Global Recession and Its Impact on the Asian Economy Denero November 2011
Black Thursday 1929 l l l l Stock Market Crash Passive Federal Reserve System Ignorance of Keynesian Pump Priming Panic in the Banking Sector Unemployment Rate of 25% Complete Dominance of the US Economy in the World Financial Market Illiquid
Black Monday 2008 l l l l l Real Estate Bubble Proactive Federal Reserve System US Government Pump Priming No Panic in the Banking Sector No Crash in the Stock Market Unemployment Rate Manageable Countervailing Power of Emerging Markets Liquidity of Sovereign Funds Massive intervention of European governments
Financial Times, 20 Sept 2008 l l l “…bank boards and bank executives have failed to understand complex mortgage-backed banking products, as have central bankers, regulators and credit rating agencies. ” “…a reward system that has granted huge bonuses to those who peddled toxic mortgagerelated products…. ” “Almost as absurd has been the degree of leverage racked up by investment banks. ”
TYPES OF FINANCIAL CRISIS
BANKING CRISIS
SPECULATIVE BUBBLES & CRASHES
INTERNATIONAL FINANCIAL CRISIS
WIDER ECONOMIC CRISIS
CAUSES l l l l Strategic complementay in Financial Market Leverage Asset liability mismatch Uncertainty & heard behavior Regulatory failures Fraud Contagion
ASIA & CRISIS
EFFECTS l l Subprime losses > 0. 1%($ 19. 5 billion) Non performing losses > 5% Growth rate slowed down from 9. 5%- 6. 3% Real economy badly hurt imports were affected more than exports
ASIA’S RESPONSE l l l Taken several steps both on the fiscal side & On the monetary side Cut policy rates and reserve requirements Increased foreign exchange Deposit gurantee hiked Taxes have been cut
FAQ 3 What can be done from a human development perspective?
Proactive macroeconomic policy l Countercyclical monetary policy and real exchange rate management (inc. capital controls) necessary: l l MICs with forex reserves already do this; but LICs constrained by IMF. Support domestic banks (esp for agriculture and SMEs), underwrite longterm investment lending; keep real interest rates low. Raise tax pressure (not rates) to maintain fiscal balance and reduce public borrowing.
HD strategy for difficult times l l l Evidence (UNICEF) that for children employment stability more important than wages; implications for e. g. inflation policy Essential to ringfence budgets (in real terms) for education and health; extend schemes for (simple) universal benefits. Focus on inequality (especially horizontal) rather than just poverty; to reduce conflict and increase social cohesion.
International action and the “duty to protect” l l l Essential to moderate G 8 policy shifts (e. g. bank regulation, interest rates, exchange rates) from viewpoint of impact on world poor. Need for UN to speak in a clear, timely and credible fashion on these issues. Regional arrangements for mutual currency support etc are vital (Asia progressing; LA talking; Africa nothing). Role for sovereign wealth funds?
THANK YOU
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