martin wolf on 'the shifts and the shocks: what we've learned – and still have to learn...

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The Shifts and the Shocks Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times IPPR 1 st December 2014 London

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Page 1: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

The Shifts and the ShocksMartin Wolf, Associate Editor & Chief

Economics Commentator, Financial Times

IPPR

1st December 2014

London

Page 2: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

2

The Shifts and the Shocks

• What happened: the shifts and shocks?

• What is to be done: the solutions?

Page 3: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? The costs

3

IN THE US IT IS NOW LOOKING LIKE A NEW ERA

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

$0

$5,000

$10,000

$15,000

$20,000

$25,000

1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010

Dev

iati

on

fro

m t

ren

d (

per

cen

t)

GD

P (

bn

)

US GDP(Actual, trend and deviation from trend)

Gross domestic product 1950-2007 Trend Deviation from trend (per cent)

Page 4: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? The costs

OUTPUT IS VASTLY BELOW THE PRE-CRISIS

TREND

4

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

€ 0

€ 500

€ 1,000

€ 1,500

€ 2,000

€ 2,500

€ 3,000

De

via

tio

n f

rom

tre

nd

(p

er

ce

nt)

Qu

art

erl

y G

DP

(b

n)

EUROZONE GDP(Actual, trend and deviation from trend)

Actual 1955-2007 trend Deviation

Page 5: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? The costs

OUTPUT IS VASTLY BELOW THE PRE-CRISIS

TREND

5

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

UK GDP PER HEAD(purchasing power parity, at 1990 Geary Khamis dollars)

Source: Maddison project and the Conference Board

1870-1950 trend 1950-2007 trend GDP per head

Page 6: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Savings glut

6

-2

-1

0

1

2

3

4

5

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

Q11995

Q11997

Q11999

Q12001

Q12003

Q12005

Q12007

Q12009

Q12011

Q12013

Ind

ex-lin

ke

d Y

ield

Real H

ou

se P

rices (

ind

ex n

um

ber)

REAL HOUSE PRICES AND REAL INDEX-LINKED YIELDS

US real (S&P Case Shiller National) UK real Nationwide

Spain real UK 10-year IL gilts

SLIDE INTO DEPRESSION RATES OF INTEREST

Page 7: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Imbalances

7

-3

-2

-1

0

1

2

3

4

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

GLOBAL IMBALANCES (as per cent of world GDP)

US Oil exporters Germany and Japan

Peripheral Europe China and Emerging Asia Rest of world

Discrepancy

WHERE EXCESS SAVINGS CAME FROM

Page 8: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened

8

THE ROLE OF GOVERNMENTS

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

FOREIGN CURRENCY RESERVES ($bn)

China Other Asian developing countries

Other developing countries Industrial countries

Page 9: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Debt

9

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

300.0%

350.0%

US CUMULATIVE PRIVATE SECTOR DEBT OVER GDP

Households Non-financial Business Financial Sectors

THE TRAP OF LEVERAGE

Page 10: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Bank leverage

10

Ratio of risk-weighted to unweighted assets declines in four largest UK

headquartered banks falls, as leverage increases

Page 11: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Cheep money

11

RATES AS LOW AS THEY WILL GO

0

1

2

3

4

5

6

7

8

CENTRAL BANK INTERVENTION RATES (per cent)

Fed BoE Buba/ECB BoJ

Page 12: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? More money

12

CENTRAL BANK BALANCE-SHEET EXPANSION

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Q12000

Q12001

Q12002

Q12003

Q12004

Q12005

Q12006

Q12007

Q12008

Q12009

Q12010

Q12011

Q12012

Q12013

Q12014

CENTRAL BANK ASSETS OVER GDP

Federal Reserve BoE BoJ ECB

Page 13: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Low bond yields

13

EUROZONE BECOMES JAPAN

0

1

2

3

4

5

6

10-YEAR BOND YIELDS

Germany UK France US Japan

Page 14: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Eurozone imbalances

14

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

EUROZONE IMBALANCES ON CURRENT ACCOUNT(as per cent of Eurozone GDP)

Germany Other creditors Vulnerable countries

France Others Eurozone

IMBALANCES AND REBALANCING

Page 15: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened?

15

THE EUROZON LEHMANS

-2

0

2

4

6

8

10

12

14

16

1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14

SPREADS ON TEN-YEAR GOVERNMENT BONDS OVER BUNDS (percentage points)

Portugal Ireland Italy Spain LTRO OMT TLTRO

Page 16: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

1. What happened? Managed depressions

16

90

92

94

96

98

100

102

104

106

108

110

Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014

GDP AND DEMAND IN THE CRISIS

Eurozone domestic demand Eurozone GDP

US domestic demand US GDP

THE BAD AND THE UGLY

Page 17: Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis

2. What are the solutions? Finance

• “As of July this year, two years after the enactment of

Dodd-Frank, a third of the required rules had been

finalised. Those completed have added a further

8,843 pages to the rulebook. At this rate, once

completed, Dodd-Frank could comprise 30,000

pages of rulemaking. That is roughly a thousand

times larger than its closest legislative cousin, Glass-

Steagall. Dodd-Frank makes Glass-Steagall look like

throat-clearing.” Andrew Haldane and Vasileios

Madouros, Bank of England

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