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Global Financial Crisis: The Aftermath. Kenneth Matziorinis, Ph.D., CMC Canbek Economics & McGill University www.canbekeconomics.com. AHEPA, Ottawa, January 27, 2010. What Happened?. Low interest rates, high leverage and overconfidence led to the creation of bubbles which then burst.

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Global financial crisis the aftermath l.jpg

Global Financial Crisis:The Aftermath

Kenneth Matziorinis, Ph.D., CMC

Canbek Economics & McGill University

www.canbekeconomics.com

AHEPA, Ottawa, January 27, 2010


What happened l.jpg
What Happened?

Low interest rates, high leverage and overconfidence led to the creation of bubbles which then burst

  • US Housing market went bust and real estate prices started falling

  • Prices of complex financial securities that were created by Wall Street to underwrite the housing market collapsed

  • Institutions that issued these assets along with the investors that bought them suffered huge losses in many cases exceeding the capital of these firms

  • Losses along with collapse in confidence in these products trigerred a financial meltdown starting from Wall Street and rapidly spreading to London, Continental Europe, Asia and the Rest of the World

  • With the global financial system on the verge of total meltdown, governments stepped in to avert mass panic and an economic collapse that would result in a global depression worse than that of the 1930s

Canbek Economics


What did governments do l.jpg
What Did Governments Do?

Intervened in order to prevent a systemic collapse and an economic depression

  • Governments responded swiftly and decisively to save the system from collapse based on the hard lessons that were learned in the 1930s by applying Keynesian economics

  • Central banks stepped in and provided liquidity to the banking system allowing it to keep functioning

  • Slashed interest rates

  • Expanded the money supply

  • Governments provided bailouts for major financial institutions to avert their collapse or took them over outright

  • Governments also cut taxes and raised spending to prevent the economy from falling into a deep recession or even depression

Canbek Economics


Did they succeed l.jpg
Did They Succeed?

It appears they have for now, but it is still too early to tell

  • The magnitude of the financial shock, loss of confidence, near panic was too large to prevent a hit on the real economy

  • The world economy went into a deep recession, the first since the end of WWII

  • But a global depression was averted!

  • Now much of the confidence has been restored and economic activity is rising around the world

  • There is real hope that by the end of 2010 the recovery will be on solid ground and self sustaining and that by 2011 we can enter a period of stability and re-newed growth in the global economy

Canbek Economics


We are not sure yet l.jpg
We are Not Sure Yet

The recovery remains too dependent on government support

  • Although economies are rebounding around the world, the recovery is not even

  • The emerging economies of China, India, Brazil are faring better and leading the rebound

  • The economies of the USA, Europe and Russia are lagging behind

  • Canada is a special case -fortunately for us- but still tied too much on the US economy, thus still vulnerable

  • So far the recovery is still technical, driven by a restocking of inventories, a bounce back from the lows of 2009

  • Recovery is still overly dependednt on government spending, bailout money and low interest rates

  • It is still too early to declare victory, the patient is out of the OR room but still in the ICU! Let us not forget this.

Canbek Economics


World economic growth 2001 2009 and projections for 2010 2011 l.jpg
World Economic Growth, 2001-2009 and Projections for 2010 & 2011

Percent (%) Growth

10

9

8

7

6

5

4

3

2

1

0

-1

-2

-3

-4

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Advanced Economies

Emerging Economies

World Average

Source: IMF WEO Update, January 26, 2010


This intervention comes at a high price l.jpg
This Intervention Comes at a High Price 2011

We have not received the bill yet

  • We have been pulled out of the clutches of Scylla, but we may have fallen in the arms of Charibdis

  • Why?

  • Because the battle has been won at an enormous cost in terms of a) unprecedented expansion in the supply of money and b) unprecedented peacetime expansion in government deficits.

  • It is like we have gone on a giant shopping spree and charged all our purchases on our credit card. The bank that has issued the card will soon send us the bill, that is when we will begin feeling the cost of our purchases and the pain of paying it back!

Canbek Economics


Change in us real gdp 1948 2009 l.jpg
Change in US Real GDP, 1948-2009 2011

This has been the worst downturn since end of World War II

Percent (%) Change

15

10

5

0

-5

1949

1954

1959

1964

1969

1974

1979

1984

1989

1994

1999

2004

2009

2014

Growth Rate

Canbek Economics


Effective federal funds rate june 1954 jan 2010 l.jpg
Effective Federal Funds Rate, June 1954 - Jan 2010 2011

Interest Rates have gone from 2% to 20% and then down to 0.12%, They have nowhere to go but up now

20

15

10

5

0

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

Fed Funds Rate

Source: Federal Reserve Board of Governors Canbek Economics


Adjusted monetary base usa 1925 2010 l.jpg
Adjusted Monetary Base, USA, 1925-2010 2011

To save the financial system from collapse Federal Reserve had to expand the monetary base by an unprecedented amount

2500

2000

1500

1000

500

0

1925

1935

1945

1955

1965

1975

1985

1995

2005

Adj Monetary Base

Source: Federal Reserve Bank of St-Louis Canbek Economics


Total reserves adjusted for reserve requirements us 1959 2010 l.jpg
Total Reserves Adjusted for Reserve Requirements, US, 1959-2010

They had to inject over 1 trillion in liquidity into the US banking system

1200

1000

800

600

400

200

0

1959

1969

1979

1989

1999

2009

Total Bank Reseves

Source: Board of Governors of the Federal Reserve System


Mzm money stock broad money supply us 1959 2010 l.jpg
MZM Money Stock (Broad Money Supply), US, 1959-2010 1959-2010

The money supply has risen less dramatically because banks are not as confident and have not been lending

Thousands

Thousands

10

10

8

8

6

6

4

4

2

2

0

0

1959

1969

1979

1989

1999

2009

Money Supply

Federal Reserve Bank of St-Louis Canbek Economics


Us consumer prices cpi 1959 2009 l.jpg
US Consumer Prices (CPI), 1959-2009 1959-2010

Consumer prices have remained remarkably tame so far in the face of such monetary expansion, but for how much longer?

250

200

150

100

50

0

1959

1969

1979

1989

1999

2009

CPI

Source: US Dept of Labor, BLS Canbek Economics


Us federal budget deficit as percent of gdp 1900 2010 l.jpg
US Federal Budget Deficit as Percent of GDP, 1900-2010 1959-2010

It has led to the biggest budget deficit in peacetime US history

Percent (%) of GDP

30

25

20

15

10

5

0

-5

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

Budget Deficit

Canbek Economics


Federal and total state federal us government debt as percent of gdp 1900 2010 l.jpg
Federal and Total (state & federal) US Government Debt as Percent of GDP, 1900 - 2010

Gross US public debt is now approaching 100% of GDP

140

120

100

80

60

40

20

0

1900

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2010

State

Federal

Canbek Economics


Total us debt outstanding household business government 1974 2009 l.jpg
Total US Debt Outstanding: Household, Business & Government, 1974-2009

Total private and public debt in the US is now 370% of GDP

Percent (%) of GDP

Trillions of US Dollars

400

60

50

300

40

200

30

20

100

10

0

0

1974

1979

1984

1989

1994

1999

2004

2009

Total Debt to GDP

Total Debt

Source: Federal Reserve Board, Flow of Funds Accounts Z1 d3 Canbek Economics


General government net debt 2003 2008 actual 2009 2014 projections l.jpg
General Government Net Debt: 2003-2008 Actual, 2009-2014 Projections

The US is not unique, it is happening in Europe as well and to a less extent here in Canada

100

80

60

40

20

0

93-2002

2003

2004

2005

2006

2007

2008

2009

2010

2012

2014

Euro

USA

UK

CAN

Source: IMF, WEO, October 2009


Government budget deficits percent of gdp 2009 l.jpg
Government Budget Deficits, Percent of GDP, 2009 Projections

Budget deficits have exploded all over with the worst affected being in the advanced industrial world

UK

Greece

Spain

Ireland

USA

Portugal

France

Japan

Russia

Turkey

Belgium

Italy

Canada

0

2

4

6

8

10

12

14

16

Source: The Economist, EIU, January 16, 2010


Gross debt to gdp ratios 2010 imf projections l.jpg
Gross Debt-to-GDP Ratios, 2010 IMF Projections Projections

Debt-GDP ratios have been rumped up dramatically in many countries

Japan

Greece

Italy

USA

Germany

France

UK

Canada

Spain

Advanced G-20

Emerging G-20

0

50

100

150

200

250

Source: IMF, World Economic Outlook, April 2009 & October 2009


Where are we headed from here l.jpg
Where are we Headed from Here? Projections

We are navigating through Scylla and Charibdis

  • Governments will stay the course by keeping interest rates low and policy stimulus high to nurse economy into self-sustaing growth

  • Once this is achieved later in 2010 and 2011, they will start withdrawing stimulus packages

  • Short-term interest rates will start to rise

  • Government spending will start to fall and taxes will start to rise to bring deficits under control and stabilize high debt-GDP ratios

  • Given the unprecedented size of stimulus intervention, it will take a long time to bring deficits under control and

  • A meaningful self-sustaining expansion may be delayed until 2012 or 2013.

Canbek Economics


What are the risks facing us l.jpg
What are the Risks Facing Us? Projections

Uncertainty is very high and the risks are huge

  • Exit strategies of central banks might stumble or fail and this may trigger a loss of confidence in their ability to control the value of money, and may trigger a bout of inflation and exchange rate instability

  • We may experience a sovereign debt crisis, with credit rating downgrades, drop in bond prices, rise in long-term interest rates and mortgage rates that will dampen housing values

  • The public may balk at restrictive fiscal and monetary policies and precipitate civil unrest and political crises

Canbek Economics


The great conundrum of our time l.jpg
The Great Conundrum of our Time Projections

To avoid inflation interest rates will have to rise; to avoid economic stagnation and rise in debt levels interest rates will have to stay low; but you can’t have it both ways!

  • With all this monetary easing, expansion in liquidity and money supply, central banks will have to raise interest rates to prevent inflation

  • Higher interest rates will slow down economic growth and raise the cost of funding public and private debts

  • It may become extremely difficult for governments to bring down deficits and public debt especially in the face of public opposition and political instability and civil unrest

  • In that case, the only exit strategy might be to allow inflation to rise

Canbek Economics


A time for reckoning l.jpg
A Time for Reckoning Projections

A difficult period lies ahead

  • No one can predict exactly the future

  • What one can say for sure is that we are headed for a difficult and protracted period of undertainty, economic, social and political adjustments

  • At least here in Canada, we will experience much less pain than others because we have gone through much of this adjustment already in the 1990s

  • Yet we will still feel the storm

  • THANK YOU !

  • www.canbekeconomics.com