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    Ipe04 Ipe04 Presentation Transcript

    • Y376 International Political Economy January 23, 2012
    • Financial Crises
      • Often begin with a structural deficit problem accentuated by a severe downturn in the domestic economy
      • Country may default on its international obligations (loans, other foreign investments)
      • All this occurs in a general atmosphere of panic, currency value may fall rapidly
    • The Peso Crisis of 1994
      • Mexico admitted to OECD in May 1994
      • Huge balance of payments deficit financed by Tesobonos (bonds denominated in dollars)
      • Zedillo replaces Salinas as President
      • Sudden devaluation of the peso in December 1994
      • GDP contracted by 7 percent in 1995
    • The Asia Crisis of 1997-98
      • Starts with collapse of Thai currency, the baht
      • Crisis spreads to Indonesia, South Korea, and other East Asian countries
      • IMF criticized for bad advice/pressure during the crisis
    • Depreciation of Asia Currencies
    • Russian Crisis of 1998
      • Delayed impact of Asia Crisis
      • Oil prices on the decline, government unable to collect taxes
      • Use of dollar-denominated GKO bonds to finance budget deficits
      • Ruble suddenly devalued in August 1998
      • Economy recovered quickly several years later when oil prices increased
    • Argentine Crisis, 1999-2002
      • New currency created in 1983, the austral
      • Inflation problems led to the restoration of the peso in 1990, and the peso was pegged to the dollar
      • Balance of payments problems led to debt increases that resulted in speculation about the value of the peso
      • When Brazil devalued the real, Argentine trade suffered further, and GDP declined by 4% in 1999
      • 3 years of recession followed, combined with capital flight to produce a major economic collapse
      • In 2002, the peso was allowed to float (and devalue)
    • Global Financial Crisis 2007-8
      • Led by bursting of the housing bubble in the US in 2007
      • Made worse by near collapse of US financial markets connected with mortgage-backed securities , synthetic collateralized debt obligations (CDOs), and credit default swaps
      • Response to the crisis revived the debate over regulation of financial markets and Keynesian approaches to preventing deep recessions
    • Global Financial Crisis 2007-8
      • Led by bursting of housing bubble in the US
      • Made worse by near collapse of US financial markets connected with mortgage-backed securities and credit default swaps
      • Response revives debate over Keynesian approach to preventing deep recessions
    • US Home Price Index 1963-2010 1963-2010 The Bubble Bursts
    • Contributing Factors
      • Subprime mortgages
      • Unethical mortgage brokers
      • Low interest rates set by the Federal Reserve
      • Credit Rating Agencies (conflicts of interest)
      • Insufficient regulation of financial markets
        • Mortgages and related markets
        • Derivatives, including credit default swaps
    • Subprime Mortgages
      • Definition: a type of mortgage granted to individuals with low credit ratings ( FICO less than 600)
      • Subprime mortgages feature higher interest rates than conventional mortgages because of the higher risk of default
      • Subprime borrowers were offered adjustable rate mortgages (ARMs)
      • US policy from the 1990s on was to encourage the growth of this market to make home ownership available to a wider spectrum of the population
    • Expansion of Subprime Market
    • Unethical Mortgage Brokers
      • Exaggerated expected earnings of borrowers
      • Sold more expensive loans when less expensive loans were available
      • Conspired with real estate brokers to raise the sale price of properties above market value
      • As a result, subprime delinquency rates began to increase rapidly after 2007
      Angelo Mozilo
    • The Role of Low Interest Rates
      • Investors were looking for ways to obtain higher rates of return for low-risk investments
      • Treasury Bonds became less attractive for this purpose
      • Mortgage Backed Securities (MBSs) and Collaterized Debt Obligations (CDOs) expanded rapidly to fill the void
    • Credit Rating Agencies
      • These firms (e.g. Fitch Group , Moody’s , Standard and Poor’s ) establish credit ratings for issuers of certain types of debt obligations.
      • The highest rating is AAA which denotes low risk and high liquidity.
      • They sometimes compete for business by offering better ratings (a clear conflict of interest).
    • Insufficient Regulation
      • Securities and Exchange Commission (SEC) was supposed to regulate the mortgage market and apparently failed to do so
      • The Federal Reserve (especially when headed by Alan Greenspan) chose not to regulate derivatives markets
      • Government financial regulators relied too much on the private credit rating agencies and business journalist to expose malfeasance and overly risky investments
    • Short-Term US Government Responses
      • “ Rescue” of Bear Stearns
      • Decision not to rescue Lehman Brothers
      • Takeover of Fannie Mae and Freddie Mac
      • Troubled Asset Relief Program (TARP)
        • Bailouts of AIG and GM
        • $245 billion invested in US banks
      • Obama’s economic stimulus package
    • Bear Stearns stock price
    • Medium and Long-Term Measures
      • Capital Adequacy Requirements and Deleveraging
      • Regulation of previously unregulated markets ( derivatives , but especially credit default swaps )
      • Improved protection for consumers
      • Mortgage renegotiation incentives
    • The Group of Eight (G8)
      • Began in 1975 as a way for the largest industrialized economies to deal with the problems of interdependence
      • Heads of state of the G7 countries met annually until 1997 when Russia joined
      • The European Union is represented separately in all G7/G8 meetings
    • Who are the G8?
      • US
      • UK
      • Germany
      • France
      • Italy
      • Japan
      • Canada
      • Russia
    • G7/G8 Meetings, 1975-2011
      • 1975 Rambouillet
      • 1976 Puerto Rico
      • 1977 London
      • 1978 Bonn
      • 1979 Tokyo
      • 1980 Venice
      • 1981 Ottawa
      • 1982 Versailles
      • 1983 Williamsburg
      • 1984 London
      • 1985 Bonn
      • 1986 Tokyo
      • 1987 Venice
      • 1988 Toronto
      • 1989 Paris
      • 1990 Houston
      • 1991 London
      • 1992 Munich
      • 1993 Tokyo
      • 1994 Naples
      • 1995 Halifax
      • 1996 Moscow
      • 1997 Denver
      • 1998 Birmingham
      • 1999 Cologne
      • 2000 Okinawa
      • 2001 Genoa
      • 2002 Kananaskis
      • 2003 Evian
      • 2004 Sea Island
      • 2005 Gleneagles
      • 2006 St. Petersburg
      • 2007 Heilegendam
      • 2008 Hokkaido
      • 2009 L’Aquila
      • 2010 Muskoka
      • 2011 Deauville
    • Heilegendam Summit in 2007 L to R: Tony Blair, Romano Prodi, Vladimir Putin, Nicolas Sarkozy, Angela Merkel, George Bush, Stephen Harper, Shinzo Abe and Manuel Jose Barroso
    • 2009 L’Aquila G8 “Family Photo” L to R: Taro Aso, Stephen Harper, Barack Obama, Nicolas Sarkozy, Silvio Berlusconi, Dmitry Medvedev, Angela Merkel, Gordon Brown, Fredrik Reinfeldt, Jose Manuel Barroso
    • Who are the G20?
      • G8 countries
      • Argentina
      • Australia
      • Brazil
      • India
      • Indonesia
      • Mexico
      • Saudi Arabia
      • South Africa
      • South Korea
      • Turkey
      • China
      • European Union
      Pittsburgh Summit 2009
    • What are the G8 and the G20 Doing about the Current Crisis?
      • Stimulus packages
      • Improved regulation of financial markets
      • Capital adequacy reforms (credit default swaps, especially)
      • Improve credit rating agencies
      • Continued meetings