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Sequence of the Sub-Prime crisis: 1. US Housing Market Collapse. 2. Bank distress: US-Europe-ROW. 3. Stock Market Cra

Sequence of the Sub-Prime crisis: 1. US Housing Market Collapse. 2. Bank distress: US-Europe-ROW. 3. Stock Market Crash. 4. Economic Recession. 5. Sovereign Debt Crisis .….. . The strongest crisis since 1929? The same causes, the same errors ? Where do we go?.

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Sequence of the Sub-Prime crisis: 1. US Housing Market Collapse. 2. Bank distress: US-Europe-ROW. 3. Stock Market Cra

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  1. Sequence of the Sub-Prime crisis: 1. US Housing Market Collapse. 2. Bank distress: US-Europe-ROW. 3. Stock Market Crash. 4. Economic Recession. 5. Sovereign Debt Crisis .….. Studium general - 06/10/2011

  2. The strongest crisis since 1929? The same causes, the same errors ? Where do we go? Studium general - 06/10/2011

  3. 1 - What is a financial crisis? 2 - The origins of the crises. 3 - Crisis Mutation 4 - The Current crisis. 5 - A European Crisis Studium general - 06/10/2011

  4. 1- What is a financial crisis? 1. Wikipedia: ” Situation, when money demand exceeds money supply” . Temporary event . Liquidity problem. • Frederic Mishkin: ”Nonlinear disruption,..., so that financial markets are unable to channel funds to those with the most productive investment opportunities.” . Several markets involved . Role of the banking sector . Jumps ! Speculative attacks Studium general - 06/10/2011

  5. Stock marketscrisis • Currencycrisis • Bankingcrisis • Sovereigndebtcrisis … Food crisis, Politicalcrisis Studium general - 06/10/2011

  6. Financial Crisis: a growing and more severe problem for the world economies ? No,…. - Globalization leads to a better risk diversification. - Better economic education. - More efficient prudential rules (Basle). - Information better widespread. Studium general - 06/10/2011

  7. Yeah,…. - Capital highly mobile. - Financial products (hedge,..) have widespread the risk but not removed it. Studium general - 06/10/2011

  8. Studium general - 06/10/2011

  9. 2- The origins of the financial crises . Fundamental based crises Macro- and Micro fundamentals. Studium general - 06/10/2011

  10. . Non-fundamental-based crises - Self-fulfilling propheties. - Contagion - Moral hazard. Studium general - 06/10/2011

  11. 3- Crisis mutation .Flood and Garber (1984) – Currency Crisis - Economic relationships (UIP, PPP,..) on flows - But also accounting relationship extracted from the central bank balance sheet. R + DC = Ms A crisis occurs when R=0 . Studium general - 06/10/2011

  12. .Balance sheet Approach (Rosemberg at al. 2005) Studium general - 06/10/2011

  13. . The subprime crisis explained via the BSA. Real estate bubble – non-financial BS Then financial sector BS --- Banking crisis Then Government BS --- Sovereign debt crisis Then…. Resurgence banking, currency,.. Studium general - 06/10/2011

  14. .Empirical analyses. - From currency to banking crisis: Glick-Hutchinson (1995), Bordo et al. (2001),.. - From banking to sovereign debt: Reinhart-Rogoff (2009) Candelon-Palm (2010) Studium general - 06/10/2011

  15. Studium general - 06/10/2011

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  17. 4- The Current crisis History 1/ - Business cycle turning point in early 2007. - Real estate bubble explodes. - Financial institutions faced liquidity problem (Northern Rock, Bear Stearn, Freddy Mac, Fanny Mae,…) - Bankruptcy of Lehman brothers. Sept 15th, 2008 - Systemic Banking crisis Studium general - 06/10/2011

  18. - Irrational reaction of stock markets, which crashed. - Several financial institutions in Europe faced liquidity problems (fortis, dexia,..). Nobody believe anymore in the IFS. - Uncoordinated reaction of governments (Paulson’s plan, recapitalization, nationalization) - G20 meeting to restore credibility. Studium general - 06/10/2011

  19. History 2/ - Real economy collapse since 2009. - Public finance, austerity measures. - Greek default. - Distress of the €, banking sector weakness,.. Studium general - 06/10/2011

  20. The origins of the crisis 1- . Business cycle turnpike. . Bad banking management and governance: Scandals ( SoG, CL,..), not enough diversification, too complex financial products. Studium general - 06/10/2011

  21. The crisis becomes irrational with the bankruptcy of Lehman brothers. Why? Incoherent political reaction (Paulson’s plan by the US congress, or the absence of coordinated EU reaction) Studium general - 06/10/2011

  22. The origins of the crisis 2- . Bad macroeconomic fundamentals (important debt, global disequilibrium) . Political incompetences leading to a status quo (on financial regulation –CRA-, on decisions,..) - . Procyclical fiscal policies (banking safety plans,..) Studium general - 06/10/2011

  23. Political Crisis (in particular Europe ) The markets and investors do not believe anymore politicians Studium general - 06/10/2011

  24. What is the situation in October 2011? . Financial markets: quiet until July 2011, loose more than 25% last 3 months… . Sovereign bonds markets: extremely huge spreads for Greece, Italy -- unsustainable Studium general - 06/10/2011

  25. . Real Markets- Disastrous GDP growth at 0%. Unemployment increases. Debt level and budget deficit will still deteriorate with austerity – Deflation is around the corner Studium general - 06/10/2011

  26. 5- the European crisis . From a Banking crisis to a sovereign debt crisis. . From a sovereign debt to a currency crisis (to the end of € ?). . From a sovereign debt to a political crisis Studium general - 06/10/2011

  27. . 2009. Loss of Credibility in the European Area. Sovereign Debt crisis . 2010. Threat on the euro (will it still exist in this form?) and depreciation with respect to the US$ Currency crisis ? banking crisis (Dexia) ? ---- vicious circle ? Studium general - 06/10/2011

  28. Sovereign debt crisis ? Studium general - 06/10/2011

  29. Studium general - 06/10/2011

  30. Studium general - 06/10/2011

  31. . French and German banks highly involved In PIIGS BIS (2009) Studium general - 06/10/2011

  32. Depreciation of the Euro vis a vis of other currencies is the next step, if Euro still exist… Studium general - 06/10/2011

  33. Policy recommendations: - Fiscal Policy (SGP and its implementation, the ESF and fiscal federalism). Avoid deflation.. - Monetary Policy: Role of the ECB (not quasi fiscal operations). - Exchange rate stabilization: A Future for Euro? - Debt restructuration(Greece) – exit option. Studium general - 06/10/2011

  34. Political Decisions have to be quickly taken .Within Europe: Eurobonds, restructuration of the Greek debt, fiscal policy coordination,.. .In the world: Intervention of the BIRC, IMF,... For a new world order. Studium general - 06/10/2011

  35. Conclusions My vision of the future: Pessimistic • 2012: election year – expect no courageous political decision. • On the edge of deflation (brain drain,..) • Crisis almost out of control. Studium general - 06/10/2011

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