The Global Financial Crisis

By

Eugene, Natalia

Jessica & Rikke

The news of

September 15 2008

Then it was Obama's turn

Obama's strategy

U.S.:

• Bail out - with demands
• Rating Agencies
• Regulation & deregulation

90%

1%

China:

• A succesful solution already
• perhaps global example

• tailor it to own specific

situation

China vs. USA

The

Global

Financial

Crisis

References

Caren, B & Lambert, L 2009, "Obama vows to spend stimulus money wisely", Reuters, viewed 31.10.2012, <http://uk.reuters.com/article/2009/02/20/obama-economy-idUKN2044566820090220>

Goldman, R & Tapper, J 2009, "Obama Pushes Economic Plan, Saying It Can't Wait", ABC News, viewed 31.12.2012, <http://abcnews.go.com/Business/Business/story?id=6568008&page=1#.UJJnA8WyeSp>

M.C.K. 2012, 'America's bank bailouts: They did not have to be so unfair', The Economist, 31.10.2012, viewed 31.10.2012, <http://www.economist.com/blogs/freeexchange/2012/10/americas-bank-bailouts>

Taylor, JB 2009, ‘The Financial Crisis and the Policy Responses: An Empirical Analysis of What Went Wrong’, NBER Working Paper, no. 14631, the National Bureau of Economic Research, viewed 27.10.2012, <http://www.nber.org/papers/w14631>

Thornton, DL 2009, ‘What the LIBOR-OIS Spread Says’, Economic Synopses, no. 24, Federal Reserve Bank of St. Louis, viewed 27.10.12, <http://research.stlouisfed.org/publications/es/09/ES0924.pdf>

Contents

Introduction

Conclusion

• Subprime crisis
• Architechts of

Financial deregulation

Reactions in USA

and China

Discussion

Theory

Alternative

approaches

• Predictability
• Avoidability
• The financialisation of

the economy the culprit?

China vs. USA

Conclusion

Economic nationalism:

-Predictable?

• came about because of the lapse in domestic control of the economy, labour and capital formation

• blame globalisation as they question the benefits of unrestricted free trade and are instead for the imposition of tariffs and other restrictions on the movement of labour, goods and capital

• believe that the crisis occurred by allowing economic activity to become more important than political goals and objectives

Economic nationalism:-Avoidable?

• lends itself to nationalism and a protectionist trade policy

• nations come up against issues such as putting themselves in danger of international security when they don’t cooperate with other nations

• become segregated from economic prosperity in the globalised world

GLOBAL FINANCIAL CRISIS

G

Keynesianism: Predictable?

- Worst financial crisis

- Liquidity crisis

- American housing market

- Collapse of large financial institutions,  bailout of banks, and downturns in stock markets

- Governments and Central Banks interventions

- Global recession and European sovereign-debt crisis

• believe that productive activity is influenced by a host of factorssometimes behaves erratically, affecting production, employment and inflation

predicted that the private sector’s decisions would have led to inefficient macroeconomic outcomesrequire active policy responses by the public sector•monetary policy actions by the central bank

•fiscal policy actions by the government to stabilize output over the business cycle

U. S. MACROECONOMIC AND REAL STATE CONTEXT

Keynesianism: Avoidable?

SUBPRIME MORTGAGES

Liberalism and Neo-liberalism:

• advocate a mixed economy
• private sector with a role of for government intervention during recessions
• method has been effective for fixing crises for a few years, but has soon led to severe inflation which is one of the inherent dangers of the Keynesian system

securitized

BONDS from the financial market (CDO and MBS)

-Free trade, open markets, privatisation and deregulation, and the enhancement of the role of the private sector in society

-Certain bankers and corporations manipulating the system to achieve their own ends, which then led to or created the sub-prime crisis, which is seen as the root of the GFC

-The financialisation of the economy

• resurgence in Keynesian thought
• many governments after the GFC offered Keynesian-like stimulus packages
• created possibilities for scamming which could not be regulated, and didn’t actually help several of them from stagnating soon after

• Increasing role of financial motives, markets, actors and institutions in the operation of the domestic and international economies
• The financial sector has become more important than the “real” economy
• Increased income inequality, unemployment and wage stagnation

Liberalism and Neo-liberalism:

- Most recent economic systems, and thus have been blamed for the crisis, but could it have been predicted? Or avoided?

Neo-liberalism nationalism:

• World system is one of interdependence: positive sum game
• Self-interest: engaged in production, exchange and consumption, economic growth will be beneficial for all
• Trade based upon the goal of free trade
• Money flowing in and out of most countries
• Open markets growth and wealth will be enhanced, and firms will disseminate material wealth across the globe
• State should not be an economic actor
• brings politics, distorts benefits and adds costs

-Group Discussion

• Would a combination of neo-liberalism and nationalism be an economic system worth considering in the future?

Liberalism and Neo-liberalism:

-Free-market policy of US labour and product markets

• more competitive than their more-regulated European counterparts

-Through globalisation and foreign investment, they claim that this economic growth leads to other social benefits

-Ideals have become so entrenched in the economic system that a new approach will not be indoctrinated

THE SUBPRIME CRISIS

HOUSE PRICES

INTEREST RATES

POSSIBLE CAUSES AND ARCHITECTS OF THE CRISIS

Why did it happen?

1- GLOBAL IMBALANCES (USA and China)

2- Accommodative MONETARY POLICY from 2001

3- EXCESSIVE BORROWING and RISK TAKING by the household and Wall Street

4- World's high DEPENDENCY ON WALL STREET

5- BAD MANAGEMENT OF RISKS by the Credit-Rating Agencies

6- Government policy of ECONOMY DEREGULATION

7-HUMAN NATURAL GREED

Did governments react like Liberalism predicted?

of the gains in GDP in the past 4 years

Alternative solutions

More than

China:

Neoliberalism

U.S.:

1. Yes

2. Amending that

2008 Global Financial Crisis

The theoretical aspect

TARP?

- Troubled Asset

Relief Program

No!

Tuesday September 23:

TARP of $700 billion

Neoliberal

approach

Friday September 19:

Proposed TARP

Monday September 15: Liberal solution

"My turn, Bush"

Create aditional measures to stabilise financial system + freeing up credit

• Buying toxic bank assets
• Expand federal consumer loan program
• Remains of TARP

The crisis

prolonged + worsened x 4

"No"

Chain reaction

Flight of investors

Case study 2

Case study 1

The American

Reaction

The Chinese

Reaction

photo credit Nasa / Goddard Space Flight Center / Reto Stöckli

The End