Loay Montaser

Financial crises
 Agenda

A
Introduction

What happened

Americas

Europe and Asia

LIBOR-OIS SPREAD
INDICATE

Presentation title What we learned 2

 Introduction
According to the U.S. National Bureau of Economic Research (the official arbiter of U.S. recessions)
the recession began in December 2007 and ended in June 2009, and thus extended over eighteen
months.
The years leading up to the crisis were characterized by an exorbitant rise in asset prices and associated
boom in economic demand. Further, the U.S. shadow banking system (i.e., non-depository financial
institutions such as investment banks) had grown to rival the depository system yet was not subject to
the same regulatory oversight, making it vulnerable to a bank run.
US mortgage-backed securities, which had risks that were hard to assess, were marketed around the
world, as they offered higher yields than U.S. government bonds. Many of these securities were backed
by subprime mortgages, which collapsed in value when the U.S. housing bubble burst during 2006 and
homeowners began to default on their mortgage payments in large numbers starting in 2007.

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 What happened ?
_____________________________
 Political instability related to the economic
crisis
• Business Week stated in March 2009 that global political instability is
rising fast because of the global financial crisis and is creating new
challenges that need managing. The Associated Press reported in March
2009 that: United States "Director of National Intelligence Dennis Blair
has said the economic weakness could lead to political instability in
many developing nations." Even some developed countries are seeing
political instability. NPR reports that David Gordon, a former
intelligence officer who now leads research at the Eurasia Group , said:
"Many, if not most, of the big countries out there have room to
accommodate economic downturns without having large-scale political
instability if we're in a recession of normal length. If you're in a much
longer-run downturn, then all bets are off."
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 National fiscal policy response to the Great Recession

• Americas :In 2008 the United States Congress passed—and then-President

George W. Bush signed—the Economic Stimulus Act of 2008, a $152 billion
stimulus designed to help stave off a recession. The bill primarily consisted of
$600 tax rebates to low and middle income Americans. The United States
combined many stimulus measures into the
American Recovery and Reinvestment Act of 2009, a $787 billion bill covering
a variety of expenditures from rebates on taxes to business investment. $184.9
billion was to be spent in 2009, and $399.4 billion was to be spent in 2010 with
the remainder of the bill's appropriations spread over the rest of the decade.
Announcements of rescue plans were associated with positive returns whereas a
public intervention in favor of a specific bank showed negative impacts.

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“ Europe and Asia

”
 • Germany
Eourope
• Compared to other European nations, Germany was in a unique position: It had low debt, a high balance of trade, and an export driven economy. The recession led to
a decline in German exports, but Germany had the capacity to replace some of the export demand with domestic stimulus. The Germans were initially hesitant to pass
a large stimulus bill; however, in 2009, the Germany passed a 50bn euro stimulus bill that focused on taxes, a child tax credit, and spending on transportation and
education. Prior to the 2009 stimulus, one of Germany's largest stimulus efforts had been a scrappage program. The German stimulus program included a "cash for
clunkers" program that offers rebates of $3,172 to Germans who scrap their old cars for new, more efficient models. The program totals about 5 billion euros.
• Hungary
• Hungary has a high level of debt and cannot effectively raise the money needed for deficit spending. They have unveiled a $7bn package of tax cuts and loan
guarantees directed towards businesses, especially small and medium-sized enterprises
• The Netherlands
• In November 2008 the Dutch government passed a 6bn euro plan that mainly consisted of tax breaks for businesses that made larger investments and hired short-term
workers. The package also included a new program to help find work for the unemployed, and faster public sector investment.In January 2009 the Dutch added a
variety of guarantees to help ensure and encourage exports, corporate loans, and home and hospital construction .
• United kingdom
• In 2008 the United Kingdom was one of the major economies leading calls for fiscal action to stimulate aggregate demand. Throughout that year a number of fiscal
measures were introduced including a £145 tax cut for basic rate (below £34,800 pa earnings) tax payers, a temporary 2.5% cut in Value Added Tax (Sales Tax), £3
billion worth of investment spending brought forward from 2010 and a variety of other measures such as a £20 billion Small Enterprise Loan Guarantee Scheme. The
total cost of these measures, mostly announced in the November 2008 Pre-Budget Report was roughly £20 billion (not counting loan guarantees).[28] Further limited
measures worth £5 billion were unveiled in the 2009 budget including training help for the young unemployed and a "car scrappage" scheme which offered £2,000 in
subsidy for a new car purchase for the scrapping of a car more than 10 years old (similar to schemes in Germany and France

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 Asia
• China

• A statement on the government's website said the State Council had approved a plan to invest 4 trillion yuan in infrastructure and social welfare by the end of
2010This stimulus, equivalent to US$586 billion, represented a pledge comparable to that subsequently announced by the United States, but which came from an
economy only one third the sizeThe stimulus package will be invested in key areas such as housing, rural infrastructure, transportation, health and education,
environment, industry, disaster rebuilding, income-building, tax cuts, and finance China's export driven economy started to feel the impact of the economic slowdown in the
United States and Europe, and the government had already cut key interest rates three times in less than two months in a bid to spur economic expansion.

• Japan
• In April 2009 Japan announced a third stimulus plan of 15.4 trillion yen stimulus ($153 billion). This new plan includes 1.6 trillion yen investment in low-carbon technology, 1.9
trillion yen on employment programs, and 370 billion yen for new car subsidies.[10] The legislature responded to a request from Prime Minister Taro Aso for a stimulus that equal
to 2% of GDP. Japan has been one of the hardest hit nations during the recession, having already experienced a lost decade when economic growth stagnated. Japan's total stimulus
amounts to 5% of its GDP. Since taking office, Prime Minister Aso has passed 25 trillion yen ($250bn) in stimulus. [12] Japan has basically exhausted its conventional
monetary policy options with a near zero nominal interest rate.

• South Korea
• ₩14 trillion (equivalent to ₩16.74 trillion or US$14.81 billion in 2017) stimulus package in November 2008. The November package includes 4.6 trillion won for
regional infrastructure and 3 trillion won in tax break—mainly for factory investment. In April 2009 South Korea enacted a "cash for clunkers" program that will
give a tax break of ₩2.5 million (equivalent to ₩2.91 million or US$2,572.15 in 2017) to drivers who replace a car nine years old or older with a new car. The tax
break will be in effect from May to December 2009 and is estimated to boost Hyundai sales from 530,000 to 580,000 and Kia sales from 327,000 to 357,000. South
Korea's 2009 budget includes $13bn in employment stimulus including handouts, training, and infrastructure. South Korea's total stimulus in 2008-2009 amounts to
about ₩69 trillion (equivalent to ₩80.25 trillion or US$70.99 billion in 2017).

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 What we learned

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Thank you