1. THE 2008 GLOBAL ECONOMIC CRISIS:CAUSES, CURES, AND CURADS ©Kara Tan Bhala Seven Pillars Institute May 2011 1

2. The crisis became GLOBALbut started in the US 2

3. Global Growth Dived 3

4. The crisis became an ECONOMIC crisis but started in the FINANCIAL sector 4

5. The Roots of Ruin Housing Bubble + Poor Lending Practices = Big Financial Problems 5

6. BUT ALSO GUILTY IN THIS CRISIS… Credit Default Swaps (CDS) Collateralized Debt Obligations (CDO) 6

7. GUILTY AS WELL… Leverage i.e. Debt 7

8. The Seduction of Leverage 8

9. All The Roots of Ruin Housing Bubble + Poor Lending Practices + Derivatives + Leverage = FINANCIAL DISASTER 9

10. Total Amount of Financial Assets Destroyed in the World (2007-2009)US$30 Trillion 10

11. Governments to the Rescue! GDP = Consumption (C) + Investment (I) + Net Government Spending (G-T) + Net Exports (Exports, X – Imports, M) 11

12. Total Amount of Financial Assets Destroyed in the World (2007-2009)US$ 30 TrillionUS Government Fiscal StimulusUS$787 Billion 12

13. Central Banks to the Rescue! Fed pumps money into the system Interest rates in the US are nearly zero EU and Asian Central banks brought rates down dramatically 13

14. Lately, the world seems crises prone… 14

15. The Crises List Savings and Loans Crisis - 1984 Junk Bond Crisis – 1989 Japanese Bubble Bursts - 1992 Mexico Currency Devaluation - 1994 Barings collapse - 1995 Asian Currency Crisis - 1997 Russian Currency Devaluation and Default - 1998 LTCM Bailout - 1998 Dot-Com Bubble Bursts - 2000 Bear Stearns Bails Out Funds - 2007 Lehman goes bankrupt – 15 September 2008 15

16. Is this crisis over yet? 16

17. When Will The Recession End?A Sampling of Expert Opinions (I): Jim Grant: “don’t ask when” Stephen Roach of Morgan Stanley: “late 2010 or 2011” A. Michael Spence, Nobel Laureate: “unusually long and deep global recession through 2010” William Poole (ex-Fed governor): “against government bailouts” George Cooper, financial writer: “financial drag extending into the next decade” 17

18. When Will The Recession End?A Sampling of Expert Opinions (II): Niall Ferguson, Harvard economic historian: “two years of contraction and two lean years after that” NourielRoubini, NYU Economics Professor (aka Dr. Doom): “three year recession, with chances for much worse” Alan Blinder, Princeton Economics Professor: “growth resuming in the fourth quarter of 2009, but with many caveats” Warren Buffet, CEO of Berkshire Hathaway: “economy will be in a shambles through 2009 and probably beyond” 18

19. The Slow Recovery Time Taken for S&P Index to reach its previous peak: 1932 – 26 years 1982 – 10 years 19

20. The Sixty-Four Dollar Question: Can We Prevent Another Financial Crisis? 20

21. Not while we are operating with the current financial world view 21

22. Current Financial World View Modern Finance Theories: Assume rational economic agents Assume profit maximization is their singular goal Assert separation of facts (finance theories) from values (ethics) 22

23. Some Financial Reforms Basel Bank Reforms Higher Capital Adequacy Ratios Stricter on what counts as capital Dodd-Frank Financial Reform Bill Consumer Protection Agency Living Will Fed can stop risky transactions 23

24. Financial Times Headlines Investment banks try to cushion rule changes By Patrick Jenkins in London Published: April 11 2010 22:42 | Last updated: April 11 2010 22:42 Investment bankers have begun to develop ways in which banks might be able to circumvent the most punitive of the new capital rules being drawn up by international regulators. 24

25. Regulators fighting the last battle (but they should keep fighting) Regulators cannot keep up with the pace of financial innovation (but they must keep trying) Greed in a near ethical vacuum will circumvent rules 25