This document summarizes the key events and causes of the global financial crisis according to Martin Wolf. It discusses the large declines in output compared to pre-crisis trends in the US, Eurozone, and UK. It analyzes factors such as global imbalances with excess savings in countries like China and oil exporters, private sector debt growth and leverage, low interest rates set by central banks, and the Eurozone sovereign debt crisis. The document examines how these shifts and shocks led major economies into recession and prolonged periods of weak demand and managed depressions.
Financial Leverage Definition, Advantages, and Disadvantages
Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis'
1. The Shifts and the Shocks
Martin Wolf, Associate Editor & Chief
Economics Commentator, Financial Times
IPPR
1st December 2014
London
2. The Shifts and the Shocks
• What happened: the shifts and shocks?
• What is to be done: the solutions?
2
3. 1. What happened? The costs
IN THE US IT IS NOW LOOKING LIKE A NEW ERA
3
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
$25,000
$20,000
$15,000
$10,000
$5,000
$0
1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010
Deviation from trend (per cent)
GDP (bn)
US GDP
(Actual, trend and deviation from trend)
Gross domestic product 1950-2007 Trend Deviation from trend (per cent)
4. 1. What happened? The costs
OUTPUT IS VASTLY BELOW THE PRE-CRISIS
TREND
4
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
€ 3,000
€ 2,500
€ 2,000
€ 1,500
€ 1,000
€ 500
€ 0
Deviation from trend (per cent)
Quarterly GDP (bn)
EUROZONE GDP
(Actual, trend and deviation from trend)
Actual 1955-2007 trend Deviation
5. 1. What happened? The costs
OUTPUT IS VASTLY BELOW THE PRE-CRISIS
TREND
5
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
UK GDP PER HEAD
(purchasing power parity, at 1990 Geary Khamis dollars)
Source: Maddison project and the Conference Board
1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
1870-1950 trend 1950-2007 trend GDP per head
6. 1. What happened? Savings glut
SLIDE INTO DEPRESSION RATES OF INTEREST
6
5
4
3
2
1
0
-1
-2
350.00
300.00
250.00
200.00
150.00
100.00
50.00
0.00
Q1
1995
Q1
1997
Q1
1999
Q1
2001
Q1
2003
Q1
2005
Q1
2007
Q1
2009
Q1
2011
Q1
2013
Index-linked Yield
Real House Prices (index number)
REAL HOUSE PRICES AND REAL INDEX-LINKED YIELDS
US real (S&P Case Shiller National) UK real Nationwide
Spain real UK 10-year IL gilts
7. 1. What happened? Imbalances
7
WHERE EXCESS SAVINGS CAME FROM
4
3
2
1
0
-1
-2
-3
GLOBAL IMBALANCES (as per cent of world GDP)
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
US Oil exporters Germany and Japan
Peripheral Europe China and Emerging Asia Rest of world
Discrepancy
8. 1. What happened
$14,000
$12,000
$10,000
8
THE ROLE OF GOVERNMENTS
$8,000
$6,000
$4,000
$2,000
$0
FOREIGN CURRENCY RESERVES ($bn)
China Other Asian developing countries
Other developing countries Industrial countries
9. 1. What happened? Debt
THE TRAP OF LEVERAGE
350.0%
300.0%
250.0%
200.0%
150.0%
100.0%
9
50.0%
0.0%
US CUMULATIVE PRIVATE SECTOR DEBT OVER GDP
Households Non-financial Business Financial Sectors
10. 1. What happened? Bank leverage
Ratio of risk-weighted to unweighted assets declines in four largest UK
headquartered banks falls, as leverage increases
10
11. 1. What happened? Cheep money
RATES AS LOW AS THEY WILL GO
11
8
7
6
5
4
3
2
1
0
CENTRAL BANK INTERVENTION RATES (per cent)
Fed BoE Buba/ECB BoJ
12. 1. What happened? More money
CENTRAL BANK BALANCE-SHEET EXPANSION
60.00
50.00
40.00
30.00
20.00
10.00
0.00
12
Q1
2000
Q1
2001
Q1
2002
Q1
2003
Q1
2004
Q1
2005
Q1
2006
Q1
2007
Q1
2008
Q1
2009
Q1
2010
Q1
2011
Q1
2012
Q1
2013
Q1
2014
CENTRAL BANK ASSETS OVER GDP
Federal Reserve BoE BoJ ECB
13. 1. What happened? Low bond yields
EUROZONE BECOMES JAPAN
6
5
4
3
2
1
0
13
10-YEAR BOND YIELDS
Germany UK France US Japan
14. 1. What happened? Eurozone imbalances
IMBALANCES AND REBALANCING
4.0%
3.0%
2.0%
1.0%
0.0%
-1.0%
-2.0%
-3.0%
-4.0%
14
EUROZONE IMBALANCES ON CURRENT ACCOUNT
(as per cent of Eurozone GDP)
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Germany Other creditors Vulnerable countries
France Others Eurozone
15. 1. What happened?
THE EUROZON LEHMANS
16
14
12
10
8
6
4
2
0
-2
1/1/07 1/1/08 1/1/09 1/1/10 1/1/11 1/1/12 1/1/13 1/1/14
15
SPREADS ON TEN-YEAR GOVERNMENT BONDS OVER
BUNDS (percentage points)
Portugal Ireland Italy Spain LTRO OMT TLTRO
16. 1. What happened? Managed depressions
THE BAD AND THE UGLY
110
108
106
104
102
100
98
96
94
92
90
16
GDP AND DEMAND IN THE CRISIS
Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012 Q1 2013 Q1 2014
Eurozone domestic demand Eurozone GDP
US domestic demand US GDP
17. 2. What are the solutions? Finance
• “As of July this year, two years after the enactment of
Dodd-Frank, a third of the required rules had been
finalised. Those completed have added a further
8,843 pages to the rulebook. At this rate, once
completed, Dodd-Frank could comprise 30,000
pages of rulemaking. That is roughly a thousand
times larger than its closest legislative cousin, Glass-
Steagall. Dodd-Frank makes Glass-Steagall look like
throat-clearing.” Andrew Haldane and Vasileios
Madouros, Bank of England
17