The Financial Crisis of 2007: The Bursting of the Housing Bubble in the US and Europe - Pr, Apuntes de Administración de Empresas

¡Descarga The Financial Crisis of 2007: The Bursting of the Housing Bubble in the US and Europe - Pr y más Apuntes en PDF de Administración de Empresas solo en Docsity! Topic 5. The “Great Recession”: 2008 – 2010 Plan: 1. Initial macroeconomic situation (2007). 2. Main developments. 
 3. Macroeconomic scenario. 
 4. Political response in 2008-2010. 
 5. End macroeconomic situation (2010). 
 1. Initial macroeconomic situation (2007). In 2007, the Spanish economy will experiment a boom that leads to: • Housing bubble. • Financial crisis. The bubble and the end of the housing market, happened first on the US. The financial crisis shocked Spain on 2007. The Capital Markets closed and we start having a real economic crisis characterized by a sharp decrease in the GDP. This crisis was specific in Europe, affecting sovereign- debt crisis: Supply, Demand and Consumption were really touched by this crisis. 2. Main Developments characterising the “Great Recession” 1. General economic boom due to the excess of financial liquidity. 2. Housing and financial bubbles, among other disequilibria (inflation, external deficit), generated by the excess of financial liquidity: • US: house prices start their correction in 2006. • Spain: summer 2007. Crisis in the housing market and building industry. 3. Problems in the housing market translate to financial markets
First in the US; then in Europe and also in developing countries. Crisis in the financial system. 4. Financial markets cease to function: financial institutions are not interested in lending money. The financial crisis becomes a general economic crisis. 1 General economic crisis. 5. Policy response (I): coordinated action because of the international extent of the crisis. “Keynesian” response yields to large public deficits and growing public debts. Sovereign-debt crisis in Europe. 6. Policy response (II): austerity envisaging macroeconomic adjustment so that the external and public deficit/debt imbalances are controlled. Long-lasting general economic crisis. In the US, the Monetary Policy, the Fiscal Policy and the Treasury were being managed by 3 men (Alan Greenspan, Robert Rubin and Larry Summers) who took some decisions believed to “save the world” by giving a solution to the Financial Crisis existing in the second half of 1990’s: In the second half of the 90’s 40% of the world became in Recession: South – East Asia. Thailand, Korea and Malaysia. China. Russia. Latin America. Argentina and Brazil. Japan. (1990s: “Lost Decade”) 2 started happening in 2007, were all the institutions started falling one after another: Finally, almost all Europe was worst off because they have been buying the “New Packs” from US, created during the Financiarization Process. (The Spanish Bank was not involved in those transactions but it ended up affected any way). 5 In Spain we did not need to buy those packs because we already have our problem with the Housing Bubble, so we did not want to buy anything from the US (or any other place) that can suppose a risk as we were already fuck off in our country. There was no direct exposition to this crush in Spain but we were really affected by the consequences it had in other countries as we were net borrowers; Spain needed credits from other countries to solve our own problem, as we have been having until the crisis but credits could not come any longer as with the financial crisis Capital Markets closed. In 2007: 9.3 % and in 2008: 9% (Fall in GDP) The only countries that were not so bad were the ones dedicated to save money, so when they get caught by the crisis (Germany) they have enough money to finance the banks and survive to this crisis. The Financial Crisis and the Real State Bubble Burst caused uncertainty, characterized by the degree of exposition to toxic assets. This uncertainty made the Capital Markets to close so there were growing difficulties in borrowing. Those difficulties really affected us as we were net borrowers and because of the real state bubble. All those situations leaded to crisis, and investment decreased – 10.4% between 2008 and 2009. • Decrease in investment – 10.4 %because of the closure of capital markets, the bubble burst and a decrease of employment and consumption. • Consumption decreased around 2.2%, making the GDP also to decrease around – 1.2% 6 • Public expenditure, to compensate the private debt, increased about 5% Those situations made the Gov. to implement a Keynesian policy approach in 2008/08, that leaded to an expansionary fiscal policy. In the external sectors there was a huge correction: • Exports decreased 5.9% in 08- 09, due to the EMU crisis. Tourist coming to Spain were also experimenting the crisis. • Imports decreased – 12% This correction was a way to correct the adjustments and correct the economic situation. In Spain we depended a lot on foreign capitals. The adjustments came mainly from the goods balance X – M (-5.9% - (- 12%). For the first time in decades, the degree of openness to trade (X + M/ Y) will fall. This was a novelty as Spain has been becoming more and more open. This happened because when there is a crisis, the economies try to protect themselves and adopt protectionary policies. 4. Political response in 2008-2010. 
 Economic policy. At the beginning there were not many actions been taken into account, but later some measures were adopted: 1. Monetary policy Adopted by the ECB, consisting in decreasing interest. With this they intended to increase investment and consumption but this does not work because there was nothing to work/ trade with, as capital markets were closed. This stop of the business cycle leaded from orthodox to non-orthodox monetary policies. The orthodox measures, towards interest rates did not work as the capital markets were closed. Those non-orthodox measures were orientated towards money supply (quantitating easing – Mario Draghi – 2. Fiscal Policy. 1. 2008. Those measures costed 1.5% points of the GDP 7 Therefore, the outcome of these policies has been: - Large public deficits - Credit access has become much more expensive - The ECB (or the so-called “troika”: ECB + European Commission + IMF) has had to intervene. Result: the sovereign-debt crisis (2009-2012) adds to the general economic crisis (2008-2012) and the financial crisis (2007-2012). At the end, with all those measures: • We were left with the situation of a financial crisis, since 2007. • A general economic crisis since 2008. • Sovereign debt crisis – Crisis at national levels, of the bonds of the Gov. that appeared at the end of 2009 in Greece. 5. The end of the Macroeconomic situation. ASSESSMENT: These expansionary “Keynesian” measures were decided and implemented under the assumptions that: • The crisis would be short. 
 • Public debt can increase unlimitedly. • No attention is given to the banking system’s solvency. 
 However, these assumptions proved wrong and the economic situation in the southern European Periphery became even more complicated... October 2009: Elections in Greece.
Shortly afterwards, Greece acknowledges data falsification related to public sector 
accounts. This is the starting point of the sovereign debt crisis (end 2009). 
 Lack of confidence on the situation of Portugal and Ireland 
LEADS to the “sovereign-debt crisis”, which adds to the financial and real economic crisis. 
 The sovereign debt crisis produces a radical change in the management of the crisis. IN 2010 EUROPE MOVES FROM ‘KEYNESIANISM’ TO ‘AUSTERITY’ 
The target is to regain the confidence of the financial markets and the immediate objective is the setup of a new agenda aiming at reducing public deficit to -3% (originally in 2013) (!!). 
 10 Summing up: • 2007 2009 Reason Public deficit. 2% surplus 11% deficit Crisis + Exp. Fiscal policy (increase in public debt) Unemploymen t. 8.2% 17.9% Crisis + bubble housing bubble Increase in prices. 2.8% - 0.3% :/ Deflation – schizophreni a – deflation is bad. Deflation depresses consumption . Crisis + investment and consumption falling very much. No domestic demand C/ A balance. • 9.6% • 4.3% This is Ok because of the crisis because we are adjusting but this is because of the crisis, no one is importing, capital markets closes, the goods balance 11