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 .…..
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The strongest crisis since 1929?
The same causes, the same errors ?
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1 - What is a financial crisis?
2 - The origins of the crises.
3 - Crisis Mutation
4 - The Current crisis.
5 - A European Crisis
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1- What is a financial crisis?
1. Wikipedia: ” Situation, when money demand exceeds money supply”
. Temporary event
. Liquidity problem.
2.
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
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• Stock markets crisis
• Currency crisis
• Banking crisis
• Sovereign debt crisis
… Food crisis, Political crisis
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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.
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Yeah,….
- Capital highly mobile.
- Financial products (hedge,..) have widespread the risk but not removed it.
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2- The origins of the financial crises
. Fundamental based crises
Macro- and Micro fundamentals.
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. Non-fundamental-based crises
- Self-fulfilling propheties.
- Contagion
- Moral hazard.
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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 .
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. Balance sheet Approach
(Rosemberg at al. 2005
)
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. 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,..
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. 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)
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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 15 th , 2008 - Systemic Banking crisis
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- 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.
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History 2/
- Real economy collapse since 2009.
- Public finance, austerity measures.
- Greek default.
- Distress of the €, banking sector weakness,..
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The origins of the crisis 1-
. Business cycle turnpike.
. Bad banking management and governance: Scandals ( SoG, CL,..), not enough diversification, too complex financial products.
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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)
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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,..)
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Political Crisis (in particular Europe )
The markets and investors do not believe anymore politicians
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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
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. Real Markets - Disastrous
GDP growth at 0%.
Unemployment increases.
Debt level and budget deficit will still deteriorate with austerity –
Deflation is around the corner
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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
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. 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 ?
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Sovereign debt crisis ?
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. French and German banks highly involved
In PIIGS
French b.
Greece Spain Ireland Italy Portuga l
German b.
45.0
BIS (2009)
75.2
219.6
237.9
60.3
183.8
511.4
189.7
44.7
47.4
Total.
Capital & reserve
579.3
565.2
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Depreciation of the Euro vis a vis of other currencies is the next step, if Euro still exist…
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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.
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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,...
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My vision of the future:
- 2012: election year – expect no courageous political decision.
- On the edge of deflation (brain drain,..)
- Crisis almost out of control.
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