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The Financial and Economic crisis of 2008

Causes; responses; and breeding the next,fear and greed, conspire in an environment of permissive macroeconomic conditions, economic policies, and regulatory framework, to break down confidence and trust, producing financial and economic crisis.


John Llewellyn


1 Day Course

Course Date - 22nd February 2019 / 10am-5pm

Course Price: £275.00

Course Location:

Birkbeck University, Malet Street, Bloomsbury, London WC1E 7HX Room 745


Introduction


Fundamentally, this is a story of how two basic human motivators, fear and greed, conspire in an environment of permissive macroeconomic conditions, economic policies, and regulatory framework, to break down confidence and trust, producing financial and economic crisis.

Understanding the principal mechanisms is not easy, because such crises are generally systemic, with multiple causes that interact.

Looking ahead, it seems evident that the ground is being laid for another – albeit different ‒ crisis.

Causes of the 2008 crisis


1. Macroeconomic backdrop – a story of imbalances

1.1. US fiscal deficit

1.2. US property prices

1.3. US household debt

1.4. US current account deficit

1.5. A welcome boost to the rest of the world

1.6. What happens to economies that consume beyond their means

1.7. The message of Damocles ‒ developing countries and the US

2. The passage to crisis

2.1. The search for yield

2.2. Investment-bank borrowing on capital markets

2.3. Mortgage mis-selling

2.4. Creation of new exotic instruments

2.5. Emergence of the shadow-banking sector

2.6. Other countries join in

2.7. The collapse of confidence

3. To the Queen’s question: why did so few people realise what was happening?

3.1. Lop-sided incentive structures

3.2. Poor corporate risk analysis

3.3. Undue reliance on VAR models

3.4. Lack of an appropriate statistical framework

3.5. Unwillingness of management to act

3.6. Poor corporate governance

3.7. Grade inflation by the credit agencies

3.8. Inadequate bank capital ratios

3.9. Pro-cyclical mark-to-market valuations

3.10. Defective understanding of corporate self-interest expounded by Alan Greenspan

3.11. Competitive pressures

Lunch break


Policy responses


4. The ideal policy response(s)

4.1. Coordinated and dramatic interest rate cuts

4.2. Discretionary fiscal stimulus

4.3. Guaranteeing of all bank deposits

4.4. Guaranteeing that no major bank would be allowed to fail

4.5. Removing compromised assets from the balance sheets

4.6. Provision of support to any important financial market that ceased to function

4.7. Making short-term loans directly to corporations

4.8. Easing the repayment terms on existing mortgage holders

4.9. Perhaps going to even more unusual lengths

5. The policy response in practice

Only some of the needed policy responses were enacted. The one encouraging feature at the time: policymakers seemed determined to avoid the traps of protectionism, bilateralism, debt default, and competitive devaluation of the 1930s.

Regulatory policy

Considerable progress has been made on the regulatory front.

5.1. Regulatory authorities and macroprudential policy

5.2. Conditions for taking over distressed banks

5.3. Capital adequacy ratios

5.4. Cyclicality of liquidity policy

5.5. Credit Rating Agencies

5.6. Off-balance-sheet activities

5.7. Exit conditions

Macroeconomic policy

5.8. Arguably the Fed saved the world

5.8.1. Saving the money market

5.8.2. International swap lines

5.9. Lop-sidedness:

5.9.1. Fiscal and monetary asymmetries within countries

5.9.2. Asymmetries across countries

5.10. Identifying bubbles


The next crisis already looms


6. The macro breeding ground

6.1. Burgeoning macroeconomic imbalances

6.2. Macroeconomic variables departing from historical relationships

6.2.1. Debt is at an all-time high

6.3. Financial conditions remain very easy

6.4. Irrational exuberance evident

7. Financial innovation and regulation

7.1. Greed

7.2. Banks ‒ especially Europe’s ‘doom loop’

7.3. Policy-course reversal

8. Interconnectedness

8.1. Excessive focus on banks and investment banks

8.2. The shadow banking sector

8.3. Potential demise of swap lines


Conclusions


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