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<ul><li><p>GLOBAL FINANCIAL CRISIS: Causes and Consequences</p><p>Hyeongwoo Kim</p><p>Auburn University</p><p>October 30, 2010</p><p>Prepared for the 4th KSEA-AL Symposium on Automotive Technology</p></li><li><p>US Financial CrisisUS Financial Crisis</p><p> The collapse of the </p><p>US sub-prime </p><p>mortgage market in </p><p>2007 triggered a global 2007 triggered a global </p><p>financial crisis.</p><p> The failure of Lehman Brothers resulted in a serious </p><p>disruption in international financial markets. Stock prices (level, sd)</p><p> Exchange rates (level, sd)</p></li><li><p>Global RecessionsGlobal Recessions</p><p> This US financial crisis triggered recessions not only in </p><p>the US but also in the rest of the world.Real GDP growth rates (Fig) Real GDP growth rates (Fig)</p><p> Unemployment rates (Fig) Still very high in the US (Unemployment durations )</p><p> Inflation rates (recessions) after initial increases </p><p>(expansionary M policies) (Fig)</p></li><li><p> Policy makers tried to stop it, but less </p><p>successful Expansionary monetary policies</p><p> Interest rate cuts (short, long)</p><p> Quantitative easing (US)</p><p>Policy ResponsesPolicy Responses</p><p> Quantitative easing (US)</p><p> Expansionary fiscal policies Stimulus checks</p><p> Cash for clunkers</p><p> Government spending vs. tax cuts</p><p> Private sectors did not respond as expected Consumption (Fig) and Investment (Fig) barely </p><p>responded.</p><p> International trade shrank (Fig).</p></li><li><p>Causes and ConsequencesCauses and Consequences</p><p> The profession seems to agree on that the </p><p>crisis was triggered by the collapse of the US </p><p>sub-prime mortgage market. Then, natural </p><p>questions are,</p><p> Why did it collapse?</p><p> The value of the US sub-prime mortgage market </p><p>is tiny (6.7% of total mortgage debt in 2009). </p><p>Why did it spread to,</p><p> Other financial industries?</p><p> Other non-financial industries?</p><p> Other countries?</p></li><li><p>Causes of the CrisisCauses of the Crisis</p><p> Why did it collapse?</p><p> Housing price bubble </p><p> Unsustainable (Fig)</p><p> Bubble is supposed to burst.</p><p> Some blame Greenspan unclear (Fig) Some blame Greenspan unclear (Fig)</p><p> Overall asset bubbles around 2000 </p><p>(Fig)</p><p> Securitization (financial </p><p>innovations, loophole mining)</p><p> Excessive leverage (off-balance </p><p>sheet activities)</p><p> Moral hazard (too big to fail)</p></li><li><p>Other Financial SectorsOther Financial Sectors</p><p> Financial activities are highly intertwined.</p><p> The Glass-Steagall Act (Banking Act of 1933) were repealed,</p><p> Depository Institutions Deregulation and Monetary Control Act of </p><p>1980 (Regulation Q)</p><p> The GrammLeachBliley Act (November 12, 1999; Bank-holding The GrammLeachBliley Act (November 12, 1999; Bank-holding </p><p>company)</p><p> Virtually no separation of banking from securities industry now</p><p> Update: President Obama signed the Dodd-Frank financial regulation </p><p>reform bill (July 21, 2010).</p><p> The collapse of the sub-prime mortgage market quickly </p><p>spread to other financial industries.</p></li><li><p>NonNon--Financial Real SectorsFinancial Real Sectors</p><p> Spill-over effects to non-financial </p><p>industries</p><p> Caused by liquidity crunchCaused by liquidity crunch</p><p> Excess reserves (Fig)</p><p> Money multiplier (Fig)</p><p> Higher borrowing costs due to high </p><p>degree uncertainty</p><p> Risk premium (Fig) </p><p> Credit default swap </p></li><li><p>Contagion to Other CountriesContagion to Other Countries</p><p> Financial markets are highly integrated across countries </p><p>(Financial channel)</p><p> De-regulation (can be costly, Korea vs. China in 1997)</p><p> Shares of foreign investors</p><p> Mrs. Watanabe (Fig)</p><p> Substantial increases in volumes of international trade </p><p>(Real activities channel) (Fig)</p><p> Supposed to be good (comparative advantage)</p><p> May become vulnerable to foreign shocks</p><p> Exchange rate shocks (highly volatile and persistent)</p></li><li><p>Contagion to Other CountriesContagion to Other Countries</p><p> Highly integrated international economies may imply,</p><p> Higher degree co-movement in 2000s</p><p> Coupling phenomenon</p><p> Static synchronization (Fig)</p><p> Temporary dynamic correlations (Fig) Temporary dynamic correlations (Fig)</p><p> Severer and more persistent adverse effects of a foreign </p><p>shock in 2000s.</p><p> Dynamic synchronization (Fig)</p><p> 1% in the US stock price 0.5% and 2% in German stock </p><p>prices in the 1970s and in the 2000s, respectively, in the long-run.</p><p> More Significant adverse effects in the 2000s both quantitatively and </p><p>qualitatively</p></li><li><p>Policy ImplicationsPolicy Implications</p><p> Kim and Kim (2010a, </p><p>2010b) studied the recent </p><p>US financial crisis and </p><p>identified the channels of </p><p>contagion in international contagion in international </p><p>financial markets.</p><p> Contagion occurred </p><p>abruptly and lasted for a </p><p>short period of time. </p></li><li><p>Policy ImplicationsPolicy Implications</p><p> Kim and Kim (2010a, </p><p>2010b) studied the recent </p><p>US financial crisis and </p><p>identified the channels of </p><p>contagion in international contagion in international </p><p>financial markets.</p><p> Substantial level effect</p><p> Stock prices (level)</p><p> Exchange rates (level)</p></li><li><p>Policy ImplicationsPolicy Implications</p><p> Kim and Kim (2010a, </p><p>2010b) studied the recent </p><p>US financial crisis and </p><p>identified the channels of </p><p>contagion in international contagion in international </p><p>financial markets.</p><p> EWS, Currency Swap </p><p>Agreements</p><p> Strengthen the roles of </p><p>domestic agents in </p><p>financial markets</p></li><li><p>Thank you.Thank you.Thank you.Thank you.</p></li><li><p>Stock Prices</p></li><li><p>Stock Returns Volatility</p></li><li><p>Foreign Exchange Rates</p></li><li><p>FX Depreciation Rates Volatility</p></li><li><p>Real GDP Growth Rates</p></li><li><p>Unemployment Rates</p></li><li><p>CPI-based Inflation Rates</p></li><li><p>Overnight Inter-bank Rates</p></li><li><p>10-Year Government Bond Yields</p></li><li><p>Real Consumption Growth</p></li><li><p>Real Investment Growth</p></li><li><p>Exports-Imports Growth</p></li><li><p>US Money Growth</p></li><li><p>Housing Price and Fundamentals</p><p>500</p><p>600</p><p>700</p><p>800</p><p>900</p><p>1000</p><p>150</p><p>200</p><p>250</p><p>Po</p><p>pu</p><p>lati</p><p>on</p><p> in</p><p> Mil</p><p>lio</p><p>ns</p><p>Ind</p><p>ex o</p><p>r In</p><p>tere</p><p>st R</p><p>ate</p><p>Home Prices</p><p>0</p><p>100</p><p>200</p><p>300</p><p>400</p><p>500</p><p>0</p><p>50</p><p>100</p><p>1880 1900 1920 1940 1960 1980 2000 2020</p><p>Po</p><p>pu</p><p>lati</p><p>on</p><p> in</p><p> Mil</p><p>lio</p><p>ns</p><p>Ind</p><p>ex o</p><p>r In</p><p>tere</p><p>st R</p><p>ate</p><p>Year</p><p>Home Prices</p><p>Building CostsPopulation</p><p>Interest Rates</p><p>Source: Irrational Exuberance (2nd Edition), Robert J. Shiller</p></li><li><p>Interest Rates</p></li><li><p>Commodity Prices</p></li><li><p>Risk Premium</p></li><li><p>US Trade Openness</p></li><li><p>Mrs. Watanabe</p></li><li><p>Excess Reserves</p></li><li><p>Money Multiplier</p></li><li><p>Stock Market Synchronization</p></li><li><p>BEKK Conditional Correlations</p></li><li><p>Impulse-Response Analysis</p></li></ul>