Causes of the financial crisis

Topics: Subprime mortgage crisis, Monetary policy, United States housing bubble Pages: 23 (1831 words) Published: October 20, 2013
THE FINANCIAL CRISIS
Preparing the grounds: The role of global
macro policies and the poor US regulatory
framework

Introduction

The financial crisis from 2007-2009 is beeing caused at two levels: global macro policies affecting liquidity and a poor regulatory framework

1
The policies affecting liquidity
created a situation like a dam
overfilled with flooding water

2
The regulatory system have
been the faults in the dam,
directing the liquidity into the
real estate market

Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee

Introduction

Global macro policies affecting liquidity played a major role in the built up to the finacial and economic crisis of 2007-2010

1

2

Global macro policies affecting liquidity
•  Global imbalances
•  Loose monetary policy by the Fed

Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee

Introduction

1

2

Global macro policies affecting liquidity
•  Global imbalances
•  Loose monetary policy by the Fed

Source: „The Current Financial Crisis: Causes and Policy Issues“ by Adrian Blundell-Wignall, Paul Atkinson and Se Hoon Lee

Global imbalances

Newly industrialized Asian countries and the oil-exporting Middle East went to surplusses in the 1990‘s, corrospondig with deficits in the industrialized world 1

19891997

•  US current account deficit ≤2%

1995

•  Developing Asia and Western Countries have comparable deficits

1997

•  Asian Crisis as turningpoint. Developing Asia and the newly industrialized Asian group went to surplusses afterwards

2000

•  Increasing commodity prices due to worldwide
economic growth and the dot-com boom
•  Current account surplusses in the oil-exporting Middle East

US deficit increased from 2,0% in 1997 to 4,3% in 2000
Source: „Global Imbalances and the Financial Crisis: Products of Common Causes“ by Maurice Obstfeld and Kenneth Rogoff

2

Global imbalances

Starting in 2004, the global commodity prices increased with an accelerating pace
1

Global Commodity Prices

Quelle: ??

2

Global imbalances

The fast growing current account surpluses in China and increasing commodity prices widened the global imbalance with an accelerating rate 1

2003-07

2

•  China‘s real GDP growth rate increased from 10% to 13% •  Sharply growing external surplus from 3.6% up to 11% by 2007

•  Significant exchange rate manupulations, especially in China beginning •  Accumulation of substantial stocks of US Dollar 2004
•  Accelerating growth of commodity prices
•  Big increase in the current account surpluses of commodity exporters

US current account deficit*:

1989-1997: ≤ 2%
2005-2006: ≈ 6%

Source: „Global Imbalances and the Financial Crisis: Products of Common Causes“ by Maurice Obstfeld and Kenneth Rogoff

Global imbalances

Excessive savings by surplus countries and excessive consumption by deficit countries led to the global imbalance
1

2

Global imbalances from 1995-2009

Comment
Global imbalances =
excessive savings
by surplus countries
(led by China) and
excessive consumption
by deficit countries
(led by USS)

Source: „Global Imbalances and the Financial Crisis: Products of Common Causes“ by Maurice Obstfeld and Kenneth Rogoff

Global imbalances

The low interest environment in the US led to excessive risk taking, hence the demand for MBSs
1

1

2

Excessive saving by surplus countries
•  Built up substantial Dollar reserves by China and the Middle East •  Financial capital flowed into the US

2

3

Excessive consumption by USA
•  Low interest environment
•  Yields on US Treasury Bills unusually low

Excessive risk taking
•  Low interest rates and yields on government bonds encouraged investors to search for higher-yielding assets à demand for MBSs

Source: „Global...
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