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MELTDOWN
THE GREAT MODERATION
Good luck?
Structure?
Policy?
BERNANKE
 In the United States a deep and liquid
financial system has promoted growth by
effectively allocating capital and has
increased economic resilience by increasing
our ability to share and diversify risks,
both domestically and globally”
 (15 June 2007)
AS % OF GDP
ASSET BUBBLES
“where
assets trade
in high volumes
at prices much higher
than intrinsic value…”
DOTCOM (NASDAQ)
+ ASSET BACKED SECURITIES
+ COMMODITY INDEX
+ HEDGE FUND ASSETS
10x
+ CREDIT DEFAULT SWAPS
58x
2000
$1 TRILLION
2008
$58 TRILLION
(not to scale)
WHAT DROVE THE BUBBLES?
American over-borrowing?
Low interest rates?
Asian over-saving?
THE GLOBAL IMBALANCES
USA
IMPORTS GOODS
CONSUMER DEBT
NATIONAL DEBT
IMPORTS CAPITAL
CHINA
EXPORTS GOODS
SAVINGS
NATIONAL SURPLUS
EXPORTS CAPITAL
US TRADE DEFICIT
+ CHINA DOLLAR RESERVES
2008 = $2 TRILLION
THE GLOBAL IMBALANCES
“Capital now flows
upstream, from
the world’s poor
to the richest
country of all…”
Martin Wolf
A QUICK RECAP
 Low interest rates
 + Oversupply of savings (Asia)
 = Rising debt in USA
 2001: Dotcom bubble bursts
 Asset backed security bubble begins
 Where to find new, high-risk, high-interest
borrowers? …
folks like these…?
…folks like these?
SUBPRIME
 Detroit, Michigan
 2004:
 75% of all new mortgages = subprime
 2007:
 65,000 homes foreclosed
 1/5 homes empty
 “We buy homes for cash”
US HOUSING COLLAPSE
% change y-o-y Case Shiller 10x cities
HOUSING + DOW JONES
HOUSING + DOW + OIL
$147
THE RECKONING OCT 07-08
 $2 TRILLION WRITTEN OFF BY BANKS
 $2 TRILLION MORE TO COME? (IMF)
 $12 TRILLION IN GLOBAL BAILOUTS





(INC CREDIT GUARANTEES)
$2.4+ TRILLION FISCAL STIMULUS
$1 TRILLION IMF LENDING
$32 TRILLION OFF EQUITIES
GLOBAL GDP = $64 TRILLION
GLOBAL FINANCE = $196 TRILLION
WHERE ARE WE NOW?
WHERE ARE WE NOW?
 END OF Q109
 US ECONOMY: -6.1%
 UK ECONOMY: -4%?
 CHINA: growth down from 12% to 6%
 WORLD ECONOMY: -2%?
 WBANK/11 JUNE -3%
 MFR EXPORTS: - 40% yoy Q1
 IMF: 11% chance of global deflation (Jan)
THE STATE
 Rescued freemarket capitalism
 Owns large chunks of banking system
 A generation of moral hazard?
 A generation of fiscal pain?
CHINA
 $580 stimulus, 2/3 from banks
 Micro-level policy change
 Exports down 26% yoy
 Domestic investment up 30%
 End of export-led growth model?
IDEOLOGY?
 Those of us who have looked to the selfinterest of lending institutions to protect
shareholders’ equity, myself especially, are in
a state of shocked disbelief…
I made a mistake in presuming that the
self-interest of banks and others was such
that they were best capable of protecting
their own shareholders”
 Greenspan (23.10.08)
THE DANGERS?
 Debt overhang = global lost decade
 Fiscal stimulus ‘borrows’ 2010 growth
 …or does not happen? (USA)
 Monetary stimulus = competitive
devaluations
 Global trade doesn’t recover: national
“pools” of capital
 UXBs: Germany? Sweden? China?