global crisis korea university

7/25/2019 Global Crisis Korea University

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Global Crisis

International Economics

Aguilera, Andres (2009470062)

Kim, Hyo Young (2009470010)

Lee, Kye Whan (2008470004)


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Table of Contents

1. Introduction Global Crisis

2. Why? Economic Response to the Crisis

3. How? Policy Response to the Crisis

4. Conclusion - Whats Next?


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INTRODUCTION

Global Crisis


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Timeline towards Global Crisis

July, 2007Bear Sterns

Hedge Funds

September, 2007

Federal Slashes Rates

August, 2007

Subprime Mortgage

problems Go Global

January, 2008

Real Estate Fears

March, 2008Bear Sterns

Bailout

September, 2008

Lehman Brothers Collapse


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Blueprint for a downfall?

Source: A Tales of Two Depression The Economist (2009)


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WHY?

Economic Response to the Crisis


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1. Roubinis Forecast

- Once-in-a-lifetime housing bust

- Oil shock

- Sharply declining consumer confidence

- Deep recession

2. Greed

- Spent far more than they made.

Nouriel Roubini Forecast


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Similar Signs to Asian Crises in 1990s

Excessive borrowing &reckless lending

Poorly regulated

banking systems Weak corporate

governance

Cronyism inabundance

Shoddy underwriting

Negligence on the partof the credit rating

agencies Lax government

oversight

Sub-prime financialsystem


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Imbalances between Savings andInvestments

Excess of saving large capital inflow to the U.S. low

interest rate declining private savings housing price bubble

C/A deficit-not addressed taking advantage of r/a issuer

Analogy of U.S. and Japandebate in 1980:

Excess saving vs. declining private

saving in the U.S.

Current Account vs. large public

surplus sector deficit


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U.S. Trade Deficit


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U.S. Government Deficit


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Structural Causes

Financial Liberalization

Glass-Steagal Acts

GrowingCapital

Gramm-

Leach-

Bliley Act

InvestmentBank

Commercial

Bank

InvestmentBank

=

Commercial

Bank

Emergingeconomies

Real-estateindustry:

Sub-primeMortgage loan

DerivativesProducts: MBS

Bubble

Economy


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Structural Flaws

- U.S. deregulation Competitiveness low lending

standards

- EU & Japan

Structural changes in product & labor markets.

- China

Sterilized intervention in the money market.


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Other Contributing Factors

- Low interest rates-wrong timing

- Human greed-Wall street greed

- CEO corruption- Lack of International cooperation

- Protectionism


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HOW?

Political Response to the Crisis


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Policy Response to the Economic Crisis:G-20


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Cuts in Interest Rates

FED Oct 2007 5.25% Today 0.25%

BOE Oct 2008 5% Today 0.5%

ECB Oct 2008 4.25 Today 1%

BOJ Historically low!

Lower federal-funds rate areusually a powerful tool to boosteconomic growth, though the

impact tend to lag by severalmonthsWall Street Journal, Oct 30 2008.

Source: Goldman Sachs Effective Regulation Part 1. March 2009


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US TARP Troubled Asset Relief Program

Emergency EconomicStabilization Act of 2008(known as the bail-out)US$700 Billion to buy:

1. Toxic Assets (especiallymortgage-backedsecurities)

2. Recapitalize banks

Cash for Trash Paul KrugmanNYTimes, Sept 21, 2008.


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Stimulus Plan

Known as theAmerican Recovery andReinvestment Act(Feb09) $787 BillionInfrastructure, HealthCare, Energy,Education, SocialSecurity

Govt deficit calculatedto 1.84 Trillion. (NYTimesMay 11, 2009)

Source: KALs cartoon, The Economist, Feb 26th 2009


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China: The World Banker

Source: Goldman Sachs. Effective Regulation Part 1.

China stimulus plan of

4 Trillion Yuan ($586B)

Housing, Rural Dev,Infrastructure, Education,Environment, Industry and Tech.(WSJ May 22 09)

Chinas Shopping Spree

Commodities (Oil, Iron Ore,Copper and Aluminum)

Sept 08 China became U.S.largest creditor. (Now it holds$767.9 Billion in Treasuries)


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G-2 at a glance: Chimerica

For addtional information: The End of Chimerica, HBS. Online at: http://www.hbs.edu/faculty/Publication%20Files/10-

037.pdf
http://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdfhttp://www.hbs.edu/faculty/Publication%20Files/10-037.pdf


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Competitive Devaluation or Currency Collapse?

Source: Lessons of the Financial Crisis. CFR Special Report No. 45 March 2009


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G-20s Six Pledges

1.Reform the Global BankingSystem (Shadow banking system)2. No Tax Havens (Bank Secrecy)Cooperation with OECD standards.3. International Growth

4. $750B to troubled economies +$250B in swaps of SDRs for dollarsor euros. (Other funds)5. International Accounting Standards6. Regulate Credit Rating Agencies

(Oligopoly, conflicts of interest,inaccurate risk models)

Source: http://www.telegraph.co.uk/finance/financetopics/g20-summit/5094824/G20-summit-Gordon-Brown-unveils-1.1trn-global-

recession-fight-back.html


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Quantitative Easing

Lower interest rates encouragepeople to spend, not save. But wheninterest rates can go no lower, acentral banks only option is to pumpmoney into the economy directly []

this is by buying financial assets suchas government and corporate bonds.BBC News Q&A: Quantitative Easing.

In advanced economies, scope foreasing monetary policy further shouldbe used aggressively to counterdeflation risks.World Economic Outlook, April 2009.


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CONCLUSION

Whats Next?


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Whats Next?

From Market Capitalism to Managed Capitalism1) Market Capitalism:

Reliance on market system;

Creation of venture capital and Initial Public Offering(IPO) markets

2) Managed Capitalism:

Much less reliant on market system;

Much more reliant on the government system toregulate and manage economy;

Minimize the excess observed in current crisis


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Whats Next?

From Market Capitalism to Managed Capitalism- The Re-emergence of the State?

Regulations? and Protectionism?

the end of liberal era?

- A crisis of the financial system

rather than a crisis within the

financial sector

- Main theme in the future: debt and

necessary government measures and

regulations


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Whats Next?

The Threat to Protectionism- A rise in number of trade restricting measures

- Devastating outcome?

- Global demand will be negatively affected- Danger to the path to recovery

Ex. United States clause: Buy American

EU: imposed temporary anti-dumping dutiesIndia: raised import tariffs on imported goods


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Whats Next?

Developed Economies are Losing Ground- If savings rates rise, inflationoccurs and higher taxes areimplemented to meet rising fiscaldebt

- A Possible Negative Outcome:Developed economies competitive

position vis--vis cash-richdeveloping economies

-Expect the unexpected


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Whats Next?

Developed Economies are Losing Ground- Inflation or Deflation?

Inflation is distant and containable

Deflation is at hand and pernicious

- Expectations on inflation remain stable at status quo

Pay freeze and wage cuts

- Deflation is more likelyDemand is weak

Households and firms are burdened by debt


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Whats Next?

Innovation is Immune to the Crisis- Technologies can grow even in the

deepest recessions

In 1930s, fridges had double digit

growth In 1970s faxes had double digit

growth

-smaller/faster/cheaper smarter/smarter/smarter

- Technological developments affect

providers of financial services


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Thank You

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