The False Premise Of Effortless Prosperity...the true cause of the financial crisis.

1. Paradigm Shift
The false premise of effortless prosperity
Paradigm Shift;
1. the term first coined by Thomas Kuhn in his influential book The Structure of
Scientific Revolutions (1962) to describe a change in basic assumptions within the
ruling theory of science. It is in contrast to his idea of normal science.
2. A complete change in thinking or belief systems that allows the creation of a new
condition previously thought impossible or unacceptable
Contrary to recent published thinking, the financial crisis was not an unpredictable ‘black
swan’ event, nor was it solely the result of a collapse in the housing market, or solely to
be blamed on the global imbalance between China and the US or on greedy bankers.
Instead, the financial crisis was caused by a sustained period of debt financed
consumption, made possible by the belief in the ‘paradigm shift’ that through economic
policy and financial market innovation, we had created an economic model that would
create effortless prosperity and growth, whilst enjoying a prolonged period of low
interest rates. Under Alan Greenspan this was known as the ‘Goldilocks economy’,
Gordon Brown called it the ‘end of boom and bust’.
This premise was false.
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2.
STRICTLY PRIVATE & CONFIDENTIAL
The financial crisis was caused by unsustainable debt financed consumption...
2.7 Total US Consumer Credit Debt ($ Trl) 2000‐2010 15 Total US Mortgage Debt ($ Trl) 2000‐2010
Source: Federal Reserve 14 Source: Federal Reserve
2.5 13
2.3 12
11
2.1 10
1.9 9
8
1.7 7
1.5 6
2010‐6
2000‐12
2001‐12
2002‐12
2003‐12
2004‐12
2005‐12
2006‐12
2007‐12
2008‐12
2009‐12
2000‐12
2001‐12
2002‐12
2003‐12
2004‐12
2005‐12
2006‐12
2007‐12
2008‐12
2009‐12
...built on low interest rates and transfer of counter‐party risk of borrowers by lenders...
Fed Funds Rate (%) 2000‐2008 US Asset Backed Issuance 2000‐2008 ($ml)
7.0% Source: Federal Reserve Source: SIFMA
800,000
6.0%
5.0% 600,000
4.0%
3.0% 400,000
2.0% 200,000
1.0%
0.0% 0
2000‐12
2001‐12
2002‐12
2003‐12
2004‐12
2005‐12
2006‐12
2007‐12
2008‐12
2000‐12
2001‐12
2002‐12
2003‐12
2004‐12
2005‐12
2006‐12
2007‐12
2008‐12
2009‐12
...when interest rates rose, borrowers defaulted and loan losses soared...
10 All Bank Loan Delinquency Rate (%) 2000‐2009
8 Source: Federal Reserve
6
4
2
0
2000‐12
2001‐12
2002‐12
2003‐12
2004‐12
2005‐12
2006‐12
2007‐12
2008‐12
2009‐12
...Households were left historically over‐leveraged relative to incomes and governments
forced into recapitalising the banks.
The ‘paradigm shift’ in thinking, that financial market innovation and economic policy we
believed created effortless prosperity and growth with low interest rates, was false.
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