Download CENTRAL BANK OF THE REPUBLIC OF TURKEY Global Structure, National Orientation:

CENTRAL BANK OF
THE REPUBLIC OF TURKEY
Global Structure, National Orientation:
International Monetary System and the Crisis
Đbrahim TURHAN
Deputy Governor
Cusco, 13 July 2009
Sources and Dynamics
This time, the bubble occurred in
financial services sector, which has
experienced higher productivity with
higher investment expenditures, along
with the real estate market, similar to the
1990s IT sector boom.
The role of globalization and international
monetary system in each crisis have always
been questioned and discussed.
•
Developing countries debt crises in 1982,
•
The Mexican crisis in 1994
•
The East Asian crisis in 1997
•
The Russian crisis in 1998
700
US Stock Market Indices (1990=100)
Total Capital Inflows, bn $
1200
600
All developing countries
500
East Asia & Pacific
1000
S&P500
400
800
300
600
200
400
Nasdaq
Oct'07
Apr'01
Feb'09
200
100
0
0
Jan'90
1970
1980
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Capital Inflows (bn USD)
Mar'00
Source: WB
2
Sources and Dynamics
Macro-structural Dynamics
•
Monetary policies (Great Moderation)
•
Global imbalances and exchange rate regimes
•
Global integration and interconnectedness
Micro-structural Dynamics
•
Financial innovation,
•
Change in risk taking behaviour and
•
Deficiencies in financial regulation
3
A Perfect Storm
PERFECT
PERFECT STORM:
STORM: Refers
Refers to
to the
the simultaneous
simultaneous occurrence
occurrence of
of weather
weather
events
events which,
which, taken
taken individually,
individually, would
would be
be far
far less
less powerful
powerful than
than the
the storm
storm
resulting
resulting of
of their
their chance
chance combination.
combination. Since
Since the
the non-fiction
non-fiction book
book written
written by
by
Sebastian
Sebastian Junger,
Junger, and
and the
the 2000
2000 movie
movie by
by the
the same
same name,
name, the
the phrase
phrase has
has
gained
gained popularity
popularity and
and grown
grown to
to mean
mean any
any event
event where
where aa combination
combination of
of
circumstances
circumstances will
will aggravate
aggravate aa situation
situation drastically
drastically
THREE
THREE FACTORS
FACTORS CAME
CAME TOGETHER:
TOGETHER:
1.
1. Monetary
Monetary accomodation-Financial
accomodation-Financial engineering
engineering
2.
2. Foreign
Foreign exchange
exchange regimes-Global
regimes-Global imbalances
imbalances
3.
3. Financial
Financial globalization-Reinvesting
globalization-Reinvesting in
in reserve
reserve assets
assets
4
A long period of low interest rates
Main Central Banks’ Policy Rates (%)
US Interest Rates (%)
20
18
16
14
12
10
8
6
4
2
0
7
FED
6
ECB
BOE
BOJ
5
4
3
Yields
Yields
Yields
Yields
Baa
Aaa
Merrill Ly nch high-y ield bond index
10-Year Treasury Bond
2
0.125
1
0 1 .0 0
0 5 .0 0
0 9 .0 0
0 1 .0 1
0 5 .0 1
0 9 .0 1
0 1 .0 2
0 5 .0 2
0 9 .0 2
0 1 .0 3
0 5 .0 3
0 9 .0 3
0 1 .0 4
0 5 .0 4
0 9 .0 4
0 1 .0 5
0 5 .0 5
0 9 .0 5
0 1 .0 6
0 5 .0 6
0 9 .0 6
0 1 .0 7
0 5 .0 7
0 9 .0 7
0 1 .0 8
0 5 .0 8
0 9 .0 8
0 1 .0 9
0 5 .0 9
1/31/2008
1/31/2003
1/31/1998
1/31/1993
1/31/1988
1/31/1983
1/31/1978
0
1
0.5
0.1
Source: Bloomberg
Asian
Asian crisis,
crisis, Russian
Russian crisis
crisis and
and its
its contagion,
contagion, euro
euro adoption
adoption adversely
adversely affected
affected global
global demand.
demand.
Late
Late 1990s,
1990s, Fed’s
Fed’s policy
policy moved
moved to
to aa tighter
tighter stance,
stance, and
and monetary
monetary tightening
tightening ended
ended up
up bursting,
bursting,
the
the dot-com
dot-com bubble
bubble in
in 2000-01.
2000-01. A
A fear
fear of
of deflation
deflation following
following aa series
series of
of above
above mentioned
mentioned crises
crises
between
between 1997-2001,
1997-2001, led
led policymakers
policymakers to
to keep
keep short-term
short-term real
real interest
interest rates
rates low.
low. Abnormally
Abnormally low
low
real
real interest
interest rates:
rates:
•Decreased
•Decreased cost
cost of
of capital
capital and
and supported
supported risk
risk appetite
appetite
•Greased
•Greased the
the wheels
wheels of
of financial
financial engineering
engineering
5
Great Moderation
Benign Macroeconomic Conditions
Source: IMF
Source: IMF
Improved
Improved policies,
policies, which
which stabilized
stabilized inflation
inflation and
and better
better anchored
anchored inflation
inflation expectations,
expectations, are
are
an
an important
important reason
reason for
for loose
loose monetary
monetary policy
policy amidst
amidst high
high growth;
growth; structural
structural changes
changes in
in
the
the economy
economy such
such as
as deregulation,
deregulation, improved
improved inventory
inventory control
control methods,
methods, and
and better
better riskrisksharing
sharing in
in the
the financial
financial markets
markets also
also contributed
contributed
6
Global Saving, Investment and Current Accounts
Advanced Economies
Source: IMF
Emerging and Developing Economies
Source: IMF
••
Various
Various factors
factors contributed
contributed to
to this
this so-called
so-called “savings
“savings glut.”
glut.” In
In emerging
emerging Asia,
Asia, the
the main
main
contributor
contributor was
was aa steady
steady increase
increase in
in private
private savings.
savings.
••
High
High levels
levels of
of corporate
corporate saving
saving and
and strong
strong precautionary
precautionary motives
motives for
for savings
savings in
in the
the
absence
absence of
of aa well-working
well-working system
system of
of social
social insurance,
insurance, rapid
rapid rise
rise in
in public
public savings
savings in
in Middle
Middle
Eastern
Eastern oil
oil exporters
exporters as
as aa surge
surge in
in oil
oil prices,
prices, general
general trend
trend towards
towards higher
higher public
public savings
savings
as
as governments
governments took
took advantage
advantage of
of strong
strong revenue
revenue growth
growth to
to consolidate
consolidate fiscal
fiscal positions
positions
7
Global Imbalances and Exchange Rate Regimes
Current Account Balance of Emerging
Economies (bn $)
Net Capital Flows (bn $)
1000
800
800
600
700
400
600
200
500
0
400
-200
US
-400
UK
-600
Euro Area
-800
EM
300
200
100
0
Source: IMF
••
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
-1000
-100
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: IMF
The
The high
high level
level of
of the
the saving
saving rate
rate in
in the
the emerging
emerging economies
economies and
and its
its low
low level
level in
in the
the
United
United States
States were
were associated
associated with
with the
the large
large current
current account
account deficits
deficits and
and surpluses
surpluses
resulting
resulting in
in capital
capital flows
flows from
from emerging
emerging economies
economies to
to developed
developed economies.
economies.
••
Developing
Developing countries
countries hold
hold massive
massive dollar
dollar reserves
reserves in
in return
return of
of their
their exports
exports and
and
reinvest
reinvest these
these reserves
reserves into
into US
US financial
financial markets.
markets.
→
→ Breakdown
Breakdown in
in macroeconomic
macroeconomic adjustment
adjustment mechanisms
mechanisms
8
Asset Price Boom
Commodity Prices(03.01.2006=0)
Monetary Accomodation
160
140
Agriculture
120
100
Energy
Metal
80
60
40
20
0
-20
-40
0 7 .0 9
0 4 .0 9
0 1 .0 9
1 0 .0 8
0 7 .0 8
0 4 .0 8
0 1 .0 8
1 0 .0 7
0 7 .0 7
0 4 .0 7
0 1 .0 7
1 0 .0 6
0 7 .0 6
0 4 .0 6
0 1 .0 6
-60
Source: Office of Federal Housing (OFHEO)
Source: Bloomberg
••
First,
First, low
low interest
interest rates
rates led
led to
to aa credit
credit boom
boom in
in major
major economies.
economies.
••
Second,
Second, low
low interest
interest rates
rates were
were the
the main
main reason
reason to
to drive
drive up
up asset
asset prices.
prices. Housing
Housing boom
boom
and
and continuous
continuous rises
rises in
in stock
stock markets
markets are
are the
the main
main examples.
examples.
9
What makes the difference: Leverage
Ratio of Debt to GDP in Advanced Economies
(In percent, GDP-weighted, 1987 = 100)
300
280
Financial institutions
Households
Nonfinancial corporations
Government
260
240
220
200
180
160
140
120
2008q1
2006q3
2005q1
2003q3
2002q1
2000q3
1999q1
1997q3
1996q1
1994q3
1993q1
1991q3
1990q1
1988q3
1987q1
100
Source: IMF
••
Most
Most importantly,
importantly, low
low interest
interest rate
rate environment
environment has
has changed
changed the
the risk
risk taking
taking behaviour
behaviour of
of
the
the financial
financial institutions
institutions and
and laid
laid down
down the
the foundations
foundations of
of the
the current
current crisis.
crisis.
••
For
For the
the sake
sake of
of higher
higher returns,
returns, financial
financial institutions
institutions have
have distorted
distorted their
their risk
risk perception,
perception,
and
and the
the risk
risk management
management strategies
strategies in
in the
the financial
financial sector
sector were
were totally
totally changed.
changed. This
This also
also
led
led to
to acceleration
acceleration of
of financial
financial innovation.
innovation.
10
Is the History Simply Repeating Itself?
Triffin Dilemma
• The use of a national currency as global reserve currency leads to a tension
between national monetary policy and global monetary policy
e.g. 1982 Third World Debt Crisis
Gambling with the Future or Adaptive Behavior
• Dutch Tulipmania (1634-37)
The immense expansion of commerce [in the Netherlands] encouraged gambling
upon profits to be made from speculation in all kinds of products
• Great Depression
“Buying now and paying later” or “telescope the future into the present”
Between 1925 and 1929 the total amount of outstanding instalment credit more
than doubled, by 1928, with over 21 million cars on the roads, there was roughly
one car for every six Americans
→ car, steel and metal, fuel, textile
→ construction industry grew nearly 50%: house (suburbs), hotels, factories
11
Micro-structural Dynamics
Financial innovation
•As massive capital inflows to the US had been financing its current account deficits, financial
institutions intermediated the vast liquidity into consumer credit and mortgages, which have converted
into mortgage-backed securities (MBSs) and CDOs.
Change in risk taking behaviours
•Fast growing financial innovation in instruments, such as CDSs named as an insurance against risk,
and the regulatory framework of the financial system caused deterioration in risk perception of the
market players. As optimism in financial sector prevailed due to ongoing higher global growth,
investors depended too much on credit ratings in risk evaluations, rather than deeply examining
themselves the nature of assets they bought. No direct monitoring between lender and borrower,
misallocation of loanable funds.
Deficiencies in financial regulation
•Regulation arbitrage opportunities in terms of (1) countries, and (2) instruments
12
Monetary Policy
FED Funds Rate and Taylor Rule Path
US House Prices (yoy, % change)
14
12
10
8
6
4
2
0
-2
-4
Source: Taylor (2008)
2009q1
2008q3
2008q1
2007q3
2007q1
2006q3
2006q1
2005q3
2005q1
2004q3
2004q1
2003q3
2003q1
2002q3
2002q1
2001q3
2001q1
2000q3
2000q1
-6
Source: Office of Federal Housing (OFHEO)
Taylor
Taylor (2008)
(2008) argues
argues that
that monetary
monetary policy
policy was
was too
too loose
loose in
in the
the United
United States
States over
over 2002–04
2002–04 as
as
interest
interest rates
rates were
were lowered
lowered further
further even
even as
as the
the economy
economy seemed
seemed to
to be
be turning
turning around
around after
after the
the
“dot-com”
“dot-com” recession
recession of
of 2001.
2001.
However;
However; the
the optimality
optimality of
of the
the imposed
imposed rule
rule is
is to
to be
be questioned
questioned and
and
Between
Between 2002–04
2002–04 deflationary
deflationary pressures
pressures were
were greater
greater than
than conventional
conventional output
output gap
gap estimates,
estimates,
natural
natural rate
rate of
of interest
interest is
is uncertain
uncertain and
and subject
subject to
to debate.
debate.
13
Monetary Policy and Credit Boom
Real House Prices and Excess Credit
Real House Price and Taylor Rule Residuals
Source: IMF
Source:IMF
Taylor
Taylor rule
rule residuals
residuals for
for 17
17 advanced
advanced economies
economies and
and changes
changes in
in real
real house
house prices
prices over
over the
the
period
period 2003:1
2003:1 to
to 2006:4
2006:4 show
show that
that looser
looser monetary
monetary policy
policy is
is associated
associated with
with larger
larger house
house price
price
gains
gains but
but the
the relationship
relationship is
is weak.
weak. However
However AUS,
AUS, FIN,
FIN, GBR,
GBR, SWE,
SWE, NZL
NZL excluded,
excluded, itit is
is more
more
significant.
significant.
There
There is
is aa very
very close
close relationship
relationship between
between house
house prices
prices and
and the
the growth
growth of
of money
money and
and of
of private
private
sector
sector credit.
credit. More
More evidence
evidence b/w
b/w monetary
monetary policy
policy and
and asset
asset prices
prices through
through liquidity
liquidity and
and credit
credit
14
Shortfalls of Domestic Monetary Policies
UNCONTROLLABLE
UNCONTROLLABLE FACTORS
FACTORS
1.
1. Globalization
Globalization →
→ Capital
Capital flows
flows may
may weaken
weaken the
the effects
effects of
of
domestic
domestic monetary
monetary policy
policy
2.
2. Financial
Financial Innovation
Innovation →
→ Less
Less effects
effects of
of MP
MP on
on structured
structured
products,
products, private
private (outside)
(outside) money
money
• Globalization led to a decline in the sensitivity of inflation to domestic output
gaps and thus domestic monetary policy
• Globalization reduced the scope for individual central banks to control
domestic interest rates and so stabilize both inflation and output.
• Effect of the interest rate channel on overall economic activity was
diminished by greater trade integration as changes in domestic demand are
offset by induced changes in imports.
15
Global Crisis, Global Solution
MAIN CONFLICT/TENSION ARISES FROM THE DUALITY
CRISIS: GLOBAL
CRISIS RESOLUTION MECHANISMS: NATIONAL
TWO
TWO LAYERS
LAYERS CONCEPTUALIZATION
CONCEPTUALIZATION
1.
1. Globalization
Globalization →
→ global
global infrastructure.
infrastructure.
2.
2. Mechanisms
Mechanisms →
→ national
national superstructure
superstructure
16
Global Crisis, Global Solution
Impossible Trinity of Economic Policies
First
First introduced
introduced by,
by, Fleming
Fleming (1962)
(1962) and
and Mundell
Mundell (1963)
(1963)
Developed
Developed and
and applied
applied to
to international
international trade
trade theory
theory by
by Obstfeld
Obstfeld
and
and Taylor
Taylor (1998)
(1998)
Frankel
Frankel (1999)
(1999) systematized
systematized and
and baptized
baptized as
as “impossible
“impossible
trinity”
trinity” or
or “trilemma”
“trilemma”
Under
Under free
free capital
capital movements
movements
Either
Either interest
interest rate
rate policy
policy (independent
(independent monetary
monetary policy)
policy) or
or
exchange
exchange rate
rate policy
policy (fixed
(fixed FX
FX regime)
regime) is
is feasible
feasible
17
Global Crisis, Global Solution
Impossible Trinity of Economic Policies
Rodrik
Rodrik (Feasible
(Feasible Globalizations,
Globalizations, 2002)
2002) established
established aa similar
similar
methodology
methodology in
in order
order to
to discuss
discuss the
the problematic
problematic structure
structure
observed
observed in
in global
global economic
economic order.
order.
Under
Under the
the global
global economic
economic integration
integration
ItIt is
is not
not possible
possible to
to have
have both
both
full
full national
national independence/sovereignty
independence/sovereignty and
and
democratic
democratic domestic
domestic policies
policies
18
Conclusions
Acceleration of US productivity and the increase in household net worth mid1990s, led an upward shift in private sector propensities to invest and to
consume. The US monetary policy stance generally accommodated this
development.
Expansionary monetary (and fiscal) stance sustained US domestic demand,
contributed to a widening of the external imbalance, compensated by an imbalance of
opposite sign in the external positions of major emerging economies
A number of countries that pegged their currencies to the US dollar
accumulated very substantial official reserves. The investment of these in US
Treasury paper contributed to lower long-term interest rates.
Low interest rates triggered a search for yield which, by squeezing risk
premiums, tended to make financial conditions even more favourable for a broad
range of borrowers. Low perceived risk, abundant liquidity and credit expansion,
as well as regulatory failures in some markets, helped feed the asset price
bubble.
19
Conclusions
Not a happy end: Increased global demand and commodity supply constraints
caused a global inflation, monetary policies were gradually tightened. At that
point, the large risk exposures that had accumulated in the financial system
suddenly became apparent, precipitating the turmoil.
Credit and money markets crashed. Contrary to previous expectations (i.e. a hard
landing for the US economy originating from a correction of unsustainable US current
account imbalance, through a disorderly dollar depreciation) USD appreciated due to
huge develeraging efforts all over the world.
The task of monetary policy in this context is problematic. Asset price cycles
tend to happen with large changes in indebtedness and increase financial
vulnerabilities. Whether and how monetary policy should react to asset price
misalignments and financial imbalances? Whether central banks must and can
target, with just a single policy instrument, more than just inflation?
20
Conclusions
• The policy issues in national level caused and will continue to cause crossborder financial and
macroeconomic spillovers in an integrated world
economy.
•Neither national nor international measures or institutions are enough.
• The concept of “international framework” should be substituted by “global
framework”. The solutions should be redesigned within the globalized risk
environment.
• The impossible trinity of global economic order should be addressed.
• Since the financial, economic and political globalisation is irreversible, the
legislation of globalization should be first agenda item. Legitimate and
supranational mechanisms should be established to monitor the global benefits
of the national states.
21
CENTRAL BANK OF
THE REPUBLIC OF TURKEY
Global Structure, National Orientation:
International Monetary System and the Crisis
Đbrahim TURHAN
Deputy Governor
Cusco, 13 July 2009