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THE TRASFORMER ASSOCIATION SPRING MEETING LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS by Tassos Malliaris Loyola University Chicago May 12, 2010. OUTLINE. Brief Evaluation of the Global Crisis Emphasis on Lessons Discussion of the Currency Markets 4. Problems with the Euro. - PowerPoint PPT Presentation
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THE TRASFORMER ASSOCIATION SPRING MEETING
LESSONS FROM THE RECENT CRISIS AND CURRENCY MARKETS
byTassos Malliaris
Loyola University Chicago
May 12, 2010
OUTLINE
1. Brief Evaluation of the Global Crisis
2. Emphasis on Lessons
3. Discussion of the Currency Markets
4. Problems with the Euro
Causes of the Financial Crisis
1. The Unpredictability of Crises2. Macroeconomic factors (housing)3. Microeconomic factors (rating agencies,
subprime loans, derivatives)4. Banking and Shadow Banking (leverage,
securitization)5. Monetary Policies6. Government Policies
The Nature of Crises
1. Currency Crises
2. Banking Crises
3. Financial Crises
4. Economic Recessions
The Financial Crisis of 2007-09
• What caused the real estate bubble?• Easy Monetary Policy for 2002-2005• Why such an easy monetary policy?• Irrational exuberance and the internet
bubble• The bursting of the internet bubble
10-Year S&P 500 Performance
10-Year NASDAQ Composite Performance
Actual and simulated housing demand
Growth of the Finance Industry as % of GDP
Development of the Crisis
• Subprime Problems with Bear Sterns• Highly Leveraged Financial Institutions• Bankruptcy of Lehman Brothers• Troubled Asset Relief Program• Liquidity Provided by the Fed• Stress Testing of Top 19 Banks
Federal Reserve Lending
Lending Facilities
http://www.bos.frb.org/news/speeches/rosengren/2009/100209.htm
Real GDP
Relative Global Unemployment Rates
Figure 1: Global Outlook (Real GDP; percent change from a year ago)
Global GDP Growth
Lessons
• Crisis started in the U.S.• Irony: Moderation Breeds Exuberance• High Leverage and Risk Taking• Regulatory Failures• Uncertainty Leads to Market Failures• Fed: Lender of Last Resort • Action: Fast, Decisive, Forceful
Global Currency Markets
• Global Financial Crisis
• U.S. and EU
• China was affected Less
• Some Emerging Nations were also affected less
China/US Exchange Rate
Balance of Current Account
Price of Gold During 2 CenturiesGold
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10-Year Performance of Gold
Three Scenarios
1. Moderate Stability in the U.S. and EU.
2. EU Destabilizes; Prospects for the Euro
3. Inflation or Deflation?
Concluding Remarks:Current Challenges
• Financial Innovation vs. Financial Stability• New Wave of Financial Regulations• Equity vs. Growth• Drivers of Future Growth• Global Co-Leadership• The New Worrisome Bubble: Public Debt
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China (1990-2008) Germany (1955-1975) Japan (1955-1975)
Foreign currency reserves, % of own GDP
Chinese Gender Ratio
China’s Challenge:The over 65s