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Prospects for the future – policy options Seminar „ Geography of the Financial Crisis and the Policy Response ” Warsaw,

Prospects for the future – policy options Seminar „ Geography of the Financial Crisis and the Policy Response ” Warsaw, 22 September 2009. Prof. dr hab. Krzysztof Rybiński Warsaw School of Economics and Ernst & Young Email: rybinski@rybinski.eu Blog: www.rybinski.eu.

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Prospects for the future – policy options Seminar „ Geography of the Financial Crisis and the Policy Response ” Warsaw,

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  1. Prospects for the future – policy optionsSeminar „Geography of the Financial Crisis and the Policy Response”Warsaw, 22 September 2009 Prof. dr hab. Krzysztof Rybiński Warsaw School of Economics and Ernst & Young Email: rybinski@rybinski.eu Blog: www.rybinski.eu

  2. Two visions of the crisis • Markets’ failure creates a risk of depression, hence government intervention is necessary to restore equilibrium • Crises and recessions are market-driven corrections of series of failed government policies in the past, so it should be allowed to work • Before designing policy options one has to understand what happened. Today we are in the dark alley.

  3. Who is this man?

  4. A creator of copula formula on default correlation

  5. When knowledge is on the dark side of the force • Never in the human history has one working paper had such a massive impact on our lives • And cost so many trillionsof dollars

  6. It contributed to credit derivatives bubble Swaps and options (LHS), CDS (RHS), USD trillion Źródło: ISDA.

  7. And spilled all over the world Cross-border bank claims, as percentage of GDP. Source: BIS

  8. Derivatives markets growth far outpaced other markets Source: Rybinski K., Opala P., Holda M. (2008) „Gordian knots of the 21st century”, book published by Ministry of Regional Development and Rewasz, June 2008

  9. Fourteen families – concentration of power • Fourteen global financial institutions account for 95% of financial markets turnover (from US, UK, Germany, Switzerland and France) • They get invited by Fed to solve problems • Goldman Lloyd Blankfein refers to them as „fourteen families” • No Asian institution is a member of the family • „Nearly all men can stand adversity, but if you want to test a man’s character, give him power” Abraham Lincoln Source: Rothkopf D. (2008), “Superclass: The Global Power Elite and the World They Are Making by”, Farrar, Straus and Giroux, March 2008

  10. Concentration on financial markets To big to fail, to interconnected to fail !!! Source: BIS, 2007, Triennial Central Bank Survey, December 2007

  11. What happened? From 3-5-3 banking to leveraged, originate-to-distribute banking, unregulated shadow banking Risk originator sold it entirely, bought back opaque risk Too complicated instruments, nobody understood the risk that was created Tightly coupled systems Huge leverage Huge, not managed liquidity risk

  12. What reaction is needed? Simplify Reduce leverage Introduce circuit breakers Introduce speed limits Learn risk management from the very best R.Bookstaber „Demon of our own design”

  13. Are we heading in the right direction? More regulation? More complexity!!!

  14. First global recessionsince 2nd WW World GDP growth 1950-2010 IMF forecasts, April 2009 Source: The Conference Board and Groningen Growth and Development Centre, Total Economy Database, Jan. 2009;World Economic Outlook, Międzynarodowy Fundusz Walutowy, Kwiecień 2009

  15. What growth prospects? L U V W

  16. The age of turbulence has begun Age of turbulence ???? Great moderation 1-3% 3-5%

  17. Post crisis challenges • Aging • Debt mountain • Inflation • Commodity price surge • Dollar scare • Accelerated core migration to Asia • Lack of global strategic management

  18. EU demographic challenge is coming

  19. CEE has 20 years to catch up Source: European Commission, May 2008

  20. My name is Obama Barack Obama

  21. Wo jiao Jintao Hu Jintao.

  22. Ich heisse Merkel Angela Merkel

  23. Global strategic management • Examples of global public goods: • Good climate • Clean air • Low poverty • Health • Peace • Financial stability • Low and stable inflation Source: Rybiński et al. „Gordian knots of the 21st century”, Warsaw, 2008.

  24. Global strategic management Source: Rybiński et al. „Gordian knots of the 21st century”, Warsaw, 2008.

  25. Lisbon strategy Cohesion policy Stop simplifying, start simple

  26. Next steps • From massive regulation complexity to simplicity • From „Commission as police force” to „strategic leadership” • From GDP to intellectual capital • Countries • Regions • Cities • New horizontal Knowledge Commissioner needed • Propose Global Strategic Council, EU with one seat

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