OK Trucking Association ConferenceFebruary 2010 Presentation<br />In regard to the economy:<br />How did we get here?<br /...
Title of Presentation Last Yearat OU/OSU Executive Program<br />
Title This Past Summer Session<br />“That's another fine mess you've gotten me into!”<br />Oliver Hardy<br />
First Chapters of Story<br />Irrational Exuberance<br />Stock Market Boom/Bust<br />Recession of 2001<br />Floods of Liqui...
Irrational Exuberance<br />Where the Story Begins<br />We need to go back more than 12 years to December 5, 1996 where, in...
Greenspan “Put”: Expand the Money Supply in the Face of any Financial Trauma<br />Has Greenspan created a MORAL HAZARD?<br...
Moral Hazards<br />Wikipedia:  “Moral hazard is the prospect that a party insulated from risk may behave differently from ...
From Stock Market Boom and Bust to Housing Market Boom and Bust<br />Financial Innovation<br />Banks as loan originators o...
Greenspan Not the Only Culprit<br />Financial Market Deregulation<br />Govt. Policy Promoting Housing<br />Housing Market ...
 Refinancing
Up-scaling
 Vacation Homes
 Flipping
 Rising Home Prices</li></ul>Low Interest Rates and Liquidity<br />Rise of Securitization: CDO, CMO, CDS, SIV, SPE<br />Su...
Significance of Moral Hazards<br />Economists Akerloff, Spence and Stiglitz received the Nobel Prize in 2001 for their wor...
Adam Smith<br />The first economist, famous for his “An Inquiry into the Nature and Causes of the Wealth of Nations” and h...
Exercise: Moral Hazard Meter<br />Fannie and Freddie make contributions to the campaign funds of key committee members in ...
CRISIS TIMELINE<br />Bear Stearns acquired by<br />JPM<br />Countrywide narrowly<br />avoids bankruptcy<br />Lehman<br />b...
The Economy Today <br /><ul><li>High Debt Loads
Atypical Recession—Balance Sheet Recession
 Housing Market Busts in Some Regions
 Weak Labor Market, now in earnest
 Volatile World Energy Prices
 Financial Markets in Distress
 Credit Market “locking up” but “easing”
 Failures of Venerable Financial Institutions
Fed Reserve and Treasury Intervention
Falling Interest Rates—Negative Real Rates
 2008-09 Global Recession/Sovereign Debt
 Govt. Rescue Legislation (TARP and Stimulus)</li></li></ul><li>
Balance Sheet Recession<br />Emerges after bursting of a nationwide asset bubble.<br />Leaves a large number of private-se...
Fed, once again, to the Rescue<br />Term Auction Facility (TAF)—12/12/07<br />Term Securities Lending Facility (TSLF)—3/10...
Term Asset-Backed Securities Lending Facility (TALF)<br />Announced November 25, 2008<br />$800 Billion program<br />$200B...
Quantitative Easing-Seigniorage<br />Equation of Exchange:  Money * Velocity = Price * Quantity<br />Bank of Japan experie...
Fed’s Magical Balance Sheet<br />
Upcoming SlideShare
Loading in …5
×

Oklahoma Economic Outlook

208,061 views

Published on

Presented by Dr. Robert Dauffenbach for the 2010 Oklahoma Trucking Association's Midwinter Conference

Robert C. Dauffenbach is Associate Dean, Research and Graduate Programs, Professor of Business Administration, and Director, Center for Economic and Management Research, Michael F. Price College of Business, University of Oklahoma.

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
208,061
On SlideShare
0
From Embeds
0
Number of Embeds
2
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Oklahoma Economic Outlook

  1. 1. OK Trucking Association ConferenceFebruary 2010 Presentation<br />In regard to the economy:<br />How did we get here?<br />Where are we now?<br />Where are we going?<br />What are the implications for Oklahoma?<br />What do we, as citizens, have to guard against?<br />
  2. 2. Title of Presentation Last Yearat OU/OSU Executive Program<br />
  3. 3. Title This Past Summer Session<br />“That's another fine mess you've gotten me into!”<br />Oliver Hardy<br />
  4. 4. First Chapters of Story<br />Irrational Exuberance<br />Stock Market Boom/Bust<br />Recession of 2001<br />Floods of Liquidity Promoting Speculation and Low Rates<br />Rise of the Housing Bubble<br />
  5. 5. Irrational Exuberance<br />Where the Story Begins<br />We need to go back more than 12 years to December 5, 1996 where, in a speech, Alan Greenspan coined the term “irrational exuberance.”<br />"But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade?" <br />
  6. 6.
  7. 7. Greenspan “Put”: Expand the Money Supply in the Face of any Financial Trauma<br />Has Greenspan created a MORAL HAZARD?<br />1987 Stock Market Crash<br />Solution—Add liquidity<br />1990 Gulf War<br />Solution—Add liquidity<br />Mexican Financial Crisis<br />Solution—Add liquidity<br />Asian/Russian Financial Crisis<br />Solution—Add liquidity<br />Long-Term Capital Market Collapse<br />Solution—Add liquidity<br />Y2K Problems<br />Solution—Add liquidity<br />Stock Market Collapse<br />Solution—Add liquidity<br />2001 Recession<br />Solution—Add liquidity<br />9/11 Attack<br />Solution—Add liquidity<br />
  8. 8. Moral Hazards<br />Wikipedia: “Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.”<br />It is related to information asymmetry, i.e., when one party to a transaction has more information that the other party. <br />It poses problems in insurance, health care, finance, management (nepotism, sinecure, nepotism, project accountability)<br />
  9. 9. From Stock Market Boom and Bust to Housing Market Boom and Bust<br />Financial Innovation<br />Banks as loan originators only<br />Loans sold to Ginnie Mae and Freddy Mac and Others<br />Strip principal from interest<br />Packaged into various risk traunches<br />Evaluated (over optimistically) by rating agencies (S&P, Moody’s)<br />Sold to unwitting foreigners who happen to hold a lot of dollars<br />Structured Investment Vehicles (SIV)<br />Collateralized Debt Obligations (CDO)<br />Collateralized Mortgage Obligations (CMO)<br />Credit Default Swaps (CDS)<br />Has Financial Innovation gotten “Too cute by half?”<br />
  10. 10. Greenspan Not the Only Culprit<br />Financial Market Deregulation<br />Govt. Policy Promoting Housing<br />Housing Market Boom<br /><ul><li> New Construction
  11. 11. Refinancing
  12. 12. Up-scaling
  13. 13. Vacation Homes
  14. 14. Flipping
  15. 15. Rising Home Prices</li></ul>Low Interest Rates and Liquidity<br />Rise of Securitization: CDO, CMO, CDS, SIV, SPE<br />Subprime, Alt-A, Liar’s Mortgage Loans<br />Public Attitudes Toward Housing<br />
  16. 16. Significance of Moral Hazards<br />Economists Akerloff, Spence and Stiglitz received the Nobel Prize in 2001 for their work on asymmetric information, moral hazards and adverse selection.<br />They showed that markets fail when moral hazards are present.<br />Market failure is what we have seen in the housing market.<br />
  17. 17. Adam Smith<br />The first economist, famous for his “An Inquiry into the Nature and Causes of the Wealth of Nations” and his notion of the invisible hand, was first a moral philosopher.<br />He considered his first work “The Theory of Moral Sentiments” to be his best work.<br />
  18. 18. Exercise: Moral Hazard Meter<br />Fannie and Freddie make contributions to the campaign funds of key committee members in the US House and Senate.<br />Doctors pool funds to start a medical lab to serve their patient base.<br />In originating a mortgage, the local bank knows that it will be able to sell the loan to either a government-backed or “private label” company.<br />Senator Dodd receives a special rate from Countrywide Financial on his mortgages.<br />Bond rating agencies (Fitch, Moody’s, Standard & Poors) receive fees from the same entities issuing the bonds.<br />You are asked by a potential buyer what gas mileage you get on your used car you are trying to sell him.<br />Retired military procurement officials go to work for industry suppliers.<br />A professor requires the use of her textbook by her students.<br />A revolving door of Treasury and Fed policy officials between Washington and Wall Street exists.<br />Your employer provides free (to you), no-deductible health insurance including prescription drug coverage.<br />
  19. 19. CRISIS TIMELINE<br />Bear Stearns acquired by<br />JPM<br />Countrywide narrowly<br />avoids bankruptcy<br />Lehman<br />bankruptcy<br />AIG bonus<br />controversy<br />Am. New Century Financial (largest Subprime lender) files for bankruptcy<br />Fed pumps<br />in $41 B<br />Merrill - BoA<br />deal<br />AIG Bailout<br />2007<br />2008<br />2009<br />4th<br />2nd<br />1st<br />3rd<br />4th<br />2nd<br />1st<br />3rd<br />1st<br />IndyMac<br />fails<br />Freddie Mac stops buying subprimes<br />First Fed<br />TAF<br />Paulson regulatory<br />reform proposal<br />Treasury systemic<br />risk proposal<br />Merrill has<br />$5.5 B loss<br />
  20. 20. The Economy Today <br /><ul><li>High Debt Loads
  21. 21. Atypical Recession—Balance Sheet Recession
  22. 22. Housing Market Busts in Some Regions
  23. 23. Weak Labor Market, now in earnest
  24. 24. Volatile World Energy Prices
  25. 25. Financial Markets in Distress
  26. 26. Credit Market “locking up” but “easing”
  27. 27. Failures of Venerable Financial Institutions
  28. 28. Fed Reserve and Treasury Intervention
  29. 29. Falling Interest Rates—Negative Real Rates
  30. 30. 2008-09 Global Recession/Sovereign Debt
  31. 31. Govt. Rescue Legislation (TARP and Stimulus)</li></li></ul><li>
  32. 32.
  33. 33.
  34. 34.
  35. 35.
  36. 36.
  37. 37.
  38. 38.
  39. 39.
  40. 40. Balance Sheet Recession<br />Emerges after bursting of a nationwide asset bubble.<br />Leaves a large number of private-sector balance sheets with more liabilities than assets .<br />In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.<br />With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers. <br />The deflationary gap created by the above leakage will continue to push the economy toward a contractionary equilibrium.<br />In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired. <br />
  41. 41.
  42. 42. Fed, once again, to the Rescue<br />Term Auction Facility (TAF)—12/12/07<br />Term Securities Lending Facility (TSLF)—3/10/2008<br />Primary Dealer Credit Facility (PDCF)—3/16/2008<br />Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (ABCPMMMFLF)—9/19/2008<br />Commercial Paper Funding Facility (CPFF)—10/14/2008<br />Interest on Reserves to Banks—10/6/2008 <br />Money Market Investor Funding Facility (MMIFF)—11/10/08<br />Term Asset-Backed Securities Loan Facility (TALF)—11/25/2008<br />
  43. 43. Term Asset-Backed Securities Lending Facility (TALF)<br />Announced November 25, 2008<br />$800 Billion program<br />$200B for consumer loans and small businesses<br />$100B for Government Sponsored Enterprises<br />$500B for Mortgage Backed Securities<br />Program began in Feb ‘09<br />
  44. 44. Quantitative Easing-Seigniorage<br />Equation of Exchange: Money * Velocity = Price * Quantity<br />Bank of Japan experience:<br />Short-term interest rates at close to zero values since 1999. <br />Flooding commercial banks with excess liquidity<br />Buying more government bonds than would be required to set the interest rate to zero<br />It also bought asset-backed securities, equities and extended the terms of its commercial paper purchasing operation. <br />Said they would keep it up until prices rose<br />New policies announced in December 2008 by the US Federal Reserve under “Ben Bernanke-san” to counter the effects of the on-setting recession have been likened to quantitative easing<br />
  45. 45. Fed’s Magical Balance Sheet<br />
  46. 46. The Fed’s Balance Sheet<br />
  47. 47. Fed’s Magical Balance Sheet<br />
  48. 48. So, where are we going?<br />Wide divergence of opinion<br />Deflation? Hyperinflation?<br />
  49. 49. Zimbabwe’s $100 Trillion Bank Note<br />
  50. 50.
  51. 51. Major Stimulus Categories<br />
  52. 52. Where is Oklahoma’s Stimulus Money Going?<br />
  53. 53. Our Fair Share?<br />
  54. 54. Economic Indicators<br />
  55. 55.
  56. 56. Price of Gold<br />
  57. 57.
  58. 58.
  59. 59. US Economic FactorsBalance Sheet<br />Assets<br />Rule of Law<br />Economic Freedom<br />Low Taxes<br />Population Growth<br />High Living Standards<br />Immigration<br />Low Interest Rates/Inflation<br />Human Capital<br />Productivity<br />Economic Resiliency<br />Reserve Currency Status<br />Liabilities<br />Baby Boomers Retiring<br />Fiscal & Generational Imbalance<br />Corporate Legacy Benefits Costs<br />Health Care Costs<br />Debt & Federal Deficits<br />Trade Imbalances<br />Outsourcing of Jobs<br />Factor Price Equalization<br />Reliance on Foreign Energy <br />Environmental Issues<br />Housing Bubble<br />
  60. 60. Conclusions<br />Housing crisis is in the process of “bottoming.”<br />Off-balance sheet derivatives appear to be the source of that difficulty, and that source has a long way to go.<br />Fed will do everything in its power to stave-off deflation, including quantitative easing and socializing of private losses.<br />The recession engendered and made worse by the financial crisis is likely to be long and deep.<br />Oklahoma will compare favorably with the nation, but, with a more diversified economy, will likely suffer, too.<br />Once the “fires are out” our financial system will need to be rebuilt: Don’t let moral hazards prevailby letting those who benefit write the new regulations.<br />

×