saving vs. declining private
saving in the U.S.
Current Account vs. large public
surplus sector deficit
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U.S. Trade Deficit
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U.S. Government Deficit
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Structural Causes
Financial Liberalization
Glass-Steagal Acts
GrowingCapital
Gramm-
Leach-
Bliley Act
InvestmentBank
Commercial
Bank
InvestmentBank
=
Commercial
Bank
Emergingeconomies
Real-estateindustry:
Sub-primeMortgage loan
DerivativesProducts: MBS
Bubble
Economy
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Structural Flaws
- U.S. deregulation Competitiveness low lending
standards
- EU & Japan
Structural changes in product & labor markets.
- China
Sterilized intervention in the money market.
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Other Contributing Factors
- Low interest rates-wrong timing
- Human greed-Wall street greed
- CEO corruption- Lack of International cooperation
- Protectionism
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HOW?
Political Response to the Crisis
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Policy Response to the Economic Crisis:G-20
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Cuts in Interest Rates
FED Oct 2007 5.25% Today 0.25%
BOE Oct 2008 5% Today 0.5%
ECB Oct 2008 4.25 Today 1%
BOJ Historically low!
Lower federal-funds rate areusually a powerful tool to boosteconomic growth, though the
impact tend to lag by severalmonthsWall Street Journal, Oct 30 2008.
Source: Goldman Sachs Effective Regulation Part 1. March 2009
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US TARP Troubled Asset Relief Program
Emergency EconomicStabilization Act of 2008(known as the bail-out)US$700 Billion to buy:
1. Toxic Assets (especiallymortgage-backedsecurities)
2. Recapitalize banks
Cash for Trash Paul KrugmanNYTimes, Sept 21, 2008.
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Stimulus Plan
Known as theAmerican Recovery andReinvestment Act(Feb09) $787 BillionInfrastructure, HealthCare, Energy,Education, SocialSecurity
Govt deficit calculatedto 1.84 Trillion. (NYTimesMay 11, 2009)
Source: KALs cartoon, The Economist, Feb 26th 2009
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China: The World Banker
Source: Goldman Sachs. Effective Regulation Part 1.
China stimulus plan of
4 Trillion Yuan ($586B)
Housing, Rural Dev,Infrastructure, Education,Environment, Industry and Tech.(WSJ May 22 09)
Chinas Shopping Spree
Commodities (Oil, Iron Ore,Copper and Aluminum)
Sept 08 China became U.S.largest creditor. (Now it holds$767.9 Billion in Treasuries)
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G-2 at a glance: Chimerica
For addtional information: The End of Chimerica, HBS. Online at: http://www.hbs.edu/faculty/Publication%20Files/10-
037.pdf
http://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdf7/25/2019 Global Crisis Korea University
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Competitive Devaluation or Currency Collapse?
Source: Lessons of the Financial Crisis. CFR Special Report No. 45 March 2009
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G-20s Six Pledges
1.Reform the Global BankingSystem (Shadow banking system)2. No Tax Havens (Bank Secrecy)Cooperation with OECD standards.3. International Growth
4. $750B to troubled economies +$250B in swaps of SDRs for dollarsor euros. (Other funds)5. International Accounting Standards6. Regulate Credit Rating Agencies
(Oligopoly, conflicts of interest,inaccurate risk models)
Source: http://www.telegraph.co.uk/finance/financetopics/g20-summit/5094824/G20-summit-Gordon-Brown-unveils-1.1trn-global-
recession-fight-back.html
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Quantitative Easing
Lower interest rates encouragepeople to spend, not save. But wheninterest rates can go no lower, acentral banks only option is to pumpmoney into the economy directly []
this is by buying financial assets suchas government and corporate bonds.BBC News Q&A: Quantitative Easing.
In advanced economies, scope foreasing monetary policy further shouldbe used aggressively to counterdeflation risks.World Economic Outlook, April 2009.
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CONCLUSION
Whats Next?
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Whats Next?
From Market Capitalism to Managed Capitalism1) Market Capitalism:
Reliance on market system;
Creation of venture capital and Initial Public Offering(IPO) markets
2) Managed Capitalism:
Much less reliant on market system;
Much more reliant on the government system toregulate and manage economy;
Minimize the excess observed in current crisis
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Whats 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
- Main theme in the future: debt and
necessary government measures and
regulations
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Whats 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 dutiesIndia: raised import tariffs on imported goods
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Whats Next?
Developed Economies are Losing Ground- If savings rates rise, inflationoccurs and higher taxes areimplemented to meet rising fiscaldebt
- A Possible Negative Outcome:Developed economies competitive
position vis--vis cash-richdeveloping economies
-Expect the unexpected
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Whats 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 likelyDemand is weak
Households and firms are burdened by debt
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Whats Next?
Innovation is Immune to the Crisis- Technologies can grow even in the
deepest recessions
In 1930s, fridges had double digit
growth In 1970s faxes had double digit
growth
-smaller/faster/cheaper smarter/smarter/smarter
- Technological developments affect
providers of financial services
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Thank You