Post on 29-Mar-2015
transcript
The Current Economic Crisis:
History and Outlook
February 19, 2009
By
Dr. Matt Will
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Overview
The Status – Loss of Confidence
The Solutions:Bailout(s), Stimulus, Mortgage
The Source – CDOs
The Outlook
Copyright © 2009 by Dr. Matthew Will. All rights reserved
IntermediariesDepositors
(1) Funding comes from depositors
(1)
(2) Cash invested
(2)
(3) Payments are made by borrower or Assets Sold
(3)
(4) Proceeds repaid to depositors & reinvested
(4)
1. Source of Credit Crisis
Investments
Banks
Investment Banks
Insurance Cos.
CDOs / MBS
Sub-Prime
Others – No problem
Institutional
Corp.
Other
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Intermediaries
(1) Funding comes from depositors
(1)
(2) Cash invested
(2)
(3) Payments are made by borrower or Assets Sold
(3)
(4) Proceeds repaid to depositors & reinvested
(4)
1. Source of Credit Crisis
Investments
Banks
Investment Banks
Insurance Cos.
CDOs / MBS
Sub-Prime
Others – No problem
Copyright © 2009 by Dr. Matthew Will. All rights reserved
1. Source of Credit Crisis
Corp.
Developers
New Business
Consumers
etc.
IntermediariesDepositorsInvestments
Banks
Investment Banks
Insurance Cos.
GSE
Mutual Funds…
Institutional
Corp.
Intl.
Consumer
Copyright © 2009 by Dr. Matthew Will. All rights reserved
2. Status = Loss of Confidence
Impact
Depositors
Capital Markets
Cash / Money Markets / Intl. / etc.
? What Happens To The Economy? ? What Happens To The Economy?
Copyright © 2009 by Dr. Matthew Will. All rights reserved
How to Restore Depositor / Investor
Confidence?
2. Status = Loss of Confidence
Copyright © 2009 by Dr. Matthew Will. All rights reserved
The Issues
The Status – Loss of Confidence
The Solutions: Bailout(s), Stimulus, Mortgage
Subsidies, Alternatives
The Source – CDOs
Agreement
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions
Banks PROBLEM FIRMS
Insurance Companies
Investment Banks
Intermediaries
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Send Cash (borrowed by Govt.)
Sell Bad Mortgages to Government
3. Solutions: Paulson/Geitner/Bernanke (TARP)
Government
Owned Assets
Rehabilitated Banks (restores confidence)
Bad Banks (no confidence)
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Myth 1: The plan will restore confidence (BB GB)
Fact: Only 20% to 30% of depositors will return
Myth 2: There is no private market for mortgages
Fact: False – See Lehman, Washington Mutual, etc.
Myth 3: The government will make a profit
Fact: Banks will sell worst mortgages
Myth 4: We know which mortgages are bad and their value
Fact: Mortgages are hidden in S.I.V.s - no market price
Myth 5: The government is better at loan workout than banks
Fact: Banks do this for a living
3. Solutions: Paulson/Geitner/Bernanke (TARP)
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Emergency Economic Stabilization Act of 2008– Paulson = 4 pages ($700 bil)
– Final bill = 451 pages ($850 bil)
Highlights - TARPTroubled Asset = “any other financial instrument that the Secretary …
determines the purchase of which is necessary to promote financial market stability.”
Lack of Support
Opposed by over 100 university economists in a signed letter
3. Solutions: Paulson/Geitner/Bernanke (TARP)
Copyright © 2009 by Dr. Matthew Will. All rights reserved
HR 1424 – The Xmas Tree• Energy Improvement and Extension Act of 2008
• Tax Extenders and Alternative Minimum Tax Relief Act of 2008
• Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008
• Heartland Disaster Tax Relief Act of 2008
• "Certain wooden arrows designed for use by children" (Sec. 503)
• Wool research (Sec. 325)
• Film and television productions (Sec. 502)
• Virgin Island and Puerto Rican rum (Sec. 308)
• Auto racing tracks (Sec. 317)
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Stimulus $787 bil
Recovery and Reinvestment Act of 2009 • $400 tax credit per worker…phase out at $75,000• $2,500 tax credit for hiring workers• $61 bil for DOT projects **• $20 bil for food stamps• $2.5 bil for internet for farmers• $7,500 credit, for low income first-time homebuyers
Amount Description
286$ Tax Provisions501$ Spending Provisions787$ Total Stimulus Bill
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Stimulus Impact
Recovery and Reinvestment Act of 2009 • Adds $35 bil per year in interest to federal budget• Exacerbates root cause (unqualified homebuyers)
– American Dream Downpayment Act (2003)– $7,500 for low income home buyers
• Tax credits are temporary (not tax cuts)• Spending distribution
– Social spending dominates plan– Infrastructure spending limited
• Credits new baseline for entitlement spending• Magnifies credit crisis
– Crowds out private borrowing
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Stimulus Impact
Myth: New Deal Stopped Depression
• Cost of New Deal ($2009) = $550 bil• Length of Depression AFTER New Deal = 8 years
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Mortgage Subsidies
Total Cost = $275 bil• $200 bil for Fannie Mae & Freddie Mac• $75 bil direct payments to homeowners• Low income qualification requirement• Targeted assistance • Details to follow
Copyright © 2009 by Dr. Matthew Will. All rights reserved
US Govt. Financial Commitments
Federal Government Financial Commitments from December 2007 thru February 2009.
Excludes Federal Reserve injections via FOMC
Company $ Billions
Bear Sterns 29.0$ AIG 85.0$ FHA Mortgage Guarantees 300.0$ AIG (2nd) 37.5$ AIG (3rd) 27.5$ TARP 700.0$ TARP Riders 150.0$
Financial Market Direct Payments to Date
1,329.0$
Bailouts, Stimulus, etc. 8,562.00$
Total (billions)……………….. 9,891.00$
Disbursements to date = $ 2.546 trillion
Government Borrowing “Crowds Out” Private
Capital Formation
Government Borrowing “Crowds Out” Private
Capital Formation
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Total Impact
• 2/19/09 national debt = $ 10.8 trillion
• Natl. Debt + Current Stimuli = $12.1 trillion– Assumes balanced budget
– ALL Loans / Investments are repaid fully ($8.6 tril)
• Annual interest expense = $545 billion
• Per person– Debt = $40,333
– Annual interest = $1,817
• 2012 Forecast debt = $18.1 trillion
• 2012 Forecast annual interest = $815 billion
Copyright © 2009 by Dr. Matthew Will. All rights reserved
3. Solutions: Credit Market Thaw
• January 2009 China Private Bond issues = $237 bil (record)
• US Non-Govt Guaranteed Loan Volume as of 2/6/09
Reprint from 2/20/09 Wall Street Journal
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Status of Financial Market “Clean Up”
Financial Market Realignment
Only 1 qualified bidder for bailout RFP (Allianz) Cannot unwind CDOs Asset purchases not working (AIG, etc.) Everyone wants a bailout
Acquirer Target
Barclays Lehman BrothersJP Morgan Washington MutualBank of America Merrill LynchJP Morgan Bear SternsWells Fargo WachoviaPNC Financial National City
Commercial Bank Conversions
Goldman SachsMorgan StanleyAmerican Express
Market Solution
Govt. Solution
Copyright © 2009 by Dr. Matthew Will. All rights reserved
SolutionSolution1. Fix the original problem
• Make predatory lending practices illegal
• Require overhaul of rating agencies and “approve” all derivatives
• Repeal Community Reinvestment Act of 1977
• Repeal American Dream Downpayment Acts of 2003 and 2009
• Regulate / Eliminate Credit Default Swaps ***
2. Market value all assets by banks & eliminate off balance sheet holdings
3. Orderly market realignment and/or liquidation of financial institutions
• Wachovia, Was Mu, Goldman, Morgan, Lehman, Merrill Lynch, etc.
• Expand TARP/CPP to include financing acquisitions
4. Avoid more bailouts (ala AIG, GM, etc.)
3. Solutions – An Alternative
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Result of Alternative Solution
• RESTORE CONFIDENCE
• Clean out poor institutions
• Increase quality of loan portfolios
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Summary
• Solution must…
… address root causes
… not be political or reactionary• Bailouts…
… delay recovery
… make recession worse
…do not fix fundamental problems
…drain money from capital markets
• Economy will recover
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Questions
Copyright © 2009 by Dr. Matthew Will. All rights reserved
Three Important Secrets
1. Credit Default Swaps (CDSs)
2. Structured Investment Vehicles (SIVs)
3. “Rating Agency Game”
Copyright © 2009 by Dr. Matthew Will. All rights reserved
White House Aid PackageWhite House Aid Package Government appointed Czar Government to finance turnaround Required Targets
Convert 2/3 of debt to equity Fund ½ of VEBA with Stock Eliminate Jobs Bank Convert UAW work rules to Transplant rules Convert UAW wages to Transplant wages
Restructuring = Competitive
IssuesIssues Can this be done outside of bankruptcy? Will Obama enforce targets?
3. Solutions – Auto Industry