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

SESSION ONE: The roots of the crisis

The Great Recession SOURCE: IMF World Economic Outlook, April 2009 Recession or Depression? Greenspan: once in a century event IMF repeatedly revised growth forecasts

The Great Recession Two key factors contributing to crisis: 1.Emergence of “Chimerica” 2. Bush administration’s response to 9/11

The emergence of “Chimerica” The emergence of “Chimerica” CHINA: export & save AMERICA: borrow & spend

The Great Recession

Bush 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 9/11

Goldilocks and the “savings glut” Era easy money, two crucial consequences: 1 – US shifts from production to financing 2 – Creates the “bubble economy”

Easy money: production to finance

Easy money: the “bubble economy” Stock marketHouse prices Wealth illusion encouraged accumulation of debt

Easy 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 ATMs US more dependent on consumer, more reliant on debt

Government debt: a war of choice

America: a nation in debt 78m baby boomers: eligible Social Security and Medicare ADD war on terror and financial market bail-outs

America: a nation in debt RankCountryDebt % GDP 1Zimbabwe241.2% 2Japan170.4% 14India78.0% 17America73.2%* 35Argentina51.1% 41Britain47.2% 50Brazil40.7% 74South Africa29.9% 101China15.7% SOURCE: CIA The World Factbook SOURCE: The Washington Post * OECD 2008 estimate

The American dream unravels

The 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

The dream unravels: crisis timeline UK government announces Northern Rock to be nationalised Bear Stearns, America’s 5 th 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

The dream unravels: crisis timeline 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 7 th 15 th 16 th 25 th 28 th 29 th

The dream unravels: crisis timeline

OCTOBER 2008: Governments fight back US passes $700bn plan to rescue the US financial sector UK announces $88bn rescue plan for banking sector Major central banks announce emergency interest rate cuts G7 finance ministers issue 5-point plan to unfreeze credit markets 3rd 8 th 11 th

Crisis timeline: crisis hits economy Oct’08 Acknowledge that financial crisis has become an economic crisis Major global stockmarkets plunge

Crisis hits the real economy 4Q’08 Official figures confirm US, UK and Europe in recession

Crisis goes global: decoupling theory

Crisis goes global: decoupling denied! SOURCE: IMF World Economic Outlook, April 2009

Crisis goes global: decoupling denied! Export-orientated manufacturers Commodity producers

Crisis 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 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?