The document discusses the causes and consequences of the 2008 global financial crisis. It begins by defining different types of financial crises and outlines some of the key events that triggered the crisis. These include failures of large financial institutions in the US, speculative bubbles bursting, and the subprime mortgage crisis. The consequences section examines the impact on Saudi Arabia and India, including effects on government spending, private investment, employment, and inflation. Overall, the crisis accelerated financial reforms and transition to a post-oil economy in Saudi Arabia.

1. Global Financial Crisis:
Causes and Consequences
Dr. Prajapati Trivedi
Senior Economist
The World Bank

2. Presentation Outline
• Meaning of Global Financial
Crisis
• Causes
• Consequences
– Saudi Arabia
– India

3. Global Financial Crisis
• The global financial crisis of 2008 is the
worst of its kind since the Great
Depression
• Began with failures of large financial
institutions in the United States
• Rapidly evolved into a global crisis
resulting in a number of European bank
failures

4. Meaning of Global Financial Crisis
• The term financial crisis is applied
broadly to a variety of situations
• Usually, some financial institutions or
assets suddenly lose a large part of
their value
– Banking Panics (and recessions)
– Stock market crashes
– Bursting of financial bubles
– Currency crisis
– Sovereign defaults

5. Banking Panics (and recessions)
• Commercial banks suffer a sudden rush of withdrawals
by depositors, this is called a bank run
– September 7, 2008:
• Two United States Government sponsored enterprises
(GSEs), Fannie Mae (Federal National Mortgage
Association) and Freddie Mac (Federal Home Loan
Mortgage Corporation), into conservatorship run by
FHFA
– September 14, 2008
• Lehman Brothers files for bankruptcy.
• Sale of Merrill Lynch to Bank of America
– September 16, 2008
• AIG faces severe liquidity crunch
• Financial institutions lost a large part of their value in
coming days and weeks

7. Banking Panics (and recessions)
1 year ago RBS paid $100 billion for ABN Amro.
For this amount it could now buy:
Citibank $22.5 billion
Morgan Stanley $10.5 billion
Goldman Sachs $21 billion
Merrill Lynch $12.3 billion
Deutsche Bank $13 billion
Barclays $12.7 billion
And still have $8 billion change......with which it would
be able to pick up GM, Ford, Chrysler and the
Honda F1 Team.

8. Speculative Bubbles and Crashes
• A bubble exists when the price of stock exceeds the
value of the future income (such as interest or
dividends) that would be received by owning it to
maturity
– Dutch tulip mania
– Wall Street Crash of 1929
– Japanese property bubble of the 1980s,
– Crash of the dot-com bubble in 2000-2001, and now the
– United States housing bubble.

9. Speculative Bubbles and Crashes

10. Speculative Bubbles and Crashes

11. Causes
• Leveraged Investment
• Asset-Liability Mismatch
• Regulatory Failures
• Fraud
– Medford
• Contangion
• Œcopathy
• Self-fulfilling Prophecy
Sub-prime Mortgage

12. Why History is Repeated?
• Schumpeterian Creative
Destruction
• Regulatory Evolution
• New markets
• Nature of competition

13. Consequences

17. All you need is cash
The increasingly desperate search for the stuff is changing
modern management?

18. Consequences for the Saudi Economy
Impact on the Demand Side of Development Process
• Government Investment
• Consumer Demand
• Private Sector Demand

19. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Capital Flows
• Liquidity – working capital flows
• Skilled Labor
• Unskilled labor
• Energy
• Raw Materials
Impact of the crisis on the reform of the Saudi economy

20. Consequences for the Saudi Economy
Impact on the Demand Side of Development Process
• Government Investment
– Long pipeline of funded Government projects
– Funds from budget surpluses also committed for
projects
Hence neutral impact is expected in the medium
term.

21. Consequences for the Saudi Economy
Impact on the Demand Side of Development Process
• Consumer Demand
– No reason for Saudi consumption spending to
change.
– Expatriate consumer spending may decrease as
some private sector projects may be postponed
Given that the Saudi economy was till recently
facing an excess demand situation, on balance
this may be a positive factor.

22. Relationship between Individual Consumption and GDP
1000.00
800.00
Saudi Riyals
600.00 Abroad
Clothes
400.00
Rent
Food
200.00
Furniture
0.00 Medical
Other
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
A
69
71
73
75
77
79
81
83
85
87
89
91
93
95
97
99
01
03
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
-200.00 Entertainme
Transport
Years
GDP

23. Consequences for the Saudi Economy
Impact on the Demand Side of Development Process
• Private sector Investment
– Private sector investment in real estate sector
likely to be affected adversely. However, this
may be a good outcome given that the Saudi
real estate market was over-heated and was
suffering from speculative fever.
– Private sector investment related to other
aspects of population requirements not likely to
be affected as the real purchasing power of
Saudi consumer is not likely to be adversely
affected.

24. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Capital Flows
– There will be a slow-down of private capital flows (FDI)
as the financial crisis decreases the available pool of
funds.
– However, from this smaller pool a much larger proportion
of funds may be expected to come to Saudi Arabia. This
is because of the large and stable buying power of Saudi
consumers and Kingdom favorable business climate.
According to the World Bank Saudi Arabia is ranked
number 16 and is ahead of all countries in the Middle
East.
• Impact likely to be neutral.

25. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Liquidity – Working capital flows
– Like all other countries, Kingdom’s banks were also in
danger of a potential liquidity crisis resulting from losses
on banks’ foreign investments.
– However, timely intervention by the Saudi government on
October 16, 2008 eliminated this risk. The Supreme
Economic Council asked SAMA to ensure sufficient
liquidity for the Banks and guarantee the security of bank
deposits.
• Impact likely to be neutral.

26. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Skilled labor
– Given the global slow down and retrenchment in
OECD countries, the available pool of skilled
workers will increase and there would be a
downward pressure on their salaries. This would
benefit Kingdom.
• Impact likely to be positive.

27. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Unskilled labor
– Given the global slow down and retrenchment in
OECD countries, the available pool of un-skilled
workers will also increase and there would be a
downward pressure on their salaries. As one of
the largest employers of expatriate labor force,
this trend would benefit the Kingdom.
• Impact likely to be positive.

28. Consequences for the Saudi Economy
Impact on the Supply Side of Development Process
• Raw Materials – intermediate inputs
– Global slow down will reduce the price of
commodities in general. Hence, the cost of
construction materials (steel, copper, etc) will
come down and benefit the Kingdom.
• Impact likely to be positive.

29. Consequences for the Saudi Economy
Affect on the welfare and quality of life of citizens
• Inflation
– Globally inflation rates have started to come
down and that is also the case in Saudi Arabia.
– This trend will be further supported by
strengthening of the dollar vis a vis other
currencies.
• Hence, on balance, the financial crisis may
be good for controlling inflation.

30. Consequences for the Saudi Economy
Affect on the welfare and quality of life of citizens
• Jobs
– Saudi unemployment is not demand driven. Rather, it is a
structural problem. Hence, the dampening of demand is
not likely to have any immediate negative impact.
– If Surplus projects are executed and other reform
measures implemented, there may be a greater job
creation for Saudis.
• Hence, on balance, the financial crisis may be
neutral for jobs creation in the Kingdom.

31. Consequences for the Saudi Economy
Affect on the welfare and quality of life of citizens
• Travel Abroad
– Stronger dollar (hence stronger Riyal) makes it
easier for the Saudis to travel abroad.
• Hence, on balance, the financial crisis may
be good for citizens who want to travel
abroad.

32. Consequences for the Saudi Economy
Impact of the crisis on the reform of the Saudi economy
– There is a global trend towards accelerating reform
agendas for dealing with the financial crisis in the short
run as well as in the long-run. Kingdom will benefit from
the experience of other countries and be able to upgrade
its regulatory environment.
– The recent decrease in oil prices has once again brought
the focus to the much needed reforms. Kingdom will now
be able to work on a post-oil economy.
– The massive surpluses in the recent pasts ($70.6 billion
in 2006 and $47.6 billion in 2007) have made it easier to
make investment in these reforms.
• Hence, impact f the crisis likely to be positive.

33. Please send comments to
Dr. Prajapati Trivedi
ptrivedi3@worldbank.org
or
prajapati.trivedi@gmail.com