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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