SayItVisually--US Financial Crisis 4 min 2008
http://www.youtube.com/watch?v=h4Ns4ltUvfw
Derek Banas fin instruments – derivative- CDO –CDSwap – regulated marketderegulation-credit rating agencies 9 min 2011
http://www.youtube.com/watch?v=S3AXHQcXYMk
http://www.youtube.com/watch?v=bYZdKNjTIzY sovereign bonds/debt 10116 min ( you can watch later) 2010
Equity http://www.youtube.com/watch?v=tcpW0mM4OD4 equity 7.5min (watch at home)
A stock or any other security representing an ownership interest.
In finance, equity is ownership in any asset after all debts associated
with that asset are paid off, e.g., a car or house with no outstanding
debt is the owner's equity because he or she can readily sell the item for
cash. Stocks are equity because they represent ownership in a company.
Interest Rate Swap financing involves two parties (MNCs) who agree
to exchange loan payments (cash flows), results in benefits for both
parties. Floating vs. fixed rate exchange
Currency Swap - One party swaps the interest payments of debt
(bonds) denominated in one currency (USD) for the interest payment of
debt (bonds) denominated in another currency (BP), Currency swap is
used for cost savings on debt, or for hedging long term currency risk.
CDS: The buyer of a Credit Default Swap receives
credit protection, whereas the seller of the swap
guarantees the credit worthiness of the product. By
doing this, the risk of default is transferred from the
holder of the fixed income security to the seller of the
swap.
For example, the buyer of a credit swap will be entitled
to the par value of the bond by the seller of the swap,
should the bond default in its coupon payments.
Subprime
Subprime is a classification of borrowers with a
tarnished or limited credit history.
Lenders will use a credit scoring system to determine
which loans a borrower may qualify for.
Subprime loans are usually classified as those where the
borrower has a credit score below 640.
Subprime loans carry more credit risk, and as such, will
carry higher interest rates as well.
Approximately 25% of mortgage originations in US are
classified as subprime.
Subprime lending encompasses a variety of credit types,
including mortgages, auto loans, and credit cards.
Collateralized Debt Obligation (CDO)
•CDOs are a type of structured asset-backed security whose value and
payments are derived from a portfolio of fixed-income underlying
assets.
•CDOs are split into different risk classes, or tranches, whereby
"senior" tranches are considered the safest securities. Interest and
principal payments are made in order of seniority, so that junior
tranches offer higher coupon payments (and interest rates) or lower
prices to compensate for additional default risk.
Note:
•Each CDO is made up of hundreds of individual residential
mortgages.
•CDOs that contained subprime mortgages or mortgages underwritten
because of predatory lending, were at greatest risk of default.
•They are blamed for precipitating the global crisis and have been
called WMD “weapons of mass destruction.”
Credit Default Swap (CDS)
A CDS is an insurance contract in which the buyer of the CDS
makes a series of payments to the protection seller and, in
exchange, receives a payoff if a security (typically a bond or loan
or a collection of loans such as a CDO) goes into default.
NOTE: CDOs are widely thought to have exacerbated the financial
crisis, by allowing investors who did not own a security to purchase
insurance in case of its (CDOs they did not own) default. AIG
(American International Group of insurers) almost collapsed
because of these bets, as it was left on the hook for tens of billions
of dollars in collateral payouts to some of the biggest U.S. and
European financial institutions. AIG paid Goldman Sachs $13
billion in taxpayer money as a result of the CDSs it sold to
Goldman Sachs.
What caused the crisis?
•Market failure?
•Policy failure?
Policy failure
• US and EU government “populism” over-indebts
lower-income groups
• US and EU fiscal low-interest policies fuelled
asset bubble (including commodities)
• Global imbalances generated growing and
unsustainable debts of US, EU, and Japan (G3)
•
•
•
•
Origins of current financial crisis
Since 1990s deregulation of financial markets: risk
pricing replaces prudential supervision. Rise of derivative
“assets” with opaque markets and few players. Bank
loans replaced by bonds, etc.
Huge US fiscal deficit, monetary expansion (“Greenspan
put”), low savings led to a US mortgage boom/bust (non
traded sector) and a huge current account deficit (traded
sector).
Mortgage bubbles (e.g. 1992 in UK) are familiar with
obvious political costs; join recurrent bubbles in past
decade (dotcoms, Tequila etc);
But 2008 crisis is by far the most serious systemically
because it threatens the global banking system itself as
creditor, and whole US electorate as debtor.
Financial Times, 20 Sept 2008
• “…bank boards and bank executives have failed to
understand complex mortgage-backed banking
products, as have central bankers, regulators and
credit rating agencies.”
• “…a reward system that has granted huge bonuses
to those who peddled toxic mortgage-related
products….”
• “Almost as absurd has been the degree of leverage
racked up by investment banks.”
Rapid (and massive) US & EU government response
•Monetary expansion by the country’s central bank ,
e.g. Fed Reserve in the US
• Fiscal expansion (Tax cuts, govt. spending, rebates)
• Bank bailouts (Govt. infusion of taxpayers’ money
into banks that fail)
Topic 1: Global Impact of the 2008 Financial Crisis
(FC): Comparing Canada and the Third World
Countries.
Thesis based on WST:
• The endless accumulation of capital is the cause for
financial crises in the global economy.
• Economic development through globalization is guided
by the Washington Consensus: “privatization of state
productive enterprises, reduction of state expenditures,
opening of the frontiers to uncontrolled entry of
commodities and capital, and the orientation to
production for export (Wallerstein, 2011: 4)”.
• However, since 1970s, the capitalists’ shifted from
production to financial speculation for their continued
accumulation of capital As a result, the world-system
went through a series of speculative bubbles of which
the FC of 2008 is one, that has lead to serious global
rise in indebtednesses.
Comparing AICs with DW:
• While the 2008 financial crisis that originated in the US, had
severe economic and financial repercussions on the core
countries (the US and the European), the regulatory regimes of
the Canadian financial institutions limited Canada’s exposure to
the crisis and minimized its adverse impact on the economy and
employment.
• In contrast, the Third world countries where most people are
already poor, faced worsening of poverty due to their declining
GDP, loss of export trade and growing unemployment that led to
greater poverty.
TheWorld Bank Global Monitoring Report 2010: The
Millennium Development Goals (MDGs) after the Crisis
(April 2010)
• WB projects the poverty impact of the crisis
through the effect on growth; also for MDG targets
• “The crisis left an estimated 50 million more
people in extreme poverty in 2009, and some
64 million more will fall into that category by
the end of 2010 relative to a pre-crisis trend”
(p. 102)
• That is 2% of the world population...
http://www.imf.org/external/pubs/ft/gmr/2010/eng/gmr.pdf
Impact of the 2008 Financial Crisis (FC): Canada
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
Canada: Financial Crisis of 2008 (FC)
I. Economy and Finance
1. FC: less impact than in other AICs. Credit has solid growth as
Canada’s financial institutions are better capitalized and less
leveraged than their international counterparts. Canadian financial
institutions continue to be the healthiest in the world. World Economic
Forum has ranked Canada’s banking system as the soundest
in the world for 3 consecutive years.
2. Strong growth in world prices of most commodities produced in
Canada since mid-2010
3. Canada’s sound fundamentals have made Canadian financial assets
attractive to international investors
http://www.bankofcanada.ca/2011/03/speech
es/great-recession-canada-perception-reality/
2012:
http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html
http://www.budget.gc.ca/2011/plan/chap2eng.html
24 September 2014 Remarks by
Timothy Lane
Deputy Governor of the Bank of Canada at Carleton University
Ottawa , Ontario
Are We There Yet? The United States and Canada After the Global Financial Crisis
- graphs
http://www.bankofcanada.ca/wp-content/uploads/2014/09/remarks-240914.pdf#chart5
2014 Canada’s Financial Troubles
As Canada’s recovery unfolded , our economy became increasingly unbalanced.
Our non – energy exports, after picking up quickly, stalled well below their
Pre -recession level (Chart 4 ).
Economic growth became increasingly reliant on building more and more
Homes , mortgaged at rock - bottom interest rates and driving up the
Indebtedness of Canadians to unprecedented levels (Chart 5 )
.
That source of growth was increasingly tapped out. And it built up vulnerabilities
In our financial system, which could spell trouble down the road.
•The six largest domestic banks hold > 90% of banking industry
assets. This adds to the banking industry’s stability
•In 2006, sub-prime loans accounted for less than 5% of new
mortgages in Canada, compared to 22% in the United States.
•While >50% of all mortgage debts outstanding in the US were
sold to investors through securitization, >75% of Canadian
mortgages were held by financial institutions on their balance
sheet as traditional mortgages
However, the downside: (Canada)
•Stock markets registered their greatest drops in more than 75 years.
•As the contagion spreads, it directly affected our exports to the
US. Three-quarters of our exports go to US markets. Sharp decline
in exports - decrease by >16 % in 2010.
•Capital investments declined due to uncertainty in a weakening
financial markets with shaken consumer and business confidence:
22 % downturn in business investments in 2010
http://www.bankofcanada.ca/2011/03/speech
es/great-recession-canada-perception-reality/
www.bankofcanada.ca/wp.../2013/01/mprsummary-2013-01-23.pdf
http://www.bankofcanada.ca/2011/03/speech
es/great-recession-canada-perception-reality/
Impact of the 2008 Financial Crisis (FC): Canada
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
Canada:
Employment losses were much less serious than during
earlier recessions - jobs regained sooner
But, only partial recovery of business investment (45%)
and exports (67%) from the losses due to the recession.
Jobs linked to these sectors have not come back .
2012:
http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html
http://www.bankofcanada.ca/2011/03/speech
es/great-recession-canada-perception-reality/
2012
http://www.budget.gc.ca/2012/plan/toc-tdm-eng.html
Impact of the 2008 Financial Crisis (FC): Canada
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
III. Human Development and Poverty (Canada)
• In US, 2 of the Detroit-based auto companies received
loan guarantees of $17 billion and $4 billion from the
Canadian Federal and Ontario provincial governments.
Ford received a line of credit. Without them, millions of
workers would have lost their jobs in Canada.
• Feminized sectors & women workers were left out in
job creation policies: Investment in ‘infrastructure’ for
repairing and constructing roads, bridges and buildings,
and bailing out the Detroit Three is job creation that
amounts to ‘jobs for boys,’ as far fewer women work
in such industries.
Human Development and Poverty: Canada (cont’d)
Public Spending on the poorer families and children:
Instead of assisting the unemployed, the poor on
welfare and income supplement by not cutting them
back in the govt budgets:
1. Canadian government helped Canada’s banks. –
swapped hundreds of billions of dollars for
questionable assets held by banks
2. $85-billion cumulative deficit over five years for the
bail out - “Insured Mortgage Purchase Program”
lists the $75-billion CMHC buyout
3. $ 45-billion is being provided to further backstop
mortgage lending by banks
Impact of the 2008 Financial Crisis (FC): Developing
World
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
World’s Risks Loom Large at Annual Meetings Oct. 2014
http://www.worldbank.org/en/news/feature/2014/10/11/worlds-risksloom-large-at-meetings 2.2 min (watch at home)
2015 LDCs
http://blogs.worldbank.org/futuredevelopment/node/194 (watch at
home)
http://www.worldbank.org/en/news/pressrelease/2014/10/08/cloudy-outlook-for-growth-in-emerging-europeand-central-asia
WASHINGTON, October 8, 2014 - Growth in the Emerging Europe and
Central Asia (ECA) region remains tepid, with GDP growth for the region
expected to be only 1.8 percent in 2014 and improving slightly up to
2.1 percent for 2015, the World Bank said during the 2014 World
Bank/IMF Annual Meetings.
Developing Countries pursued autonomous policies - not
dependent on those based on IMF strictures:
• Reserve accumulation to insure themselves after
learning form 1990s crises
• Counter-cyclical macro-policies (fiscal, monetary and
exch-rate) to stabilize their output
• More extensive safety nets (universal rather than
targeted) to sustain demand
Financial stability in DW:
The region’s financial sector had no complex new financial
instruments (such as in US: Collateralized Debt Obligation
(CDO) Credit Default Swap (CDS))
Effective financial supervision and prudent risk management
Foreign exchange reserves have been built up in Asia based on
export surpluses (e.g. China), and on capital inflows or
remittances (e.g. in the cases of Bangladesh, India, Indonesia,
and Viet Nam).
However:
FDI fell significantly. Banking stresses in low income countries
e.g., non-performing loans (NPLs) to total assets ratio doubled
in Zambia (7% to 13% during 2009.
Economy: (OXFAM study)
Asia and the Pacific, especially in Central and South-East Asia
GDP growth dropped in 2008 and 2009 in India, Indonesia,
Thailand, Viet Nam, the Philippines, Pakistan, and Sri Lanka where
the poor populations predominate.
China: state control and high foreign exchange reserves have given
greater flexibility to control the crisis.
Newly industrialized countries: South Korea, Malaysia, Singapore,
Taiwan, Hong Kong and Macau: high per capita incomes, high
degrees of trade and investment integration with the world, highly
export dependent. But, they have fiscal and social policies to deal
with declining exports & increasing unemployment.
Less developed countries :Bangladesh, Cambodia, Bhutan, Lao
PDR, Mongolia, and Nepal: increasingly integrated with the global
and regional economy through trade. Worsening economies
2010 GDP in sub-Saharan Africa : Fell 7% ($84 billion).
(International Monetary Fund (IMF) data and forecasts, 2011 http://www.imf.org/external/pubs/ft/weo/2010/update/01/index.htm)
e.g., India in 2014 https://www.youtube.com/watch?v=kdMeXutanMY 6min
India's Economic Crisis: Prospects for 2014
DW:
However, income distribution has worsened and poverty
risen in the DW
• Managed exchange rates maintain output/employment
rather than wages/incomes in the formal sector.
• The burden falls on the informal sector – lower wages and
spending by the poor.
•Remittances from abroad declined.
• World Bank estimates poverty rising due to deceleration in
growth
• Decline in job creation while labour force continues to
grow
Impact of the 2008 Financial Crisis (FC): DW
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
Employment:
The greatest impact on employment was in the garment and
mining industries.
Jobs lost:
In 2009. 25,000 to 30,000 garments workers’ jobs lost in
Bangladesh.
In 2009, Cambodia lost a third of garment workers (102,527 jobs)
A third of Zambia ‘s mining jobs lost:10,000
Three quarters of miners in DRC (18,000 people) lost jobs
Cambodia has been hit hard with job losses in garments, tourism,
and construction industries.
Philippines: most lay-offs in export processing zones (EPZs) - 75
% are women workers
Thailand: 125,700 women (I in 4 export industries) laid off or lost
regular work that turned temporary.
In Indonesia and Thailand: (Oxfam evidence)
Using crisis as an excuse: Factories dismissed workers in order
to hire younger, cheaper workers.
In Serang, Indonesia, in one factory, 79 employees with 8 to 14
years seniority were dismissed Then, hired younger workers
with flexible, lower paid short-term contracts, apprenticeships,
and for outsourcing.
2014 : No Change in Unemployment Rates; Uneven GDP Growth in Developing Countries
http://www.worldbank.org/en/topic/jobsandpoverty/publication/job-trends-june-2014
Impact of the 2008 Financial Crisis (FC): DW
I. Economy and Finance
II.Employment and Economic security
III.Human Development and Poverty
Human Development in DW: OXFAM 2010
•Families : In Indonesia: If with jobs, give up meat or fish.
Women now unemployed - only food twice a day instead of three
times - eat less at each meal.
•Forego food to give food to their children or husbands
Watered down the milk to babies and feeding children less
•No money for school meals
•For the first three months my kids found it very difficult to give up
rice, tempe, and tofu and just eat soup and the cheapest thing.
– (Dismissed worker in a focus group discussion, Indonesia)
My husband and I skip meals to make sure our baby has milk.
– (Woman in focus group discussion, the Philippines)
Men deserve to eat more food because they are physically stronger,
do hard work on the farm, and earn income for the family.
– (Focus group discussion, Viet Nam)
Human Development:
In Cambodia, 70% of the poor took out loans from relatives or
friends, or bought food on credit.
Parents in urban areas in Indonesia report eating less and
selling assets to keep their children in school.
“It is better for us not to eat than for our kids not to go to
school.”
– (Woman in a focus group discussion, Indonesia)
30 million people lost jobs since 2007 due to the ongoing
crisis, taking the pool of globally unemployed to about 200
million in 2012.
http://www.iza.org/conference_files/FutureOfLabor_2013/grosh_m6958.pdf
Mexico does not have a national unemployment insurance program,
but the Distrito Federal initiated an unemployment insurance
program in Fall 2008 for city residents working for firms in the city
for six months or more.
Mexico set up a temporary Job Preservation Program in 2008. It
provided subsidies of $110 Mexican Pesos per day (about US$8.23
with September exchange rate) for up to three quarters of the workers
in participating firms, for up to a total of $5,100 Mexican pesos per
worker (US$382).
Mexico scaled up it Programa de Empleo Temporal (PET) as one of
several labor market measures.
Mexico (cont’d)
With the global crisis, it was scaled up, covering 285,000
beneficiaries in 2008, 682,000 in 2009 and 894,000 in 2010
(World Bank 2011; ILO/OECD 2011).
Conditional cash transfer programs (CCTs) are meant to
break the intergeneration transmission of poverty, by
transferring cash to poor households on the condition that
those household make prespecified investments in the
human capital of their children (Fiszbein and Schady 2009).
Source: Understanding the Poverty Impact of the Global Financial Crisis in
Latin America and the Caribbean -Part II: The role of social protection DRAFT
1/31/13
Margaret Grosh, Anna Fruttero, Maria Laura Oliveri, World Bank
Global Financial Crisis, its Impact on India and the Policy Response Nirupam
Bajpai Working Paper No. 5 July 2011
Social spending in India after the crisis:
The spending on social sector has been increased (US$ 30 billion) in
2010-11, which is 37 percent of the total plan outlay in 2010-11.
Another 25 percent of the plan allocations are devoted to the
development of rural infrastructure.
Education :
allocation for school education increased by 16 percent (US$ 6
billion) in 2009-10. US$ 7 billion in 2010-11.
In addition, States will have access to US$ 792 million for
elementary education for 2010-11.
Health
allocation to Ministry of Health & Family Welfare increased US$ 5
billion for 2010-11.
The measures undertaken by government of India to counter the
effects of the global meltdown on the Indian economy have resulted in
shortfall in revenues and substantial increases in government
expenditures,
India
Key Drivers to Recovery India
- High Government Expenditure, funded largely through
borrowings.
- Increased incomes in rural areas due to greater social
spending and high farm good prices; creation of wage
employment are National Rural Employment Guarantee
Programme (MGNREGA) in the rural areas and Swarna Jayanti
Shahari Rozgar Yojana (SJSRY) in the urban areas.
Food security
Livelihood security
Water security
Ecological Security
Flood risk reduction
World
India: Nearly 40 per cent of female respondents were the primary income
earners in their household, and in other households, women’s income
made crucial contribution to the sustenance of their household income.
The above survey results indicated that the income-earning burden on
women seemed to be intensifying, as 20 per cent of respondents reported
recent retrenchments of household members during the previous six
months, and 40 per cent reported a drastic reduction of income provided
by one or more members of the household in the same period. An
increased number of informal women workers were supporting the entire
family on less income. (Source: Horn, Zoe Elena (2010), ‘Effects of the
global economic crisis on women in the informal economy: research
findings from WIEGO and the Inclusive Cities partners’, Gender &
Development, 18:2, 263–276.)
National Rural Employment Guarantee Programme in India
The main feature of the programme promoting women’s employment and
income opportunities entails:
- one third of jobs should be given to women;
- equal wages for work of equal value;
- requiring the provision of a crèche when there are more than five
women on a programme.
The national average of women’s participation was 49 per cent. In 20
States, women made up at least 30 per cent of participants in 2008. The
programme reduced distressed migration, and improved income and
nutrition in the workers’ households. Due to the wage payment at post
offices or through banks, the programme has introduced some sections of
the community to use formal financial institutions for the first time.
Source: 2009, UN New York: World survey on role of women in
development: Women’s control over economic resources and access to
financial resources, including microcredit, pp. 74–75.
India
http://www.voxeu.org/article/india-s-economic-slowdown-and-what-should-bedone-about-it
Population: 1.22 billion (2011)
Yearly increase: 18 million
Major group: 50% - 0 – 25 years
More than 1.53 billion people by the end of 2030.
Average life expectancy: 68.6 years
Average fertility rate: 2.7 children per woman
Male literacy rate at 75.96% and female at 54.28%
LR 74.04% in 2011 from 65.38% in 2001
About 72.2% of the population lives in some 638,000
villages and the rest 27.8% in about 5,480 towns and
urban agglomerations
Homes without electricity: 25 per cent
In 2011, World Bank reported, 32.7% of Indians below the
international poverty line of US$ 1.25 per day (PPP) while
68.7% live on less than US$ 2 per day.
• India's banks are stable compared to those in richer
countries.
• Bollywood is thriving as movies sell even in hard
times.
• People in India save, not spend their earnings
• Every Indian tries to save for a house even if it
takes 20 years to build own house. Seldom do they
borrow to finance their lifestyle.
• The country’s domestic demand does not slump