Martin Wolf on 'The Shifts and the Shocks: What we've learned – and still have to learn – from the financial crisis'
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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.
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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