2. Global Financial Crisis

7/31/2019 2. Global Financial Crisis

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Global Financial Crisis


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Why Study the Global Financial Crisis?

Big impact on world economy including India

Improve Understanding of:

Fiscal Policy

Government Revenue & Expenditure

Monetary Policy

Money Supply

Credit Crunch - Role of Credit in Economy

Characteristics of an Ideal Financial System


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Reinventing Capitalism

Nouriel Roubini

Laissez Faire (USA / UK)

Socialism (Euro-zone)

State Capitalism (China)


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Terminology

Balance of Payment is an accounting record of all monetarytransactions between a country and the rest of the world Current Account (Imports and Exports)

Balance of Trade

Capital Account (Financial Flows Investments, Forex Borrowing (ECB/FCCB),Remittances

Shortfall met through: Borrowing

Forex Reserves

BoP Deficit Decrease in Forex Reserves / Increase in Debt (USA)

BoP Surplus Increase in Forex Reserves / Decrease in Debt (China)

Exchange Rate Mechanism Fixed

Free Float

Managed Float


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Balance of Payment

India 2008-09 (Rs. in Cr.) A.1) Merchandise -542113

A.2) Invisibles 409842

A.2.a) Services 228778

A.2.b) Transfers 202180

A.2.c) Income -21116

A) Current Account -132271

B.1) Foreign Investment 11760

B.1.a) Foreign Direct Investment 76822

B.1.b) Foreign Portfolio Investment -65062

B.2) Loans 19284

B.2.a) External Assistance 12435

B.2.b) Commercial Borrowings 38009

B.2.c) Short Term Credit to India -31160

B.3) Banking Capital -19868

B.4) Rupee Debt Service -476

B.5) Other Capital 21681

B) Capital Account 32381

C) Errors and Omissions 2775

D) Overall Balance -97115

E) Monetary Movements 97115

E.1) I.M.F 0

E.2) Foreign Exchange Reserves (Increase - / Decrease +) 97115


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USA (The Ticking Time Bomb)

Loose Monetary Policy Excess Money Supply

Borrowing Binge Poor Credit Policy

Asset Bubbles Property Market Sub-Prime Lending

Excessive Leverage Remember! Leverage Equity (Owners Skin in the Game)

Failure of Fiscal Policy

The Welfare State in tatters! Failure of Monetary Policy

Zero Interest Rate; Not a Panacea anymore!


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USA (The Big Bang)

Securitization Derivatives Financial Weapons of Mass Destruction!Warren Buffet

Crude Shock! $40 to $140

Financial Failures Bear Sterns, Lehman Brothers, AIG, Citi

Contagion

Too Big to Fail!

&

Too Big to Bail!!!


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George Soros on Global Financial Crisis

http://www.youtube.com/watch?v=Ngbj_vjqd

us&feature=related


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USA (The Aftermath)

Crisis of Confidence Credit Freeze

Credit is the life-blood of economy. Economy had a massive heart attack!

Debt Overhang

Increase in NPAs

Quantitative Easing Inflation? Where did the money go?

Chasing Neverland!

Job-less Recovery

Ben Bernankes Speech

http://www.usatoday.com/video/bernanke-recovery-frustratingly-slow/1429735951001


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Europe

Only Monetary Union

Not Fiscal Union

PIGS The Ring of Fire!

Currency devaluation NOT possible

Specter Sovereign Debt Default Breakup of the monetary union

Way-out Austerity! + Hair-Cut!

Tighter Integration


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China

China is hooked on credit, but deriving ever less punch from eachdose. An extra dollar in loans increased GDP by $0.77 in 2007. It is$0.44 in 2011. China's economy today requires significantly morefinancing to achieve the same level of growth as in the past.

There had been a massive build-up in leverage and fears afundamental structural erosion in the banking system that differsfrom past downturns. For the first time, a large number of Chinesebanks are beginning to face cash pressures. The forthcoming waveof asset quality issues has the potential to become uglier than inprevious episodes.

Fitch Ratings


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China

Growth Fatigue Export Driven Growth

Forex Reserves

A Vicious Cycle

Renminbi Undervalued Currency

Ponzy Credit

BRICs or BRICkbats!


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Moral of the Story!

Do NOT allow people to play with other peoplesmoney Why should governments manage peoples money?

Why should a select few manage money for all the rest?

A team is only as strong as its weakest member! Say NO to common currency!

No Monetary Union without Fiscal Union

You either save or consume, so what is the balance? It is not how much you spend or save; it is what you spend

on or what you save for


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Indian Scenario: Before 1991

Average GDP Growth Rate

3.5% per year

Population Growth Rate

2.2% per year

Per Capita GDP Growth Rate

1.3% per year


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Indian Scenario: After 1991

Average GDP Growth Rate

6.5% per year

Population Growth Rate

1.5% per year

Per Capita GDP Growth Rate

5.0% per year


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Indias Political Regimes


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Indian GDP Growth Rate


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Indian GDP Composition


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An Expert Viewpoint

The weakest link in the Indian growth story is the State.Indian economic growth is greatly constrained by aninadequate quantity and quality of public services such aslaw and order, the judiciary, infrastructure, etc. Thefunctioning of the State is bedevilled by

(a) a lack of focus upon these critical services as the taskworth accomplishing

and

(b) poor productivity and efficiency in the production of

these services.

Indias Financial Markets

Ajay Shah, Susan Thomas, Michael Gorham


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Risks to the Indian Economy

Global Business Cycle Downturn

Misguided Monetary Policy

Fiscal Stress

Populism


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Loopholes!

Demographic Dividend or Disaster The issue of Employability

Manufacturing Gap

Credit Gap

Investment Gap

Brain Drain

Policy Paralysis


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The Present Indian Scenario

(Im)Balance of Payment

Depletion of Forex Reserves BoP Gap Financing

Defense of the INR

Currency Devaluation Self-correcting mechanism

But how do we pay for imports (Oil, High-tech etc.)?

Capital Flows Role of Remittance


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0.001.00

2.003.004.005.006.007.008.009.00

1970-71

1971-72

1972-73

1973-74

1974-75

1975-76

1976-77

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1978-79

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1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

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2006-07

2007-08

2008-09

2009-10

Central Gross Fiscal Deficit (% of GDP)

0.0010.0020.0030.0040.0050.00

60.0070.00

1980-81

1981-82

1982-83

1983-84

1984-85

1985-86

1986-87

1987-88

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Central Debt (% of gdp)


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Hindrances to Credit Growth in India

Lack of the Rule of Law Private Property

Enforcement of Contract

Government Interference

Regulatory Vacuum

Lack of Secondary Debt Markets

Lack of robust Bankruptcy processes


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India stands at the edge of a precipice!

Will it fall & shatter into a thousand pieces?

-OR-

Will it rise like a phoenix and soar high riding on

the dreams of a billion people?


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Utopia!

Minimalist Government

That government is the best, which governs the least! Henry

David Thoreau (http://www.youtube.com/watch?v=JhP7PKoRmmY)

But a government which abstains from governance is the worst!

Minimalist Social Welfare

Minimalist Progressive Taxation

Laissez Faire

Free-floating Currency

Free-flow of Capital Full Current & Capital Account Convertibility


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Utopia!

Robust Investment Climate

Robust Legal and Regulatory mechanisms Consistency of Rules and Regulations

Robust Judiciary Enforcement of Private Property

Enforcement of Legal Contract

Dismantling of the License Raj Single Window Clearance


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Utopia!

Ease of Doing Business http://www.doingbusiness.org

Free & Efficient Market for Corporate Control

Corporate Governance

Free Market Economy

Prudential Credit Management
http://www.doingbusiness.org/http://www.doingbusiness.org/


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2. Global Financial Crisis

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