2008 CRISIS : COLD OR CANCER?

1. 2008 CRISIS : COLD OR CANCER? MARTIAL FOUCAULT Université de Montréal 28 juin 2010

2. Plan of the talk • Crisis: whatdoesitmean? • The American financialcrisisfollowed by a worldwideeconomiccrisis • Market and State • Lessons for capitalism

3. Plan of the talk • Crisis: whatdoesitmean? • The American financialcrisisfollowed by a worldwideeconomiccrisis • Market and State • Lessons for capitalism

4. Financial crisis • Banking Crises • Bankruptcy • Inability to pay debts. OR • Run on the Bank , Credit Crunch

5. Financial crisis • Economic Crises • An economic crisis can take the form of a recession or a depression. • Economic Crisis will most likely experience a falling GDP, a drying up of liquidity and rising/falling prices due to inflation / deflation

6. Financial crisisS • Capital Market Bubbles/Crashes • Market Price of stocks are higher than present value of future Cash flows. • A dramatic decline of stock prices in a market. Crashes are driven by panic as much as by underlying economic factors

7. Financial crisis • Currency Crisis • A currency crisis occurs when the value of a currency changes quickly, undermining its ability to serve as a Medium of exchange or a Store of value.

8. Financial crisis A Short History

9. A short crisis ?

10. 28.500.000hits for "recession is over“ Jul 25, 2009 The Recession Is Over Slate The Recession Is Over! What America's best economic forecaster is saying. By Daniel GrossPosted Tuesday, July 14, 2009 Sept. 15, 2009 Bernanke declares 'recession is very likely over' Unfortunately, unemployment will come down slowly

11. The roots of the crisis • Easy access to cheap borrowing combined with: • low interest rates (since the collapse of the internet bubble) • null regulation (Glass-Steagall Act in 1999) • Fundamentals of the US economy • Low level of savings rate • Unbalanced international trade • Excessive private consumption • Financial sector oriented economy • Last transformation of the “American dream” capitalism • Risk value: new sources of profit

12. Water in the dam… • Asset price bubbles are not rare in history (tulip speculation in Netherlands, share prices in the 1920s, « dotcom » bubble…) • Low US interest rates • Low Japanese interest rates • Impact of China and sovereign wealth funds (state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other)

13. Whylowinterest rates? • Economic boost? • Laxist monetary policy? • Stop increasing Wages ? • Europeanresponsesdifferentfrom the US policy: • Competition race? • More cautious Euro zone?

14. Easy mortgage: subprimes • A myriad of actors • Subprime borrowing • Credit score (good borrower vs. bad borrower) • Adjustable-rate mortgages • Expectations that house prices would rise faster than loan rates… • Subprime crisis once mortgages securitized • RMBS (Residential Mortgage Backed Security) • SPV (Special Purpose Vehicle) • Things can go wrong…

15. Explosion in mortgage assets, USA 2004: beginning of the end

16. Housingmarket

17. The crisisgoes on…

18. Why did banks create these securities? • How banks work? • Is there a risk for not getting back my money? • Basel capital rules (Basel I in 1998 and Basel II in 2004) • In the 1990s, they changed their core business • Trading income • Increasing fees from mortgage securitization • A new financial capitalism is born

19. Explosion in mortgage assets, USA 2004: beginning of the end

20. Financial (De)regulation • New US policies to encourage home ownership • Changes to Fannie Mae and Freddie Mac rules • Changes to rules on investment banks • Publication of Basel II proposals

21. Consequences A US CREDIT CRUNCH followed by an ECONOMIC CRISIS

24. Bad times for the economy • Macroeconomic consequences • Microeconomic consequences • Financial consequences • Political consequences

25. Macroeconomicconsequences • GDP growth • Public Debt • Unemployment • Incomeinequalities

26. GDP impact

27. More recently…

28. GDP decrease in developped countries

29. Public debtlevels

30. Confidence erroded

31. Bank lendinggrowth

32. Labor still prime affected

33. Crisis and unemployment

34. Crisis and incomeinequalities in the US

35. How the crisis affected global trade? Growth in World merchandise exports trade by region 
(Year to year % change in dollar values) Volume of world merchandise exports, 1965-2009
(Annual % change)

36. Microeconomicconsequences I Bank Failures

37. Microeconomicconsequences II

38. Time-lags: Schematic comparison of stock markets, employment, public revenues and public debt Stock markets Employment Public revenues Public debt ? ? uncertainties ? ? ? ? ? ? ? Oct Nov Dec Jan Feb Mar Apr May June Jul Aug Sep Oct Nov Dec Jan Feb Mar 2008 2009 2010 G20 G20 G20

39. To sum up… • Basic story of the crisis: • Causes of mortgage bubble • Role of the financial sector • Manage risks • Allocate capital • Run payment mechanisms • Regulators • Insufficient regulations • Special interests • Economics as a not so credible science

40. Lessons for Capitalism • Permanent sources of crisis: • Information • Confidence • Corporate governance • Market and States • Capitalism and self-regulation • Governments are strongly exposed