Roots of the Current Crisis and its Implications

Transcription

1 Roots of the Current and its Implications Department of Economics School of Business Administration Fort Lewis College Presented at the June 23, 2009

2 Overview

3 Short Run: Scenario One Consider... Commercial real estate boom Banking deregulation risky assets and loans Asset bubble Lend long borrow short Inflation short term interest rates Inept banking supervision (regulators ) Forbearance: keep insolvent banks open Central bank gave money to banks

4 Short Run: Scenario 2 or... Deregulation Risky loans Asset bubble Real estate bubble Bank capital deposits defaults lending Forbearance: keep insolvent banks open assets Central bank gave money to banks

5 Short Run Scenario One US S&L Recession Resolution Trust Corporation : $124b taxpayer money 750 failures

6 Short Run Scenario One US S&L Recession Resolution Trust Corporation : $124b taxpayer money 750 failures Scenario 2 Japanese Financial : ish Ten year recession RGDP 0.9% and deflation Japan $440b in taxpayer money Greater banking regulations but only currency to appreciate against the dollar recently

7 Housing Market GS1 = One Year Yield, FEDFUNDS = FFR, MORTG = 30 Year Fixed Mortgage, HOUST(R) = Housing Starts

8 State Housing Price: Bubble? FLSTHPI = Florida, CASTHPI = California, COSTHPI = Colorado, MISTHPI=Michigan

9 Mortgages and Foreclosure

10 Excess Reserves and Non-Performing Loans

11 Short Run This is what will concern us over the next months Output Gap, Unemployment, Inflation (Deflation?)

12 Short Run: Output Gap The Output Gap

13 Short Run: Inflation and Unemployment CPIAUCNS = Inflation, UNRATE = Unemployment Rate

14 Short Run: Consumer Behavior Home equity prices

15 Short Run: Consumer Behavior Home equity prices Credit Card

16 Short Run: Consumer Behavior Home equity prices Credit Card Borrowing

17 Short Run: Consumer Behavior Home equity prices Credit Card Borrowing Household spending

18 Short Run: Consumer Behavior Debt TDSP(L) = Household Debt Service Payments as a Percent of Disposable Personal Income, DSPI(R) = Disposable Personal Income, CMDEBT(R) = Household Sector: Liabilites

19 Short Run: Consumer Behavior Consumption Consumption Disposable Income Ratio (and 12 mo. MA)

20 Short Run: Consumer Behavior and Retail Sales Michigan Index of Consumer Sentiment and Retail Sales UMCSENT = Consumer Sentiment, RRSFS(r) = Retail Sales

21 Food Stamps Food stamp claims and percent change to July 2009 Date 7/2003 7/2007 6/2008 7/2008 7/2009 Number Claims (mil) Population (mil) Percent Population 7.58% 8.81% 9.41% 9.53% 10.98% Percent Change 31.82% 9.10% 1.30% 16.7% Annual Average 6.36% 1.30% Estimated

22 Jobs Gain/Loss PAYEMS(L) = Change Nonfarm Payrolls, OUTNFB(R), % Change Output Nonfarm Business Sector

23 Short Run: Industrial Production, Productivity, Labor Participation Industrial Production & Manufacturing Productivity: Annual % Change OPHMFG(R) = Manufacturing Output per Hour, INDPRO(L) = Industrial Production, CIVPART = Labor Participation Rate

24 Short Run: Rest of the World Figure: World GDP Growth: EZ, UK, Mexico, Canada, Japan, Australia

25 Inflation

26 Unemployment

27 Composition

28 Two questions:

29 Two questions: With variety of differences across cities, how do we design domestic economic policy?

30 Two questions: With variety of differences across cities, how do we design domestic economic policy? What about across countries?

31 Allows for free(r) movement of paper and real assets across borders The less advertised part of Globalization Not to be confused with free trade: tariffs, subsidies, non-tariff barriers Prerequisite for entry into many global economic entities: EU, NAFTA, WTO, etc. Often accompanied by a fixed or managed float exchange rate regime inflation stabilization

32 : Benefits Access to financial markets loans, grants to be used for creation of real (productive) capital Access to foreign investors Domestic access to foreign capital markets Lower domestic interest rates Economic stabilization: exchange rates, etc. Gains in foreign currency reserves

33 : Costs May require painful economic reforms Extraction of rents by... Economic de-stabilization: inflation? Rapid devestment of foreign and domestic holdings of domestic assets: currency crisis and/or contagion loss of confidence and economy collapses

34 Deregulation Reduces restrictions in domestic financial markets Increases competition/innovation in financial markets lower interest rates May increase risk

35 US and EZ US: Identical Monetary policy, centralized fiscal policy

36 US and EZ US: Identical Monetary policy, centralized fiscal policy EZ: Identical Monetary policy, de-centralized fiscal policy Countries, different... economic policy risk rates objective or loss functions Single EZ fiscal authority?

37 UK: German Re-Unification UK Bank Lending Rate and $/

38 Sweden: German Re-Unification Swedish Overnight Interest Rates

39 Mexican Peso

40 SE Asian

41 : n Precaution Desire to join EZ Price stability: managed float exchange rate requires foreign currency reserves Removal of many capital restrictions & financial deregulation Wary of currency crisis Restrictions on foreign currency holdings: 51% of all foreign currency inflows held in Central Bank Vault protect kuna

42 : n Precaution : under pressure, difficult to get foreign loans, foreign currency reserves running low (out?), IMF loans to Eastern Europe What if can t repay foreign loans? Foreign Debt - GDP ratio about 90% Implications outside of : Italian, Austrian Banks (Swedish banks in the Baltic countries): Too big to fail or too small to care? House of cards

43 However Some lessons may have been learned In, the 51% rule In international community: less taste for financial collapse (again) economic and geo-political factors

44 However Some lessons may have been learned In, the 51% rule In international community: less taste for financial collapse (again) economic and geo-political factors On the other hand... Last year s oil price jump global commodity prices though short term, exacerbated current crisis