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Transforming Crisis in Financial Markets against a Background of ( Almost ) Conventional Recession

Transforming Crisis in Financial Markets against a Background of ( Almost ) Conventional Recession. Prof. Dariusz Filar University of Gdańsk. Two parallel phenomenons began in the summer of 2007. In the realm of financial markets: The subprime mortgage crisis in the United States.

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Transforming Crisis in Financial Markets against a Background of ( Almost ) Conventional Recession

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  1. TransformingCrisisin Financial Marketsagainst a Backgroundof (Almost) ConventionalRecession Prof. Dariusz Filar University of Gdańsk

  2. Two parallel phenomenons began in the summer of 2007 In the realm of financial markets: The subprime mortgage crisis in the United States In the realm of the real economy and business cycle: The „normal” downturn in the economy, both in the United States and Europe

  3. The two phenomenons continued in H2/2007 – H1/2008… In therealm of financial markets: Thesubprimemortgagecrisistransformedintocollateralizeddebtobligations (CDOs) crisis TheCDOscrisistransformedintothemoney market (theinterbank market) crisis In view of thissituation, the central banks began to injectliquidityintothe financial system In therealm of therealeconomy and business cycle: Thesignificantlowering of credit to theprivatesectorcontributed to deepening of slowdownintheeconomicactivity

  4. Throughout H2/2008 the situation worsened in both of the realms … In therealm of financial markets: Despitetheinterventions of central banks, theinterbank market crisistransformedintothecrisis of financial institutions. Thedepreciation of theassetsintheseinstitutionsbalancesheets and theworsening of their capital ratiosresultedin a series of bailouts and bankruptcies (Bear Stearns, Merrill Lynch, Lehman Brothers) In therealm of therealeconomy and business cycle: Blockage on world commercial credit causedthesharpcontractioninworld trade. Consumersmakingdownwardadjustment to theirspending, werebehindtheweakness of domesticdemand. Thedownturn of 2007 developedintofull-grownrecession

  5. The double improvement of 2009 In therealm of financial markets: As the first financial institutionsbenefitedfrominjection of public fundsintotheir capital, thewholesale financial marketsbegan to reactfavourably. Itraisedtheissue of how and whenthe central banks shouldwithdrawtheexceptionalexpansionarymeasures applied to avoidcatastrophe (exitstrategies) In therealm of therealeconomy and business cycle: Thedeepness of drop ineconomic growth, ledtheauthorities to design fiscalpolicymeasuresaimedatstimulatingeconomicactivity (fiscalstimuluspolicies). Attheend of 2009, practicallyallcountrieswere on start of recovery.

  6. The Paradox of 2010 In therealm of financial markets: Thefiscalstimuluspoliciesraiseddoubtsaboutfiscalsustainability of many countries. Thecontinuingincreasein return on governmentbondsimpliedthatinvestors’ confidencehadbeenundermined. Thus, the subprimemortgagecrisistransformedfinallyintofiscalcrisis and was about to transformintonewcrisis of financial institutions. Therescueonceagaincamefrom central banks In therealm of therealeconomy and business cycle: Theworst of the H1/2009 recessionseems to be behindus. Therecovery of the global economyiscontinuing …

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