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A ringside view of the economic crisis David Fenton, Senior Economist March 2012. Was the Greenspan “put” a shot in the foot?. Policy rates, UK and US. Source: Datastream. Goodbye dot-com bubble, hello housing bubble. Equity prices, house prices. Source: Datastream. - PowerPoint PPT Presentation
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A ringside view of the economic crisis
David Fenton, Senior Economist
March 2012
Slide 2
Was the Greenspan “put” a shot in the foot?Policy rates, UK and US
Source: Datastream
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007
BoE Fed Reserve ECB
Slide 3
Goodbye dot-com bubble, hello housing bubble
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
Ma
r-97
Ma
r-98
Ma
r-99
Ma
r-00
Ma
r-01
Ma
r-02
Ma
r-03
Ma
r-04
Ma
r-05
Ma
r-06
Ma
r-07
Ma
r-08
Ma
r-09
Ma
r-10
Ma
r-11
Ma
r-12
100
120
140
160
180
200
220Case-Shiller 20-city Comp Index
RHSNasdaq Comp LHS
Equity prices, house prices
Source: Datastream
Slide 4
(Taylor) rules are made to be broken?
Federal funds rate (%)
Source: “Housing and monetary policy”, Jackson Hole conference 2007
Housing starts (millions of units)
Slide 5
Signs of a property bubble – difficult to miss
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Comm prop yield
10y gilt yield
Normal(c200 bps)
Nuts(inverted!)
Nasty!(c400bps)
Commercial property and gilt yields, %
Source: Datastream, IPD
Slide 6
The Great Moderation made us complacent
0%
1%
2%
3%
4%
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
US UK
GDP % growth, standard deviation
Source: Datastream, RBS calcs
Slide 7
The price of risk fell sharply
RBS net interest margin (%)
Source: Bloomberg
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Slide 8
The loan to deposit ratio shot upRBS loan to deposit ratio (%)
Source: Bloomberg
97
104
124
147152
134
60
70
80
90
100
110
120
130
140
150
160
2000 2002 2004 2006 2008 2010
Slide 9
We saw it coming...sort of
“Unlike previous scenarios, the main source of the economic downturn is in the banking system...it is the resultant ‘credit crunch’ that propagates this initial shock, and turns recession into depression.”
RBS stress scenario, July 2006
Slide 10
Strange things afoot in the inter-bank marketSpread between 3m LIBOR and bank rate (bps)
Source: Datastream
-50
0
50
100
150
200
250
300
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Slide 11
Did we really think Greece was like Germany?10y bond yields (%)
Source: Datastream
0
5
10
15
20
25
1995 1997 1999 2001 2003 2005 2007 2009 2011
Germany Italy Spain Ireland Portugal Greece
36%LehmanBrothers
fails
Greece joins euro
Birth of
euro
Slide 12
Where do we from here?
Goldilocks Returns
“V”
Deflation“L”
Not much spare
capacity
Strong demand
Weak demand
Lots of spare
capacity
Return of macro instability
“W”
Slow Grind Higher
“U”
Slide 13
The long road to recovery
90
95
100
105
110
115
120
1 2 3 4 5 6 7
Years from start of recession
1990s recession/recovery
Current recession/recovery
Slide 14
Fiscal rebalancing: a good start, but still far to go
0.0
2.0
4.0
6.0
8.0
10.0
12.0
2001-02 2003-04 2005-06 2007-08 2009-10 2011-12* 2013-14 2015-16
Net borrowing, % GDP
Source: HM Treasury
Slide 15
“Plan A” requires a private sector response
Government
Financial companies
Rest of the world
Non-financial companies
Households
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
Deficit Surplus
Net financial surplus/deficit, % GDP (flow of funds)
Source: Datastream, RBS calcs
Slide 16
Rates expectations fade into the distance
0
1
2
3
4
5
6
7
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Feb-10
Feb-11
Aug-11
Nov-11
Feb-12
UK policy rate
Source: Datastream, Bank of England
Slide 17
Are we turning Japanese?
Market expectations of policy rate (%)
Source: Fathom
1996
Actual
1998
Slide 18
Drastic times?
Increase demand (symptom)
Massive fiscal stimulus
QE max
Liquidity unbounded
“Use it or lose it” deposit tax
PFI v2.0
Beg to China
Reduce debt (cause)
(Big) “bad bank”
Debt forgiveness
Financial repression
Monetise debt
Raise interest rates
Outright default
Slide 19
The darkest hour is just before the dawn?
“Initial projections for a V-shaped recovery are subsequently revised to a U-shaped recovery and eventually to an L-shape just as the recovery arrives.”
Blanchflower, Feb 2009
Slide 20
Keep in touch!
Internetwww.rbs.com/economics
E-mailwww.rbs.com/economics/registration
Social media@rbs_economics
Slide 21
Legal disclaimer
This material is published by The Royal Bank of Scotland plc (“RBS”) which is authorised and regulated by the Financial Services Authority for the conduct of regulated activities in the UK. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives (“Securities”). It should not be reproduced or disclosed to any other person, without our prior consent.
This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
Whilst this information is believed to be reliable, it has not been independently verified by RBS and RBS makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the RBS Group’s Group Economics Department, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information.
This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information.