Category: Bailouts, Video

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5 Responses to “Martin Wolf Weatherall Lecture 2013”

  1. denim says:

    Excellent video presentation. Slides are very readable, who and where is clearly identified, and the body language of the presenter is clear. Of course the content is key, but the artful design of the presentation facilitates learning.

  2. Orange14 says:

    Barry – you need to correct the title of the post. You left the ‘t’ out of Martin.

  3. RW says:

    Excellent lecture. Spot on IMHO. I took some notes as I watched and gladly share (if BR permits) — anyone else who watched and sees an error in the notes please feel free to correct (I was typing as I listened and usually paraphrase so caveat lector).
    ——————————

    “Has the financial crisis changed the world? It’s too soon to know but I hope it has.”

    My focus is on the global macroeconomic elements of the crisis rather than the details of the financial sector because “the financial sector is in the business of losing money” and the latest way they have found to do it is not particularly interesting. It is true though that misbehavior in the financial sector has absolutely huge macroeconomic consequences, larger than any other sector.

    Where are we:
    Central bank response to the crisis is simply unprecedented w/ wildly expanding balance sheets.
    Through the financial sector there is an implicit claim on the entire assets of every remaining solvent country because of the linkage to their full faith and credit.
    The liabilities of the financial sector have been completely socialized; 100%
    Recession was huge and recovery is still feeble at best; only two countries are back to their pre-crisis levels.
    Fiscal deficits have grown at levels comparable to world wars but this is primarily due to automatic stabilizers, otherwise fiscal support has been modest at best.
    Every major central bank is basically at ZIRP
    There is no credit growth, virtually all the growth in money supply is via central bank activity.
    10-year bond rates remain very low; e.g., in the UK long and short-term rates as low as they have ever been in over three centuries.
    High unemployment in crisis countries continues.

    How we got here:
    Housing bubble; rise really begins in July 1997 when interest rates dropped 2% or more.
    Balance of saving and investment shifted strongly; global savings glut moved to RE
    Financial sector is mainly in the business of leveraging up property assets (business lending is insignificant) and that’s what they did but it was OPM; entire banking sector had no capital.
    Deficit countries, mainly the US and peripheral Europe, borrowed massively for housing rather than more productive assets; all these countries became crisis countries.
    A massive waste of capital which the rest of the world wants back (they’ll get it in a depreciated dollar)
    Financial sector leverage remains far too high, 100% of GDP or more, and remains a threat to nations.
    Public debt was not a predictor of crisis — e.g., Ireland and Spain had virtually none — the worst public consequences in countries were those with high levels of household and financial sector debt and all those crisis countries now have large deficits from recession.

    Where we go:
    The US output gap remains large and every year we fall further below trend; e.g., the US economy is 15% smaller than trend predicted a decade ago.
    Most of Eurozone and the UK are in comparable poor shape.
    Is this a “new normal” — countries that kept their workers employed seemed to have given up productivity to do so but countries with high unemployment such as the US and Spain have had large productivity gains — seems possible countries such as Germany that gave up some productivity per worker have room to grow it back and so may evade the “new normal.”

    Lessons:
    a. What we thought was a well-designed financial system run by technically skilled people is spectacularly crisis prone and insufficiently under control; steps to cure this are modest at best and largely insufficient.
    b. Dominant dogma of central banking — stabilizing prices will stabilize the economy — has been conclusively disproved leaving central banks in a quandary as to their essential job description
    c. To a first approximation, an extended period of current account deficits is likely to predict macroeconomic trouble unless it is invested very productively and in assets that are tradable.
    d. We could be on a fundamentally different growth trend. Those who invested in deficit countries are not going to get it back; defaults will occur one way or the other.
    e. A large part of what went wrong is due to a failure of global macroeconomic management and failure in financial regulation; we are in no better shape to deal with the bankruptcy of a globally interconnected financial firm than we were when Lehman collapsed.

    Four main conclusions:
    1. We are nowhere near a normal economic situation; we remain in a contained depression.
    2. We got here from the interaction of global capital imbalances — flows of capital from surplus to deficit countries — and a profoundly unstable financial system.
    3. It is not clear we can get back to the former global growth trend; this will determine much of what we can do in future.
    4. Risk management is still inadequate and it is only the current climate of strong risk aversion that is granting a superficial semblance of stability.

  4. [...] current investment eco-system might benefit from an hour with Martin Wolf.  His recent lecture on lessons learned from the Great Repression and the way forward should make clear that our current investment market [...]