1 / 27

The Current Economic Crisis: History and Outlook

The Current Economic Crisis: History and Outlook. February 19, 2009 By Dr. Matt Will. Overview. The Source – CDOs. The Status – Loss of Confidence. The Solutions: Bailout(s), Stimulus, Mortgage. The Outlook. 1. Source of Credit Crisis. (2). (1). (4). (3).

reya
Download Presentation

The Current Economic Crisis: History and Outlook

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. The Current Economic Crisis: History and Outlook February 19, 2009 By Dr. Matt Will

  2. Overview The Source – CDOs The Status – Loss of Confidence The Solutions: Bailout(s), Stimulus, Mortgage The Outlook

  3. 1. Source of Credit Crisis (2) (1) (4) (3) (1) Funding comes from depositors (2) Cash invested (3) Payments are made by borrower or Assets Sold (4) Proceeds repaid to depositors & reinvested Intermediaries Investments Depositors Banks Investment Banks Insurance Cos. CDOs / MBS Sub-Prime Others – No problem Institutional Corp. Other

  4. 1. Source of Credit Crisis (2) (1) (4) (3) (1) Funding comes from depositors (2) Cash invested (3) Payments are made by borrower or Assets Sold (4) Proceeds repaid to depositors & reinvested Intermediaries Investments Banks Investment Banks Insurance Cos. CDOs / MBS Sub-Prime Others – No problem

  5. 1. Source of Credit Crisis Economic Engine Intermediaries Investments Depositors Banks Investment Banks Insurance Cos. GSE Mutual Funds… Corp. Developers New Business Consumers etc. Institutional Corp. Intl. Consumer

  6. 2. Status = Loss of Confidence Depositors Impact Cash / Money Markets / Intl. / etc. Capital Markets ? What Happens To The Economy?

  7. 2. Status = Loss of Confidence How to Restore Depositor / Investor Confidence?

  8. The Issues Agreement The Source – CDOs The Status – Loss of Confidence The Solutions: Bailout(s), Stimulus, Mortgage Subsidies, Alternatives

  9. 3. Solutions Intermediaries Banks PROBLEM FIRMS Insurance Companies Investment Banks

  10. 3. Solutions: Paulson/Geitner/Bernanke (TARP) Bad Banks (no confidence) Rehabilitated Banks (restores confidence) Sell Bad Mortgages to Government Send Cash (borrowed by Govt.) Cost = $700 bil + Government Owned Assets

  11. 3. Solutions: Paulson/Geitner/Bernanke (TARP) Myth 1: The plan will restore confidence (BB GB) Fact: Only 20% to 30% of depositors will return Myth 2: There is no private market for mortgages Fact: False – See Lehman, Washington Mutual, etc. Myth 3: The government will make a profit Fact: Banks will sell worst mortgages Myth 4: We know which mortgages are bad and their value Fact: Mortgages are hidden in S.I.V.s - no market price Myth 5: The government is better at loan workout than banks Fact: Banks do this for a living

  12. 3. Solutions: Paulson/Geitner/Bernanke (TARP) Emergency Economic Stabilization Act of 2008 • Paulson = 4 pages ($700 bil) • Final bill = 451 pages ($850 bil) Highlights - TARP Troubled Asset = “any other financial instrument that the Secretary … determines the purchase of which is necessary to promote financial market stability.” Lack of Support Opposed by over 100 university economists in a signed letter

  13. HR 1424 – The Xmas Tree • Energy Improvement and Extension Act of 2008 • Tax Extenders and Alternative Minimum Tax Relief Act of 2008 • Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 • Heartland Disaster Tax Relief Act of 2008 • "Certain wooden arrows designed for use by children" (Sec. 503) • Wool research (Sec. 325) • Film and television productions (Sec. 502) • Virgin Island and Puerto Rican rum (Sec. 308) • Auto racing tracks (Sec. 317)

  14. 3. Solutions: Stimulus $787 bil Recovery and Reinvestment Act of 2009 • $400 tax credit per worker…phase out at $75,000 • $2,500 tax credit for hiring workers • $61 bil for DOT projects ** • $20 bil for food stamps • $2.5 bil for internet for farmers • $7,500 credit, for low income first-time homebuyers

  15. 3. Solutions: Stimulus Impact Recovery and Reinvestment Act of 2009 • Adds $35 bil per year in interest to federal budget • Exacerbates root cause (unqualified homebuyers) • American Dream Downpayment Act (2003) • $7,500 for low income home buyers • Tax credits are temporary (not tax cuts) • Spending distribution • Social spending dominates plan • Infrastructure spending limited • Credits new baseline for entitlement spending • Magnifies credit crisis • Crowds out private borrowing

  16. 3. Solutions: Stimulus Impact • Myth: New Deal Stopped Depression • Cost of New Deal ($2009) = $550 bil • Length of Depression AFTER New Deal = 8 years

  17. 3. Solutions: Mortgage Subsidies Total Cost = $275 bil • $200 bil for Fannie Mae & Freddie Mac • $75 bil direct payments to homeowners • Low income qualification requirement • Targeted assistance • Details to follow

  18. US Govt. Financial Commitments Federal Government Financial Commitments from December 2007 thru February 2009. Government Borrowing “Crowds Out” Private Capital Formation Disbursements to date = $ 2.546 trillion Excludes Federal Reserve injections via FOMC

  19. 3. Solutions: Total Impact • 2/19/09 national debt = $ 10.8 trillion • Natl. Debt + Current Stimuli = $12.1 trillion • Assumes balanced budget • ALL Loans / Investments are repaid fully ($8.6 tril) • Annual interest expense = $545 billion • Per person • Debt = $40,333 • Annual interest = $1,817 • 2012 Forecast debt = $18.1 trillion • 2012 Forecast annual interest = $815 billion

  20. 3. Solutions: Credit Market Thaw • January 2009 China Private Bond issues = $237 bil (record) • US Non-Govt Guaranteed Loan Volume as of 2/6/09 Reprint from 2/20/09 Wall Street Journal

  21. Status of Financial Market “Clean Up” Financial Market Realignment Market Solution Govt. Solution • Only 1 qualified bidder for bailout RFP (Allianz) • Cannot unwind CDOs • Asset purchases not working (AIG, etc.) • Everyone wants a bailout

  22. 3. Solutions – An Alternative • Solution • Fix the original problem • Make predatory lending practices illegal • Require overhaul of rating agencies and “approve” all derivatives • Repeal Community Reinvestment Act of 1977 • Repeal American Dream Downpayment Acts of 2003 and 2009 • Regulate / Eliminate Credit Default Swaps *** • Market value all assets by banks & eliminate off balance sheet holdings • Orderly market realignment and/or liquidation of financial institutions • Wachovia, Was Mu, Goldman, Morgan, Lehman, Merrill Lynch, etc. • Expand TARP/CPP to include financing acquisitions • Avoid more bailouts (ala AIG, GM, etc.)

  23. Result of Alternative Solution • RESTORE CONFIDENCE • Clean out poor institutions • Increase quality of loan portfolios

  24. Summary • Solution must… … address root causes … not be political or reactionary • Bailouts… … delay recovery … make recession worse …do not fix fundamental problems …drain money from capital markets • Economy will recover

  25. Questions ?

  26. Three Important Secrets • 1. Credit Default Swaps (CDSs) • 2. Structured Investment Vehicles (SIVs) • 3. “Rating Agency Game”

  27. 3. Solutions – Auto Industry • White House Aid Package • Government appointed Czar • Government to finance turnaround • Required Targets • Convert 2/3 of debt to equity • Fund ½ of VEBA with Stock • Eliminate Jobs Bank • Convert UAW work rules to Transplant rules • Convert UAW wages to Transplant wages • Restructuring = Competitive • Issues • Can this be done outside of bankruptcy? • Will Obama enforce targets?

More Related