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The G20 Summit: what to expect
Howard DaviesDirector, LSE
Director’s Circle Lecture
Alumni Theatre, NAB
11th March 2009
The phases of the crisisRising US sub-prime mortgage arrears
Losses and downgrades on related asset-backed securities (ABS) and other structured instruments
Loss of confidence in the value of ABS globally
Wider flight from risk in credit and other markets
Risks flow back to banks’ balance sheets
Money markets tighten as liquidity is hoarded
Funding problems for some banks
Act One: Subprime
Act Two: Liquidity
Act Three: Unravelling
Act Four: Meltdown
Act Five: Pumping
The Credit Crisis: A Five-Act Tragedy
•global imbalances
•loose monetary policy, leading to•mispricing of risk•credit bubble
•‘excess’ growth of financial sector
•‘excess’ leverage, facilitated by procyclical regulation
But what are the underlying causes?
Global current account balances
China’s Growth LaggardPersonal Consumption as % of GDP
Source: China National Bureau of Statistics and Morgan Stanley
Household debt as a proportion of GDP
Source: FSA, ONS, Federal Reserve, Eurodata, Datastream
“ Bank failures are caused by depositors who don’t deposit enough money to cover the losses due to mismanagement”.
Dan Quayle
“ The owners of capital will stimulate the working class to buy more and more of expensive goods, houses, and mechanical products, pushing them to take more and more expensive credits, until their debt becomes unbearable The unpaid debt will lead to bankruptcy of the banks, which will have to be nationalised, and the state will have to take the road which will eventually lead to communism.”
Das Kapital
So what next?• growth prospects have deteriorated
sharply, across the world
• Europe mired in recession
• long downturn the most likely outcome, and anaemic recovery
Growth Rates: IMF Forecasts
-4
-3
-2
-1
0
1
2
3
4
Germany France US UK
2007
2008
2009
2010
Source: www.ft.com
European Economic Forecast – April 2008
Source: www.ft.com
European Economic Forecast – January 2009
Larger than previous crises
Recovery options:• V-shaped: sharp contraction, quick
bounce-back• U-shaped: longer trough, delayed but
strong recovery• L-shaped: Japanese style stagnation• Nike swoosh: sharp downturn, weak
recovery
The declared agenda• stimulating global demand• strengthening the international financial
institutions• reshaping the global financial and regulatory
system• putting the world economy on track for
sustainable growth
G20 Summit: 2 April
Stimulating global demand: the issues
• fiscal packages uncoordinated so far
• uneven scale of stimuli – Germany and Japan lagging
• financial protectionism
Strengthening the International Financial
Institutions• increasing the IMF’s resources to allow it to lend more
• strengthening the early warning and surveillance functions
• more trade credit support from Development banks, together with bank recapitalisation
Reshaping the global financial and
regulatory system• enhance corporate governance and risk management
• strengthen prudential regulation, but with a ‘managed transition’ to avoid exacerbating the downturn
• regulate financial activities according to their economic substance and ensure regulation is consistent in all jurisdictions
Global Committee Structure – A Regulator’s View
G-7(Gov’ts)
Financial Stability Forum
WTOOECD
(Gov’ts)
FATF (Money Laundering) IASB
(Accounting IASC
Bank for International Settlements
(Central Banks)
G-10(Central Banks)
CGFS CPSS
Basel(Banking)
IOSCO(Securities)
Joint Forum
IAIS
(Insurance)
Monitoring Group
IAASB(Audit)
PIOB
IMFWorld Bank
(Gov’ts)
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
Specific measures may include:• enlarging and strengthening the Financial Stability Forum
• a new approach to capital: Basel 3?
• regulation of systemic hedge funds
• a tough approach to offshore centres
• more regulation of credit rating agencies
• supervisory colleges
Will it work? The omens are not good:
• financial protectionism on the rise
• little co-ordination of fiscal policies so far, even in Europe
• fundamental mismatch between global markets, global banks and domestic taxpayer-funded support
But:
• Monetary and fiscal stimulation on a massive scale ought to work in the end… though many businesses may not be there to see it.
The G20 Summit: what to expect
Howard DaviesDirector, LSE
Director’s Circle Lecture
Alumni Theatre, NAB
11th March 2009