1. The Financial Crisis and
what it means for you
John Quiggin
University of Queensland

2. The subprime crisis
A crash heard around the world
A symptom of bigger problems

3. A short primer
Circulated on the Internet early 2008
Author unknown
Style follows xkcd

28. The bigger picture
Competing versions of capitalism
Market liberalism
Central role of financial sector
State intervention and social democracy
Financial sector tightly regulated
Balance shifted back and forth over 20th century
The Great Depression

29. Bretton Woods system
1945-70s
Fixed exchange rates anchored on US
dollar and gold
Tightly controlled capital flows
Domestic economy managed using fiscal
policy
Full employment

30. The end of Bretton Woods
Accelerating inflation
Vietnam War, Great Society, 1968
Breakdown of capital controls
Collapse of fixed exchange rates and
gold peg
Mass unemployment (stagflation)

31. The counter-revolution
1975-1990
Floating exchange rates
Financial deregulation
Privatisation and the fiscal crisis of the
state
Thatcher, Reagan, collapse of
communism

32. The Great Moderation
1990-2007
A long period of economic stability,
particularly in English speaking countries
Minor recession following dotcom boom
Not so stable in developing markets - crises in Asia,
Russia, Latin America
High returns and explosive salary growth
for managers and the financial sector

33. Growth in international financial transactions

34. Growth in financial assets

35. The First Warnings
The LTCM crisis, 1998
The dotcom boom and bust
The ‘Greenspan put’

36. The crisis
Subprime problems emerge early 2007
Broader credit squeeze from August
2007
CDOs
Bond insurance
Auction rate securities
Student loans
Bear Stearns rescue March 2008

37. The implosion, September-
October 2007
Fannie and Freddie nationalised, 7 Sep
Lehman Bros failed, 14 Sep
AIG nationalised, 16 Sep
US Bailout, 3 Oct, partial nationalisation
Iceland, 8 October
Deposit Guarantee, Australia, 12 October

38. The future
US already in recession, others likely to
follow
Australia ?
Governments are likely to incur large
losses -
30 per cent of national income

39. What does it mean for
public policy ?
Financial sector tightly regulated
Back to Bretton Woods
Bigger role for government

40. What does it mean for us?
No easy money
Lower returns on investments
Tighter access to debt
Less financial innovation
Any flavor you want, as long as it’s vanilla
Budget deficits now, higher taxes ahead

41. What should we do?
IANAFA
Older conventional wisdom now appliea
Avoid excessive debt
Risky investments (shares) for the young, safe
investments (bonds) for those nearing retirement

42. The Financial Crisis and
what it means for you
John Quiggin
University of Queensland