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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
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
(Taylor) rules are made to be broken? Housing starts (millions of units) Federal funds rate (%) Source: “Housing and monetary policy”, Jackson Hole conference 2007
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
The Great Moderation made us complacent GDP % growth, standard deviation Source: Datastream, RBS calcs
The price of risk fell sharply RBS net interest margin (%) Source: Bloomberg
The loan to deposit ratio shot up RBS loan to deposit ratio (%) Source: Bloomberg
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
Strange things afoot in the inter-bank market Spread between 3m LIBOR and bank rate (bps) Source: Datastream
Did we really think Greece was like Germany? 10y bond yields (%) Source: Datastream
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
Fiscal rebalancing: a good start, but still far to go Net borrowing, % GDP Source: HM Treasury
“Plan A” requires a private sector response Net financial surplus/deficit, % GDP (flow of funds) Source: Datastream, RBS calcs
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
Are we turning Japanese? Market expectations of policy rate (%) 1996 1998 Actual Source: Fathom
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
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
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