A ringside view of the economic crisis David Fenton, Senior Economist March 2012

Slide 2 Was the Greenspan put a shot in the foot? Policy rates, UK and US Source: Datastream

Slide 3 Goodbye dot-com bubble, hello housing bubble Equity prices, house prices Source: Datastream

Slide 4 (Taylor) rules are made to be broken? Federal funds rate (%) Source: Housing and monetary policy, Jackson Hole conference 2007 Housing starts (millions of units)

Slide 5 Signs of a property bubble – difficult to miss Comm prop yield 10y gilt yield Normal (c200 bps) Nuts (inverted!) Nasty! (c400bps) Commercial property and gilt yields, % Source: Datastream, IPD

Slide 6 The Great Moderation made us complacent GDP % growth, standard deviation Source: Datastream, RBS calcs

Slide 7 The price of risk fell sharply RBS net interest margin (%) Source: Bloomberg

Slide 8 The loan to deposit ratio shot up RBS loan to deposit ratio (%) Source: Bloomberg

Slide 9 We saw it coming...sort of Unlike previous scenarios, the main source of the economic downturn is in the banking system...it is the resultant credit crunch that propagates this initial shock, and turns recession into depression. RBS stress scenario, July 2006

Slide 10 Strange things afoot in the inter-bank market Spread between 3m LIBOR and bank rate (bps) Source: Datastream

Slide 11 Did we really think Greece was like Germany? 10y bond yields (%) Source: Datastream

Slide 12 Where do we from here? Goldilocks Returns V Deflation L Not much spare capacity Strong demand Weak demand Lots of spare capacity Return of macro instability W Slow Grind Higher U

Slide 13 The long road to recovery

Slide 14 Fiscal rebalancing: a good start, but still far to go Net borrowing, % GDP Source: HM Treasury

Slide 15 Plan A requires a private sector response Net financial surplus/deficit, % GDP (flow of funds) Source: Datastream, RBS calcs

Slide 16 Rates expectations fade into the distance Feb-10 Feb-11 Aug-11 Nov-11 Feb-12 UK policy rate Source: Datastream, Bank of England

Slide 17 Are we turning Japanese? Market expectations of policy rate (%) Source: Fathom 1996 Actual 1998

Slide 18 Drastic times? Increase demand (symptom) Massive fiscal stimulus QE max Liquidity unbounded Use it or lose it deposit tax PFI v2.0 Beg to China Reduce debt (cause) (Big) bad bank Debt forgiveness Financial repression Monetise debt Raise interest rates Outright default

Slide 19 The darkest hour is just before the dawn? Initial projections for a V-shaped recovery are subsequently revised to a U-shaped recovery and eventually to an L-shape just as the recovery arrives. Blanchflower, Feb 2009

Slide 20 Keep in touch! Internet Social

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