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The Financial Crisis: whodunnit? Howard Davies Director, LSE Reserve Bank of New Zealand Wellington 31 July 2009 Who is most to blame for the current financial crisis? % Bank executives 28 Governments 24 Financial regulators 10 The media 2 Central Banks 3 Thatcher and Reagan 1980s deregulatory reforms 11 Consumers for borrowing too much 9 Everyone (democratic society for its collective failure to policy the above) Other 12 1 Source: Thisismoney.co.uk, June 2009 Some usual and unusual suspects •economists - “if anything needs fixing, it’s the sociology of the profession” – Dani Rodrik (Harvard) • business schools – the Guardian •testosterone – Scientific American “above-average testosterone levels may lead to irrational risk-taking”. •video games – Professor Susan Greenfield of Oxford • human greed – Rowan Williams •Jews – 25% of Americans blame then (Boston Review survey) Global current account balances Household debt as a proportion of GDP Source: FSA, ONS, Federal Reserve, Eurodata, Datastream Bank Balance Sheets Large-cap banks’ aggregate assets rose to 43x tangible book equity Source: Silverlake, Capital IQ Global Issuance of Structured Products Source: Silverlake, Lehman Brothers, April 2008 Latest GDP forecasts 6 4 2 0 2007 -2 2008 2009 2010 2011 2012 2013 2014 France Germany Japan UK US -4 -6 -8 Source: IMF World Economic Outlook Database, April 2009 Federal funds rate, actual and counterfactual, (in percent) Source: The Economist, October 18 2007 Resecuritisation Capital Structure Containing Subprime Loans Subprime Mezzanine CDO Containing BBB Subprime Bonds 100% 100% 11% SUPER SENIOR CUMULATIVE LOSSES AAA AAA 8.6% 40% AAA 28% 20% 11% 7% 0% AA AA A BBB Residual/ Equity A 11% 7% BBB 7% Equity 0% Global Committee Structure – A Regulator’s View G-7 (Gov’ts) IMF World Bank (Gov’ts) OECD (Gov’ts) WTO FATF (Money Laundering) IASB (Accounting Financial Stability Forum IAASB (Audit) Bank for International Settlements (Central Banks) G-10 (Central Banks) CGFS Basel (Banking) CPSS IOSCO (Securities) Joint Forum IAIS (Insurance) PIOB IASC Monitoring Group IFIAR (Audit) Source: Adapted with permission from Sloan and Fitzpatrick in Chapter 13, The Structure of International Market Regulation, in Financial Markets and Exchanges Law, Oxford University Press, March 2007 Average of % happy and % satisfied Happiness: comparing countries Income per head ($ per year) 30 0 5000 10000 15000 20000 25000 30000 35000 The Financial Crisis: whodunnit? Howard Davies Director, LSE Reserve Bank of New Zealand Wellington 31 July 2009