Transcript Recession 2009 Global Implications

Dr Maurice Mullard
Lecture 10
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Financial crisis that started in America with
sub prime mortgages
Savings glut thesis on global imbalances
China Germany Japan high export surpluses
US UK France deficit countries
Alan Greenspan low interest rates after 9/11
Compare with Depression of 1929 – 1931
Consumer debt
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Differences trigger events from structural
flaws
Financial Sector Banks assets liabilities capital
and liquidity
Intermiedary role deposits short term and
long term exposure
Leverage
Thin capital and liquidity
Run on Banks
Gorton on repo markets and investment
banks
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Credit crunch 20 07 limited to sub prime
mortgages total1 trillion dollars not sufficient
to create global crisis
Finance Securities Derivatives and Credit
Default Swaps
640 trillion dollars 10 times global GDP
Bear Stearns March 2008 and JP Morgan
Lehman bankruptcy September 2008
AIG
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Innovation and New Instruments
Derivatives Market now worth 600 trillion
dollars keep in mind world GDP is 65 trillion
dollars
CDS Collatarised default swaps insurance for
a fee insured pays insurer against default of
loans worth 47 trillion dollars
Argument of distributing risks financial
modelling started at JB Morgan
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CDS Collaterised Debt Obligation contained
tranches of loans mortgage backed securities
on home loans and also commercial
properties
CDS sliced and diced into tranches according
to risk and default
Senior seen as safest Mazzini and high risk
Mainly held at Lehmann and Bear Stearns
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History of House Prices house prices slowing
down in 2007 first time in history CMS
started to lose value worry about defaults
Bear Stearns take over by JB Morgan share
value fell from 170 dollars to 2 dollars
Lehmann Brothers allowed to go into
bankruptcy watershed
AIG rescue
Financials system described as falling off a
cliff Buffet derivatives weapons of mass
destruction
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Idea of Household Net worth
Estimate US household net worth about 103
trillion dollars net debt 50 trillion dollars
US households debt 15 per cent of income
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Lessons from History Financial Panics
Bank runs and insurance
Loss of confidence
30 year flood syndrome or a repeat of history
Unable to forecast the bubble
Reluctance to increase interest rates
The Savings Glut
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Bank of England monetary policy target
inflation FSA responsible for Banks stress
tests
De regulation Thatcher Revolution continued
Labour Government light touch on regulation
Finance important to UK GDP expansion of
hedge funds and Special Investment Vehicles
SIV beyond supervision not defined as Banks
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More Powers to Bank of England deal with
system failure Banks too big to fail
competition authority
Future role of FSA
Bank of England MPC and New Finance
Committee
Beishoff Report Adair Turner Report
HC Reports on Banking Crisis
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Difference between Commercial and
Investment Banks how to protect individual
savings account
Banks that are too large to fail a moral hazard
Shadow Banking bring into the formal system
of regulation
Hedge Funds
Transparency and risk
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More restrictions on Shadow Banking Sector
Hedge Funds
Special Investment Vehicles
German criticisms of US and UK Model
Resistance from City of London
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Oversight and Regulatory authority
Tighter controls of regulators stop regulatory
arbitrage
OTC to be standardised through central
clearing system more transparency
Consumer protection