2008 Global CrisisStarting in 2005, the Federal Reserve perc.docx
Ifme
1. Macroeconomic and Financial Policies
before and after the Crisis
Dr. S P Chaudhry (1213007)
Ravindra Molo L (1213015)
Srawan Kumar Agarwal (1213017)
2. Presentation Layout
Content of this presentation is based on paper by Barry Eichengreen
Financial Policies in Run-Up to the crisis
Topic 1
Glass-Steagall and GSAs
Topic 2
The role of Global imbamalnces
Topic 3
Response
Topic 4
Rethinking the Response
Topic 5
Conclusion
Topic 6
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4. Root Cause lay in he United states Crisis has it
root cause
in the end
of cold
Market fundamentalism and policies flowing from it war-
Greenspan
Removal of Regulation Q ceiling on interest on deposits
Rejected the proposal of regulating financial derrivatives Rise of
China
leading to
Limiting the resources of SEC & other regulators global
unbalance
caused
Banks were allowed to raise leverage to dangerous height crisis
Privatization of supervisory and regulatory function
Mortgage operator were allowed to raise subprime loans
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5. Poor banking practices
The practices started due to inadequate regulatory resources
Regulator allowed banks to If banks lacked models,
rely on their own models to regulators allowed to use
gauge risk and capital letter grades assigned to their
adequacy. securities by the rating
agencies.
The rating agencies were no
Banks had obvious incentive
better. Advising an originator
to tweak their models to limit
on how to structure an
the estimated likelihood of a
instrument so as to secure an
significant loss on their
investment-grade rating and
portfolios, since this limited the
then rating the same security
capital they had to hold and
bred conflicts of interest. The
elevated their profits. If it also
agencies allowed themselves
heightened the risk of failure,
to be played off against one
well, that was someone else’s
another by issuers shopping
problem.
for ratings.
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7. Elimination of Glass-Steagall
• elimination of the Glass-Steagall restrictions on mixing
commercial and investment banking
• not deposit-taking commercial banks freed up by the
elimination of Glass-Steagall, that played the central
role in originating and distributing complex mortgage-
related securities, had the highest levels of leverage,
and took the hardest fall
• the removal of the Glass-Steagall restrictions intensified
the competition between the commercial and
investment bank
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8. US Policy to subsidise home loan
• Freddie and Fannie were mandated to devote
additional resources to low-income housing.
• This political encouragement and the incentives it
created, it is argued, fostered the growth of the
subprime mortgage market at the epicenter of the
crisis.
• while policies channeling excessive finance into
affordable housing did not help, a wider credit boom
and more pervasive incentive problems were at work
Political pressure mixed with financial
innovation is a toxic brew
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10. Imbalance and Monitory Policy
• Lower yield on treasury bond encouraged investors to
stretch for yield by investing in risky markets
• Large current account deficits
• European banks were substantial enablers of the
subprime crisis in the sense that they ended up holding
large numbers of subprime-related structured credit
products
• U.S. monetary policy was too loose in 2003-4, it is
alleged, when the Fed’s discount rate was significantly
below the levels suggested by the Taylor Rule
• But it is hard to imagine if yield would have been higher
how it would have fundamentally changed the crisis
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12. Policy response
• Policy response was quick and powerful
• G 20 group felt need of coordinated efforts
• Large fiscal stimulus by the US
• Larger the slowdown more was the stimulus
• Countries with high level of debt
• central banks of countries suffering the most
pronounced growth slowdowns had the greatest
inclination to cut interest rates
• countries cutting policy rates aggressively were not
always rewarded with lower long-term real interest
rates
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21. Policy response
• the stimulus measures widely credited with averting “Great
Depression 2.0” do not come off as looking quite so positive
• governments should have been more aware of potential problems of
debt sustainability and exercised more restraint in applying fiscal
stimulus
• Countries that entered the crisis with heavy debt loads should have
been more cautious before undertaking additional deficit spending
• the fiscal authorities should have done more to detail their exit
strategies.
• governments did too little to restructure and recapitalize banking
systems
• countries should have relied more on monetary easing and less on
fiscal easing.
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23. Final Take
• while this crisis, like all crises, had multiple causes, at its
center were problems of lax supervision and regulation,
in the advanced countries in particular. It is
appropriate therefore that post- crisis efforts in the
United States and at the level of the G20 should focus
on regulatory reform.
• the crisis is a reminder of the value of keeping one’s
fiscal powder dry
• the crisis underscores the importance of early and
concerted intervention to resolve banking-sector
problems
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24. Final Take
• the crisis reminds us that mechanisms for international
policy coordination remain inadequate
• the response to the crisis is a reminder of the
importance of coordinating monetary and fiscal
policies
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