What are the implications for public policy & business?

1. What are the implications for public policy & business? John WalkerOxford Economics jwalker@oxfordeconomics.com 18 March 2010

2. US:Current cycle vs previous cycles 7

3. US:Current cycle vs previous cycles 8

4. US:Current cycle vs previous cycles 9

5. Issues • What form will regulation of financial sector take? • What will nonfinancial companies do? M&A or invest • And how much consumer retrenchment? • Can political structures cope with large public sector deficits? • Will global imbalances lead to protectionism. Or will we see more exchange rate adjustment? • China is more vulnerable than many realise because it has a debt problem too

6. What did banks do? • Banks would normally be wary of lending to someone whose liabilities were fifty times their net assets but they happily lent to each other on that basis – until, one day, they stopped

8. What does not need to happen • Controls on hedge funds etc • Limits on bonuses etc • A ban on naked CDSs etc • A long-term tax on banks

9. What does need to happen • Regulations that enable non-financial companies, consumers and governments to be insulated from a financial crisis. • And there area number of ways to achieve that • A year ago we proposed separating the utility function of banks from other activities • And we still think that is the most reliable way of succeeding as well as being something that many in finance should support

10. But unlikely to happen! • Likely to see much more messy structures that will differ across regions. Nothing on a global scale

11. Section 2: What will companies do? Investment or M&A and how much?

12. What will companies do? The new normal? • Partial retreat from supply chain dispersion because of rising transport costs, worries about intellectual property? • Networks rather than hierarchies? • More cautious financial sector limits structural changes

13. US company debt not high

14. Sectoral balances

15. Private sector balances

16. Company sector balances

17. Many companies very cash rich

18. So US manufacturing on the mend 23

19. Section 3 What will consumers do? And why the US is a special case?

20. Wealth not recovered 25

21. US household savings still low

22. Savings and housing investment

23. Section 4 Ways of dealing with public sector deficits: a lack of political consensus?

27. Section 5 Global imbalances have not gone away and will dominate policy between many countries

31. Inflows from Rest of world played a part in crisis

32. The private sector is now in surplus everywhere

33. Will the rise in the renminbe be enough?

34. US Dollar 39

35. Section 6 China: another case of debt levels being too high?

36. Chinese and Japanese growth strategies

37. Is Chinese credit growth too fast?

38. Japanese and Chinese corporate debt

39. Summary • Balance sheets and debt are at the root of the crisis and remain an issue for both finance and now governments • Companies are cash rich and will start to invest and to begin a new round of M&A soon but will remain cautious for some time • Consumers will continue to retrench but in US reform of lending laws will be critical • Imbalances are more of a problem with fixed exchange rates • China may be more vulnerable than many realise and once again debt could be the issue

40. Thankyou

41. Households savings

42. Share of corporate profits is high

43. Labor costs very low

45. …leads to lower private savings in long run

46. US/Europe

47. US/Europe