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The 2008 Global Economic Crisis Causes Cures and Curads


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The 2008 Global Economic Crisis Causes Cures and Curads

  1. 1. THE 2008 GLOBAL ECONOMIC CRISIS:CAUSES, CURES, AND CURADS<br />©Kara Tan Bhala<br /> Seven Pillars Institute<br />May 2011<br />1<br />
  2. 2. The crisis became GLOBALbut started in the US<br />2<br />
  3. 3. Global Growth Dived<br />3<br />
  4. 4. The crisis became an ECONOMIC crisis but started in the FINANCIAL sector<br />4<br />
  5. 5. The Roots of Ruin<br /> Housing Bubble<br />+ Poor Lending Practices<br />= Big Financial Problems <br />5<br />
  6. 6. BUT ALSO GUILTY IN THIS CRISIS…<br />Credit Default Swaps (CDS)<br />Collateralized Debt Obligations (CDO)<br />6<br />
  7. 7. GUILTY AS WELL…<br />Leverage i.e. Debt<br />7<br />
  8. 8. The Seduction of Leverage<br />8<br />
  9. 9. All The Roots of Ruin<br />Housing Bubble<br />+ Poor Lending Practices<br />+ Derivatives<br />+ Leverage<br />= FINANCIAL DISASTER<br />9<br />
  10. 10. Total Amount of Financial Assets Destroyed in the World (2007-2009)US$30 Trillion<br />10<br />
  11. 11. Governments to the Rescue!<br /> GDP = Consumption (C)<br /> + Investment (I)<br /> + Net Government Spending (G-T)<br />+ Net Exports<br /> (Exports, X – Imports, M)<br />11<br />
  12. 12. Total Amount of Financial Assets Destroyed in the World (2007-2009)US$ 30 TrillionUS Government Fiscal StimulusUS$787 Billion<br />12<br />
  13. 13. Central Banks to the Rescue!<br />Fed pumps money into the system<br />Interest rates in the US are nearly zero<br />EU and Asian Central banks brought rates down dramatically<br />13<br />
  14. 14. Lately, the world seems crises prone…<br />14<br />
  15. 15. The Crises List<br /> Savings and Loans Crisis - 1984<br /> Junk Bond Crisis – 1989<br /> Japanese Bubble Bursts - 1992<br /> Mexico Currency Devaluation - 1994<br /> Barings collapse - 1995<br /> Asian Currency Crisis - 1997<br /> Russian Currency Devaluation and Default - 1998<br /> LTCM Bailout - 1998<br /> Dot-Com Bubble Bursts - 2000<br /> Bear Stearns Bails Out Funds - 2007<br /> Lehman goes bankrupt – 15 September 2008 <br />15<br />
  16. 16. Is this crisis over yet?<br />16<br />
  17. 17. When Will The Recession End?A Sampling of Expert Opinions (I):<br />Jim Grant: “don’t ask when”<br />Stephen Roach of Morgan Stanley: “late 2010 or 2011”<br />A. Michael Spence, Nobel Laureate: “unusually long and deep global recession through 2010”<br />William Poole (ex-Fed governor): “against government bailouts”<br />George Cooper, financial writer: “financial drag extending into the next decade”<br />17<br />
  18. 18. When Will The Recession End?A Sampling of Expert Opinions (II):<br />Niall Ferguson, Harvard economic historian: “two years of contraction and two lean years after that”<br />NourielRoubini, NYU Economics Professor (aka Dr. Doom): “three year recession, with chances for much worse”<br />Alan Blinder, Princeton Economics Professor: “growth resuming in the fourth quarter of 2009, but with many caveats”<br />Warren Buffet, CEO of Berkshire Hathaway: “economy will be in a shambles through 2009 and probably beyond” <br />18<br />
  19. 19. The Slow Recovery<br />Time Taken for S&P Index to reach its previous peak:<br />1932 – 26 years<br />1982 – 10 years<br />19<br />
  20. 20. The Sixty-Four Dollar Question:<br />Can We Prevent Another Financial Crisis?<br />20<br />
  21. 21. Not while we are operating with the current financial world view<br />21<br />
  22. 22. Current Financial World View<br />Modern Finance Theories: <br />Assume rational economic agents<br />Assume profit maximization is their singular goal<br />Assert separation of facts (finance theories) from values (ethics)<br />22<br />
  23. 23. Some Financial Reforms<br />Basel Bank Reforms<br />Higher Capital Adequacy Ratios<br />Stricter on what counts as capital<br />Dodd-Frank Financial Reform Bill<br />Consumer Protection Agency<br />Living Will<br />Fed can stop risky transactions<br />23<br />
  24. 24. Financial Times Headlines<br />Investment banks try to cushion rule changes By Patrick Jenkins in London <br />Published: April 11 2010 22:42 | Last updated: April 11 2010 22:42<br />Investment bankers have begun to develop ways in which banks might be able to circumvent the most punitive of the new capital rules being drawn up by international regulators.<br />24<br />
  25. 25. Regulators fighting the last battle (but they should keep fighting)<br />Regulators cannot keep up with the pace of financial innovation (but they must keep trying)<br />Greed in a near ethical vacuum will circumvent rules<br />25<br />