1. THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by Tassos Malliaris Loyola University Chicago May 12, 2010

2. OUTLINE 1.Brief Evaluation of the Global Crisis 2.Emphasis on Lessons 3.Discussion of the Currency Markets 4. Problems with the Euro

3. Causes of the Financial Crisis 1.The Unpredictability of Crises 2.Macroeconomic factors (housing) 3.Microeconomic factors (rating agencies, subprime loans, derivatives) 4.Banking and Shadow Banking (leverage, securitization) 5.Monetary Policies 6.Government Policies

4. The Nature of Crises 1.Currency Crises 2. Banking Crises 3. Financial Crises 4. Economic Recessions

5. The Financial Crisis of 2007-09 What caused the real estate bubble? Easy Monetary Policy for 2002-2005 Why such an easy monetary policy? Irrational exuberance and the internet bubble The bursting of the internet bubble

6. 10-Year S&P 500 Performance

7. 10-Year NASDAQ Composite Performance

12. Actual and simulated housing demand

13. Growth of the Finance Industry as % of GDP

14. Development of the Crisis Subprime Problems with Bear Sterns Highly Leveraged Financial Institutions Bankruptcy of Lehman Brothers Troubled Asset Relief Program Liquidity Provided by the Fed Stress Testing of Top 19 Banks

15. Federal Reserve Lending

16. Lending Facilities http://www.bos.frb.org/news/speeches/rosengren/2009/100209.htm

17. Real GDP

19. Relative Global Unemployment Rates

20. Figure 1: Global Outlook (Real GDP; percent change from a year ago) Global GDP Growth

21. Lessons Crisis started in the U.S. Irony: Moderation Breeds Exuberance High Leverage and Risk Taking Regulatory Failures Uncertainty Leads to Market Failures Fed: Lender of Last Resort Action: Fast, Decisive, Forceful

22. Global Currency Markets Global Financial Crisis U.S. and EU China was affected Less Some Emerging Nations were also affected less

28. China/US Exchange Rate

29. Balance of Current Account

30. Price of Gold During 2 Centuries

31. 10-Year Performance of Gold

32. Three Scenarios 1.Moderate Stability in the U.S. and EU. 2.EU Destabilizes; Prospects for the Euro 3.Inflation or Deflation?

33. Concluding Remarks: Current Challenges Financial Innovation vs. Financial Stability New Wave of Financial Regulations Equity vs. Growth Drivers of Future Growth Global Co-Leadership The New Worrisome Bubble: Public Debt

38. Chinese Gender Ratio

39. China’s Challenge:The over 65s