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A ringside view of the economic crisis David Fenton, Senior Economist March 2012

A ringside view of the economic crisis David Fenton, Senior Economist March 2012. Was the Greenspan “put” a shot in the foot?. Policy rates, UK and US. Source: Datastream. Goodbye dot-com bubble, hello housing bubble. Equity prices, house prices. Source: Datastream.

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A ringside view of the economic crisis David Fenton, Senior Economist March 2012

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  1. A ringside view of the economic crisis David Fenton, Senior Economist March 2012

  2. Was the Greenspan “put” a shot in the foot? Policy rates, UK and US Source: Datastream

  3. Goodbye dot-com bubble, hello housing bubble Equity prices, house prices Source: Datastream

  4. (Taylor) rules are made to be broken? Housing starts (millions of units) Federal funds rate (%) Source: “Housing and monetary policy”, Jackson Hole conference 2007

  5. Signs of a property bubble – difficult to miss Commercial property and gilt yields, % 9.0 Comm prop yield 8.0 7.0 6.0 5.0 4.0 10y gilt yield 3.0 2.0 Normal (c200 bps) Nuts (inverted!) Nasty! (c400bps) 1.0 0.0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: Datastream, IPD

  6. The Great Moderation made us complacent GDP % growth, standard deviation Source: Datastream, RBS calcs

  7. The price of risk fell sharply RBS net interest margin (%) Source: Bloomberg

  8. The loan to deposit ratio shot up RBS loan to deposit ratio (%) Source: Bloomberg

  9. We saw it coming...sort of “Unlike previous scenarios, the main source of the economic downturn is in the banking system...it is the resultant ‘credit crunch’ that propagates this initial shock, and turns recession into depression.” RBS stress scenario, July 2006

  10. Strange things afoot in the inter-bank market Spread between 3m LIBOR and bank rate (bps) Source: Datastream

  11. Did we really think Greece was like Germany? 10y bond yields (%) Source: Datastream

  12. Where do we from here? Strong demand Goldilocks Returns “V” Return of macro instability “W” Not much spare capacity Lots of spare capacity Slow Grind Higher “U” Deflation “L” Weak demand

  13. The long road to recovery

  14. Fiscal rebalancing: a good start, but still far to go Net borrowing, % GDP Source: HM Treasury

  15. “Plan A” requires a private sector response Net financial surplus/deficit, % GDP (flow of funds) Source: Datastream, RBS calcs

  16. Feb-10 Feb-11 Aug-11 Nov-11 Feb-12 Rates expectations fade into the distance UK policy rate 7 6 5 4 3 2 1 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Datastream, Bank of England

  17. Are we turning Japanese? Market expectations of policy rate (%) 1996 1998 Actual Source: Fathom

  18. Drastic times? Increase demand (symptom) • Massive fiscal stimulus • QE max • Liquidity unbounded • “Use it or lose it” deposit tax • PFI v2.0 • Beg to China Reduce debt (cause) • (Big) “bad bank” • Debt forgiveness • Financial repression • Monetise debt • Raise interest rates • Outright default

  19. The darkest hour is just before the dawn? “Initial projections for a V-shaped recovery are subsequently revised to a U-shaped recovery and eventually to an L-shape just as the recovery arrives.” Blanchflower, Feb 2009

  20. Keep in touch! Internet www.rbs.com/economics E-mail www.rbs.com/economics/registration Social media @rbs_economics

  21. Legal disclaimer This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.

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