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THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by

THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by Tassos Malliaris Loyola University Chicago May 12, 2010. OUTLINE. Brief Evaluation of the Global Crisis Emphasis on Lessons Discussion of the Currency Markets 4. Problems with the Euro.

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THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by

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  1. THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by Tassos Malliaris Loyola University Chicago May 12, 2010

  2. OUTLINE • Brief Evaluation of the Global Crisis • Emphasis on Lessons • Discussion of the Currency Markets 4. Problems with the Euro

  3. Causes of the Financial Crisis • The Unpredictability of Crises • Macroeconomic factors (housing) • Microeconomic factors (rating agencies, subprime loans, derivatives) • Banking and Shadow Banking (leverage, securitization) • Monetary Policies • Government Policies

  4. The Nature of Crises • Currency Crises 2. Banking Crises 3. Financial Crises 4. Economic Recessions

  5. The Financial Crisis of 2007-09 • What caused the real estate bubble? • Easy Monetary Policy for 2002-2005 • Why such an easy monetary policy? • Irrational exuberance and the internet bubble • The bursting of the internet bubble

  6. 10-Year S&P 500 Performance

  7. 10-Year NASDAQ Composite Performance

  8. Actual and simulated housing demand

  9. Growth of the Finance Industry as % of GDP

  10. Development of the Crisis • Subprime Problems with Bear Sterns • Highly Leveraged Financial Institutions • Bankruptcy of Lehman Brothers • Troubled Asset Relief Program • Liquidity Provided by the Fed • Stress Testing of Top 19 Banks

  11. Federal Reserve Lending

  12. Lending Facilities http://www.bos.frb.org/news/speeches/rosengren/2009/100209.htm

  13. Real GDP

  14. Relative Global Unemployment Rates

  15. Global GDP Growth Figure 1: Global Outlook (Real GDP; percent change from a year ago)

  16. Lessons • Crisis started in the U.S. • Irony: Moderation Breeds Exuberance • High Leverage and Risk Taking • Regulatory Failures • Uncertainty Leads to Market Failures • Fed: Lender of Last Resort • Action: Fast, Decisive, Forceful

  17. Global Currency Markets • Global Financial Crisis • U.S. and EU • China was affected Less • Some Emerging Nations were also affected less

  18. China/US Exchange Rate

  19. Balance of Current Account

  20. Price of Gold During 2 Centuries

  21. 10-Year Performance of Gold

  22. Three Scenarios • Moderate Stability in the U.S. and EU. • EU Destabilizes; Prospects for the Euro • Inflation or Deflation?

  23. Concluding Remarks:Current Challenges • Financial Innovation vs. Financial Stability • New Wave of Financial Regulations • Equity vs. Growth • Drivers of Future Growth • Global Co-Leadership • The New Worrisome Bubble: Public Debt

  24. Chinese Gender Ratio

  25. China’s Challenge:The over 65s

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