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The Great Moderation, the Great Panic and the Great Contraction

Explore the causes & impacts of the financial crisis of 2008, from credit expansion to global imbalances, in an insightful analysis by Charlie Bean, Deputy Governor of the Bank of England.

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The Great Moderation, the Great Panic and the Great Contraction

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  1. The Great Moderation, the Great Panic and the Great Contraction Charlie Bean Deputy Governor, Bank of England Barcelona, 25 August 2009

  2. 1. International credit expansionFinancial liabilities of household and business(% of GDP) Source: OECD Source: Federal Reserve, Flow of Funds

  3. 2. Financial innovation Stock of CDS outstanding Off-balance-sheet issuance Source: Dealogic. Source: Bank for International Settlements. (a) Notional principal of outstanding credit default swaps.

  4. 3. Real house prices Source: Bank for International Settlement

  5. 4. The Great ModerationOutput and inflation volatility in the G5 Source: ??

  6. 5. The Great Moderation and risk perceptionsImplied volatilities from options – standardised to zero mean and unit variance Source: Bloomberg and Bank calculations

  7. 6. Overly Loose Monetary Policy?Deviation of policy rates from Taylor rule Source: OECD

  8. 7. Global imbalancesCurrent accounts (% of GDP, 5-year rolling average) Source: IMF and national sources

  9. 8. Long-term real interest ratesReal 8.5 year government forward rates Source: Bloomberg and Bank calculations

  10. 9. Real house prices & current accounts Source: Bank for International Settlements

  11. RK = (1+λ)RL – λRD

  12. 10. Defaults on US sub-prime mortgagesDefault rate by cohort of origination

  13. 11. Pay-offs & prices on CDO tranches

  14. 12. CDS spreads for major financial institutions Source: Markit. (a) Five-year senior CDS premia.

  15. 13. The Great Panic: the flight to qualitySpread between US Treasuries and Eurodollar rates Source: Bloomberg

  16. 14. Expected losses get bigger & bigger…Financial sector writedowns on US originated assets

  17. 15. The Great Contraction Source: IMF World Economic Outlook

  18. 16. UK financial network in 2007Gross bilateral exposures

  19. 17. International financial network in 2005External assets + external liabilities Source: BIS, IMF, OECD, UNCTAD and Kubelec and Sa (2009)

  20. 0 -1 -2 -3 -4 -5 18. Total output loss in slowdowns & recessions Medians, % GDP Slowdowns Recessions Preceded by financial stress Not preceded by financial stress Preceded by financial stress Not preceded by financial stress Source: IMF WEO October 2008

  21. The Great Moderation, the Great Panic and the Great Contraction THE END www.bankofengland.co.uk

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