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Financialcrisis0810 Financialcrisis0810 Presentation Transcript

  • The Financial Crisis and what it means for you John Quiggin University of Queensland
  • The subprime crisis A crash heard around the world A symptom of bigger problems
  • A short primer Circulated on the Internet early 2008 Author unknown Style follows xkcd
  • The bigger picture Competing versions of capitalism Market liberalism Central role of financial sector State intervention and social democracy Financial sector tightly regulated Balance shifted back and forth over 20th century The Great Depression
  • Bretton Woods system 1945-70s Fixed exchange rates anchored on US dollar and gold Tightly controlled capital flows Domestic economy managed using fiscal policy Full employment
  • The end of Bretton Woods Accelerating inflation Vietnam War, Great Society, 1968 Breakdown of capital controls Collapse of fixed exchange rates and gold peg Mass unemployment (stagflation)
  • The counter-revolution 1975-1990 Floating exchange rates Financial deregulation Privatisation and the fiscal crisis of the state Thatcher, Reagan, collapse of communism
  • The Great Moderation 1990-2007 A long period of economic stability, particularly in English speaking countries Minor recession following dotcom boom Not so stable in developing markets - crises in Asia, Russia, Latin America High returns and explosive salary growth for managers and the financial sector
  • Growth in international financial transactions
  • Growth in financial assets
  • The First Warnings The LTCM crisis, 1998 The dotcom boom and bust The ‘Greenspan put’
  • The crisis Subprime problems emerge early 2007 Broader credit squeeze from August 2007 CDOs Bond insurance Auction rate securities Student loans Bear Stearns rescue March 2008
  • The implosion, September- October 2007 Fannie and Freddie nationalised, 7 Sep Lehman Bros failed, 14 Sep AIG nationalised, 16 Sep US Bailout, 3 Oct, partial nationalisation Iceland, 8 October Deposit Guarantee, Australia, 12 October
  • The future US already in recession, others likely to follow Australia ? Governments are likely to incur large losses - 30 per cent of national income
  • What does it mean for public policy ? Financial sector tightly regulated Back to Bretton Woods Bigger role for government
  • What does it mean for us? No easy money Lower returns on investments Tighter access to debt Less financial innovation Any flavor you want, as long as it’s vanilla Budget deficits now, higher taxes ahead
  • What should we do? IANAFA Older conventional wisdom now appliea Avoid excessive debt Risky investments (shares) for the young, safe investments (bonds) for those nearing retirement
  • The Financial Crisis and what it means for you John Quiggin University of Queensland