THE GREAT RECESSION The Crisis, the Impact, the Future

1. THE GREAT RECESSIONThe Crisis, the Impact, the Future June 2009

2. SESSION ONE: The roots of the crisis

3. The Great Recession SOURCE: IMF World Economic Outlook, April 2009 Recession or Depression? Greenspan: once in a century event IMF repeatedly revised growth forecasts

4. The Great Recession • Two key factors contributing • to crisis: • Emergence of “Chimerica” • 2. Bush administration’s • response to 9/11

5. The emergence of “Chimerica” CHINA: export & save AMERICA: borrow & spend

6. The Great Recession

7. Bush administration response 9/11 “As we … chart a new course in Iraq and strengthen our military to meet the challenges of the 21st century, we must also work together to achieve important goals for the American people here at home. This work begins with keeping our economy growing … And I encourage you all to go shopping more.” – President George W Bush To revive slowing economy: - slashed interest rates - promised tax cuts - urged to “go shopping”

8. Bush administration response 9/11

9. Goldilocks and the “savings glut” Era easy money, two crucial consequences: 1 – US shifts from production to financing 2 – Creates the “bubble economy”

10. Easy money: production to finance

11. Easy money: production to finance

12. Easy money: the “bubble economy” Stock market House prices Wealth illusion encouraged accumulation of debt

13. Easy money: “affluenza” emerges Affluenza: “a painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more.”

14. Role of consumer: the home ATMs US more dependent on consumer, more reliant on debt

15. Government debt: a war of choice

16. America: a nation in debt 78m baby boomers: eligible Social Security and Medicare ADD war on terror and financial market bail-outs

17. America: a nation in debt SOURCE: The Washington Post SOURCE: CIA The World Factbook * OECD 2008 estimate

18. The American dream unravels

19. The dream unravels: crisis timeline New Century Financial files for bankruptcy Fears of bank losses triggers wider credit crunch, prompting global central banks to pump billions into market to improve liquidity Major losses emerge at banks: UBS, Citigroup & Merrill Lynch Despite further central bank intervention, crisis spreads to bond insurers – monoline insurers Apr 07 Aug 07 Oct 07 Dec 07

20. The dream unravels: crisis timeline UK government announces Northern Rock to be nationalised Bear Stearns, America’s 5th largest bank, sold to rival JPMorgan Chase supported by $30bn state loan IMF warns credit crunch spreading to other sectors US government steps in to save Fannie Mae and Freddie Mac, owners or guarantors of $5 trillion worth of home loans Feb 08 Mar 08 Apr 08 Jul 08

21. The dream unravels: crisis timeline SEPTEMBER 2008: EYE OF THE STORM US government bails out Fannie Mae and Freddie Mac, one of the largest bailouts in US history Lehman Brothers files for Chapter 11 and Merrill Lynch is bought out by Bank of America Fed announced $85bn rescue package for AIG Washington Mutual closed and sold to JPMorgan Chase European banking and insurance giant, Fortis, is partly nationalised UK mortgage lender Bradford & Bingley is nationalised 7th 15th 16th 25th 28th 29th

22. The dream unravels: crisis timeline

23. The dream unravels: crisis timeline OCTOBER 2008: Governments fight back US passes $700bn plan to rescue the US financial sector UK announces $88bn rescue plan for banking sector Major central banks announce emergency interest rate cuts G7 finance ministers issue 5-point plan to unfreeze credit markets 3rd 8th 11th

24. Crisis timeline: crisis hits economy Oct’08 Acknowledge that financial crisis has become an economic crisis Major global stockmarkets plunge

25. Crisis hits the real economy 4Q’08 Official figures confirm US, UK and Europe in recession

26. Crisis goes global: decoupling theory

27. Crisis goes global: decoupling theory

28. Crisis goes global: decoupling denied! SOURCE: IMF World Economic Outlook, April 2009

29. Crisis goes global: decoupling denied! Export-orientated manufacturers Commodity producers

30. Crisis goes global: European crisis European banks: - aggressive lenders to EM, notably E Europe - nearly 75% loans to countries now in deep recession

31. Crisis goes global: European crisis • European banks face two problems: • 1 – IMF estimates 50% more highly • leveraged than US banks • 2 – banking sector far larger proportion • of their economies than US • Banks too expensive to bail-out • EU has no framework to deal with situation • Difficult to resolve regional crisis, when • each governments faces local crises • Europe at far greater risk than US, • regional crisis could dwarf sub-prime AUSTRIA: - $300bn loans to E Europe - 70% of economy - 10% default bankrupt banking system

32. Global crisis: where to from here?