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Market Meltdown:Understanding 300 Years of Credit Crises
Dr. Mark MullinsExecutive DirectorFraser Institute
January 13, 2009
“Prosperity, boom, crisis, slump, and recovery succeed each other with a regularity that suggest(s) inevitability”
Professor T. S. AshtonEconomic Fluctuations in England 1700-18001959
“If a panic were to pass a certain height, that system, which rests on confidence, would be destroyed by terror”
Walter BagehotLombard Street: A Description of the Money Market1873
HistoryMarket Meltdown
Past Crises
Source: MullinsSource: Mullins
Past EpisodesYear Stocks Event1701 -41% Spanish Succession1721 -78 South Sea Bubble1722 -43 South Sea Bubble1797 -34 French Invasion1803 -32 Recession1826 -20 South America1837 -24 Foreign Investments1848 -28 Railways1866 -27 Bank Collapse1877 -34 Depression1893 -27 Gold Standard
1900 -32 Recession1903 -35 Rich Man’s Panic1907 -45 Bankers’ Panic1913 -24 War Threat1917 -38 WWI1920 -39 Post War Bust1921 -29 Post War Bust1929 -48 Crash1930 -46 Depression
1931 -60 Sterling1932 -74 Depression 1938 -48 War Threat1939 -22 War Threat1940 -27 WWII1941 -22 WWII1942 -28 WWII1946 -23 Post War Bust
1962 -27 JFK and Steel1966 -25 Credit1970 -33 Recession1974 -41 Oil Shock1978 -23 Stagflation1982 -22 Recession
1987 -36 Crash1990 -21 Recession1998 -19 Asian2002 -27 High Tech2008 -52 Credit
Source: MullinsSource: Mullins
Leading Stock Markets
1
10
100
1000
10000
1700
1750
1800
1850
1900
1950
2000
UK Index US Index
Source: S&P 500, Various Historical IndicesSource: S&P 500, Various Historical Indices
CausesMarket Meltdown
“A previous record of delinquency, foreclosure or bankruptcy; a credit score of 580 or below … and a debt service-to-income ratio of 50 percent or greater”
Professor Paul MizonThe Credit Crunch of 2007-2008Federal Reserve Bank of St. Louis Review
Subprime Borrower
US Subprime Originations
$0
$2
$4
$6
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$US
Tri
llio
n
Subprime Mortgage Originations
Source: Mortgage Bankers AssociationSource: Mortgage Bankers Association
US Housing Prices and Rates
60
120
180
240
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
1995
= 1
00
3
5
7
9
Per
cen
t
House Prices 1 Year ARM 30 Year Mortgage
Source: S&P/Case-Shiller, HSH Associates, US Federal Reserve BoardSource: S&P/Case-Shiller, HSH Associates, US Federal Reserve Board
ScaleMarket Meltdown
Global Stock Markets
$0
$15
$30
$45
$60
$75
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
$US
Tri
llio
n
Global Stocks US Housing Subprime
Source: World Federation of Exchanges, Mortgage Bankers Association, Author’s CalculationsSource: World Federation of Exchanges, Mortgage Bankers Association, Author’s Calculations
Credit CrisisMarket Meltdown
US Commercial Paper Rates
0
1
2
3
4
5
6
7
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Per
cen
t
Asset Backed Financial Non-Financial
Source: US Federal Reserve BoardSource: US Federal Reserve Board
US Commercial Paper Rates
0
1
2
3
4
5
6
7
2007 2008 2009
Per
cen
t
Asset Backed Financial Non-Financial
Source: US Federal Reserve BoardSource: US Federal Reserve Board
Interbank Lending Rates
0
1
2
3
4
5
6
7
2007 2008 2009
Per
cen
t
Overnight LIBOR 3 Month LIBOR Fed Funds
Source: US Federal Reserve Board, British Bankers AssociationSource: US Federal Reserve Board, British Bankers Association
Risks and ImpactMarket Meltdown
US Bank Loan Losses
Source: IMF Global Financial Stability ReportSource: IMF Global Financial Stability Report
Global Asset Writedowns
Source: IMF Global Financial Stability ReportSource: IMF Global Financial Stability Report
US Production and Jobs
-15%
-10%
-5%
0%
5%
10%
15%
1970
1980
1990
2000
2010
Industrial Production Private Employment
Source: US BEA, Federal ReserveSource: US BEA, Federal Reserve
Oil Prices and Inflation
0%
5%
10%
15%
1960
1970
1980
1990
2000
2010
0
50
100
150
Core US Inflation Real Blended Oil Price
Source: US BEA; UNDPSource: US BEA; UNDP
Commodity Prices
-15%
-10%
-5%
0%
5%
10%
15%
1970
1980
1990
2000
2010
-60%
-30%
0%
30%
60%
Industrial Production CRB Spot Prices
Source: Federal Reserve; CRBSource: Federal Reserve; CRB
Dr. Copper
-15%
-10%
-5%
0%
5%
10%
15%
1970
1980
1990
2000
2010
-120%
-80%
-40%
0%
40%
80%
120%
Industrial Production Copper Prices
Source: Federal Reserve; CRBSource: Federal Reserve; CRB
Gold and Real Rates
-140%
-70%
0%
70%
140%
1960
1970
1980
1990
2000
2010
-8%
-4%
0%
4%
8%
Gold Price Average Real Bill and Bond Rate
Source: Federal ReserveSource: Federal Reserve
US Trade-Weighted Dollar
30
80
130
1973
1980
1990
2000
2010
80
110
140
Nominal Inflation-Adjusted
Source: US FRBSource: US FRB
Commodity Prices and C$
-20%
-10%
0%
10%
20%
1980
1990
2000
2010
-30%
-15%
0%
15%
30%
Trade-Weighted C$ CRB Spot Prices
Source: CRB; Bank of CanadaSource: CRB; Bank of Canada
Looking ForwardMarket Meltdown
Leading Economic Indicators
90
100
110
1990
1995
2000
2005
2010
OECD BRIC
Source: OECDSource: OECD
Leading Economic Indicators
70
90
110
2000
2005
2010
US Canada
Source: Conference Board; Statistics CanadaSource: Conference Board; Statistics Canada
Indicators of Coming Stability
0
4,000
8,000
12,000
2008 April July Oct 2009 April
0
30
60
90
Baltic Dry Index VIX Stock Options Volatility
Source: US Federal Reserve Board, British Bankers AssociationSource: US Federal Reserve Board, British Bankers Association
US Yield Curve Prediction
-15%
-10%
-5%
0%
5%
10%
15%
1970
1980
1990
2000
2010
-500
-250
0
250
500
Industrial Production Yield Curve - 12 Months Ago
Source: Federal ReserveSource: Federal Reserve
US Real Bill Rate Prediction
-15%
-10%
-5%
0%
5%
10%
15%
1970
1980
1990
2000
2010
-8%
-4%
0%
4%
8%
Industrial Production Real Bill Rate - 18 Months Ago
Source: Federal ReserveSource: Federal Reserve
The Real Leading Indicator
0
400
800
1200
1600
1970
1980
1990
2000
2010
World Stock Market Index
Source: MSCI BarraSource: MSCI Barra
Stock Market Comparison: I
50
85
120
1904 1905 1906 1907 1908 1909
Yea
r P
rio
r to
Pea
k =
100
Bankers' Panic 2008 Credit Crisis
Source: Dow Jones; MSCISource: Dow Jones; MSCI
Stock Market Comparison: II
0
100
200
1927 1928 1929 1930 1931 1932
Yea
r P
rio
r to
Pea
k =
100
1929 Crash 2008 Credit Crisis
Source: Dow Jones; MSCISource: Dow Jones; MSCI
Stock Market Comparison: III
50
85
120
1971 1972 1973 1974 1975 1976
Yea
r P
rio
r to
Pea
k =
100
Arab Oil Embargo 2008 Credit Crisis
Source: Dow Jones; MSCISource: Dow Jones; MSCI
Stock Market Comparison: IV
0
100
200
1985 1986 1987 1988 1989 1990
Yea
r P
rio
r to
Pea
k =
100
1987 Crash 2008 Credit Crisis
Source: Dow Jones; MSCISource: Dow Jones; MSCI
Stock Market Comparison: V
50
85
120
1998 1999 2000 2001 2002 2003
Yea
r P
rio
r to
Pea
k =
100
Tech Wreck 2008 Credit Crisis
Source: S&P; MSCISource: S&P; MSCI
PolicyMarket Meltdown
Central Bank Assets to GDP
0%
10%
20%
30%
1700 1750 1800 1850 1918 1950 2000 2006 2007 2008 2009
Bank of England US FRB Bank of Japan ECB
Source: Various Central Banks, Author’s CalculationsSource: Various Central Banks, Author’s Calculations
Mining Survey: Policy Potential
Source: Fraser InstituteSource: Fraser Institute
0102030405060708090
100
Zimbabw
eM
aliO
ceaniaLatin A
merica
DR
C (C
ongo)S
outh Africa
TanzaniaA
fricaB
urkina FasoE
urasian Ave
Zambia
Nam
ibiaU
S S
tatesA
ussie States
Ghana
Canada P
rovsB
otswana
Policy SummarySocial housing policy, Freddie and Fannie:regulation and underwriting standards
The monetary policy cycle
21st century bank runs: Lehman Brothers and others
Central Banks: lend freely to solvent entities at penalty rates
Prudential regulation: leverage, maturity matching and risk pricing
Market insurance
Social banking policy
Exit strategy – not “stimulus”
Villains and VictimsRisky business models: borrowers and lenders
Leveraged entities and markets
Iceland, Hungary, Serbia, Ukraine, Belarus, Turkey, Pakistan, South Korea, Argentina, Russia – not Canada
Central banks
Greed and market rhetoric
Social policy advocates
Banking structure
Optimal public policy – and taxpayers
What About You?
The lessons of history
The market outlook
The economic outlook
Policy and politics
Market Meltdown:Understanding 300 Years of Credit Crises
Dr. Mark MullinsExecutive DirectorFraser Institute
January 13, 2009
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