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:
In the realm of the real
economy and business
cycle:
The subprime mortgage crisis
in the United States
The „normal” downturn in the
economy, both in the
United States and Europe
The two phenomenons continued in H2/2007 –
H1/2008…
In the realm of financial markets:
The subprime mortgage crisis
transformed into collateralized
debt obligations (CDOs) crisis
The CDOs crisis transformed into
the money market (the
interbank market) crisis
In view of this situation, the
central banks began to inject
liquidity into the financial
system
In the realm of the real economy
and business cycle:
The significant lowering of credit
to the private sector
contributed to deepening of
slowdown in the economic
activity
Throughout H2/2008 the situation worsened
in both of the realms …
In the realm of financial markets:
Despite the interventions of
central banks, the interbank
market crisis transformed into
the crisis of financial
institutions. The depreciation
of the assets in these
institutions balance sheets and
the worsening of their capital
ratios resulted in a series of
bailouts and bankruptcies
(Bear Stearns, Merrill Lynch,
Lehman Brothers)
In the realm of the real economy
and business cycle:
Blockage on world commercial
credit caused the sharp
contraction in world trade.
Consumers making downward
adjustment to their spending,
were behind the weakness of
domestic demand.
The downturn of 2007 developed
into full-grown recession
The double improvement of 2009
In the realm of financial markets:
As the first financial institutions
benefited from injection of
public funds into their capital,
the wholesale financial
markets began to react
favourably. It raised the issue
of how and when the central
banks should withdraw the
exceptional expansionary
measures applied to avoid
catastrophe (exit strategies)
In the realm of the real economy
and business cycle:
The deepness of drop in
economic growth, led the
authorities to design fiscal
policy measures aimed at
stimulating economic activity
(fiscal stimulus policies). At the
end of 2009, practically all
countries were on start of
recovery.
The Paradox of 2010
In the realm of financial markets:
The fiscal stimulus policies raised
doubts about fiscal
sustainability of many
countries. The continuing
increase in return on
government bonds implied
that investors’ confidence had
been undermined. Thus, the
subprime mortgage crisis
transformed finally into fiscal
crisis and was about to
transform into new crisis of
financial institutions. The
rescue once again came from
central banks
In the realm of the real economy
and business cycle:
The worst of the H1/2009
recession seems to be behind
us. The recovery of the global
economy is continuing …