paul.mason.01@bbc.co.uk the great moderation good luck? structure? policy?

paul.mason.01@bbc.co.uk

THE GREAT MODERATION

Good luck?Structure?

Policy?

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)

AS % OF GDP

ASSET BUBBLES

“whereassets trade

in high volumesat prices much higherthan intrinsic value…”

DOTCOM (NASDAQ)

+ ASSET BACKED SECURITIES

+ COMMODITY INDEX

+ HEDGE FUND ASSETS

10x

+ CREDIT DEFAULT SWAPS

2000 $1 TRILLION2008 $58 TRILLION(not to scale)

58x

WHAT DROVE THE BUBBLES?

American over-borrowing?Low interest rates?Asian over-saving?

THE GLOBAL IMBALANCES

USA CHINA

IMPORTS GOODS EXPORTS GOODS

CONSUMER DEBT SAVINGS

NATIONAL DEBT NATIONAL SURPLUS

IMPORTS CAPITAL EXPORTS CAPITAL

US TRADE DEFICIT

+ CHINA DOLLAR RESERVES2008 = $2 TRILLION

THE GLOBAL IMBALANCES

““Capital now flows Capital now flows upstream, from upstream, from the world’s poor the world’s poor

to the richest to the richest country of all…”country of all…”

Martin WolfMartin Wolf

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? …

folks like these…?

…folks like these?

SUBPRIME

Detroit, Michigan 2004: 75% of all new mortgages = subprime 2007: 65,000 homes foreclosed 1/5 homes empty “We buy homes for cash”

US HOUSING COLLAPSE% change y-o-y Case Shiller 10x cities

HOUSING + DOW JONES

HOUSING + DOW + OIL

$147

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

WHERE ARE WE NOW?

WHERE ARE WE NOW?

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)

THE STATE

Rescued freemarket capitalism Owns large chunks of banking system A generation of moral hazard? A generation of fiscal pain?

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?

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)

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?