THE GREAT RECESSION The Crisis, the Impact, the Future June 2009.

THE GREAT RECESSIONTHE GREAT RECESSION

The Crisis, the Impact, the FutureThe Crisis, the Impact, the Future

June 2009June 2009

SESSION ONE: SESSION ONE: The roots of the crisisThe roots of the crisis

The Great RecessionThe Great Recession

SOURCE: IMF World Economic Outlook, April 2009

Recession or Depression?Greenspan: once in a century event

IMF repeatedly revised growth forecasts


Two key factors contributingto crisis:

1. Emergence of “Chimerica”

2. Bush administration’s response to 9/11

The emergence of “Chimerica”The emergence of “Chimerica”

CHINACHINA: export & save: export & save AMERICAAMERICA: borrow & spend: borrow & spend


Bush administration response 9/11Bush administration response 9/11

“As we … chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century,

we must also work together to achieve important goals for the

American people here at home. This work begins with keeping our

economy growing … And I encourage you all to go shopping

more.”

– President George W Bush

To revive slowing economy:- slashed interest rates- promised tax cuts- urged to “go shopping”

Bush administration response 9/11Bush administration response 9/11

Goldilocks and the “savings glut”Goldilocks and the “savings glut”

Era easy money, two crucial consequences:1 – US shifts from production to financing2 – Creates the “bubble economy”

Easy money: production to financeEasy money: production to finance

Easy money: production to financeEasy money: production to finance

Easy money: the “bubble economy”Easy money: the “bubble economy”

Stock market House prices

Wealth illusion encouraged accumulation of debt

Easy money: “affluenza” emergesEasy money: “affluenza” emerges

Affluenza: “a painful, contagious, socially transmitted condition of

overload, debt, anxiety and waste resulting from the dogged pursuit of

more.”

Role of consumer: the home ATMsRole of consumer: the home ATMs

US more dependent on consumer, more reliant on debt

Government debt: a war of choiceGovernment debt: a war of choice

America: a nation in debtAmerica: a nation in debt

78m baby boomers: eligible Social Security and MedicareADD war on terror and financial market bail-outs

America: a nation in debtAmerica: a nation in debt

Rank Country Debt % GDP

1 Zimbabwe 241.2%

2 Japan 170.4%

14 India 78.0%

17 America 73.2%*

35 Argentina 51.1%

41 Britain 47.2%

50 Brazil 40.7%

74 South Africa 29.9%

101 China 15.7%

SOURCE: CIA The World Factbook

SOURCE: The Washington Post

* OECD 2008 estimate

The American dream unravelsThe American dream unravels

The dream unravels: crisis timelineThe dream unravels: crisis timeline

New Century Financial files for bankruptcy

Fears of bank losses triggers wider credit crunch, prompting global central banks to pump billions into market to improve liquidity

Major losses emerge at banks: UBS, Citigroup & Merrill Lynch

Despite further central bank intervention, crisis spreads to bond insurers – monoline insurers

Apr 07

Aug 07

Oct 07

Dec 07


UK government announces Northern Rock to be nationalised

Bear Stearns, America’s 5th largest bank, sold to rival JPMorgan Chase supported by $30bn state loan

IMF warns credit crunch spreading to other sectors

US government steps in to save Fannie Mae and Freddie Mac,owners or guarantors of $5 trillion worth of home loans

Feb 08

Mar 08

Apr 08

Jul 08


SEPTEMBER 2008: EYE OF THE STORM

US government bails out Fannie Mae and Freddie Mac, one of the largest bailouts in US history

Lehman Brothers files for Chapter 11 and Merrill Lynch is bought out by Bank of America

Fed announced $85bn rescue package for AIG

Washington Mutual closed and sold to JPMorgan Chase

European banking and insurance giant, Fortis, is partly nationalised

UK mortgage lender Bradford & Bingley is nationalised

7th

15th

16th

25th

28th

29th



OCTOBER 2008: Governments fight back

US passes $700bn plan to rescue the US financial sector

UK announces $88bn rescue plan for banking sectorMajor central banks announce emergency interest rate cuts

G7 finance ministers issue 5-point plan to unfreeze credit markets

3rd

8th

11th

Crisis timeline: crisis hits economyCrisis timeline: crisis hits economy

Oct’08 Acknowledge that financial crisis has become an economic crisisMajor global stockmarkets plunge

Crisis hits the real economyCrisis hits the real economy

4Q’08 Official figures confirm US, UK and Europe in recession

Crisis goes global: decoupling theoryCrisis goes global: decoupling theory

Crisis goes global: decoupling theoryCrisis goes global: decoupling theory

Crisis goes global: decoupling denied!Crisis goes global: decoupling denied!

SOURCE: IMF World Economic Outlook, April 2009

Crisis goes global: decoupling denied!Crisis goes global: decoupling denied!

Export-orientated manufacturers Commodity producers

Crisis goes global: European crisisCrisis goes global: European crisis

European banks:- aggressive lenders to EM, notably E Europe- nearly 75% loans to countries now in deep recession

Crisis goes global: European crisisCrisis goes global: European crisis

European banks face two problems:1 – IMF estimates 50% more highly

leveraged than US banks

2 – banking sector far larger proportion

of their economies than US

• Banks too expensive to bail-out• EU has no framework to deal with situation• Difficult to resolve regional crisis, when

each governments faces local crises• Europe at far greater risk than US,

regional crisis could dwarf sub-prime

AUSTRIA: - $300bn loans to E Europe- 70% of economy- 10% default bankrupt banking system

Global crisis: where to from here?Global crisis: where to from here?

THE GREAT RECESSION The Crisis, the Impact, the Future June 2009.

Documents