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Financial Crises: Can They Be Prevented?

Prof. Mohd Nazari Ismail Faculty of Business and Accounting University of Malaya. Financial Crises: Can They Be Prevented?. Prof. Paul Krugman , Princeton U. Winner of 2008 Nobel Prize for Economics. Alan Greenspan Chairman of US Federal Reserve Board, 1987-2006.

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Financial Crises: Can They Be Prevented?

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  1. Prof. Mohd Nazari Ismail Faculty of Business and Accounting University of Malaya Financial Crises: Can They Be Prevented?

  2. Prof. Paul Krugman , Princeton U.Winner of 2008 Nobel Prize for Economics

  3. Alan GreenspanChairman of US Federal Reserve Board, 1987-2006

  4. Prof. Jeffrey SachsDirector Earth Institute, Columbia University

  5. Plenty of brains… still cannot solve problem? So how? Massachusetts Institute of Technology

  6. Hmmm….. How are we gonna solve this problem?

  7. I don’t have a clue too…

  8. Presentation Outline Reasons for concern Different types of financial crises History of finance industry Central argument Conclusion

  9. ….financial crises at their core are outcomes of over-lending and over-borrowing and are thus integral to the industry itself. CENTRAL ARGUMENT

  10. Asian Financial Crisis – Worse Economic Damage…

  11. …compared to the Asian Tsunami !

  12. US Sub-prime crisis…

  13. … impact in all corners of the world

  14. We are victims of the Jews ….

  15. Honest, it wasn’t me…

  16. Financial Crisis “a disturbance to financial markets, associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital” B. Eichengreen, 1986

  17. Economics Crisis Financial crisis

  18. Other Causes of Economics Crises • Wars • Earthquakes • Floods • Draughts • Plagues

  19. Types of Financial Crises • Currency crisis • Banking crisis • Market crashes

  20. Asian Financial Crisis

  21. Overinvestment in Real Estate

  22. Asian Financial Crisis

  23. Inflow of foreign funds prior to crisis

  24. Bank Run

  25. Source: Worldbank

  26. Argentina • Fiscal indiscipline • Public debt: • 1983 USD46 billion • 1989 USD65 billion • 1999 USD130 billion • Trade deficit • Bank run

  27. Argentina riots… Sorry, you cannot withdraw any money today…

  28. Open up the bank! We want our money back….

  29. Argentina Foreign Debt in 2007: USD127 billion!

  30. Market Crash

  31. Bubble…

  32. Examples of Market Crash • Japanese property crash (1990) • Dot.Com crash (2000) • Sup-prime mortgage crash (2007)

  33. Japanese Crash – A Puzzle? • Successful exporter • Trade surplus • High savings rate • Hardworking and skilled workforce

  34. Japanese problem • banks • over-borrowing • debt • speculation

  35. Here is how it happened… Savings/funds deposited into banks Banks increased lendings Asset prices skyrocketed ?

  36. land surrounding the Imperial Palace in Tokyo estimated to be worth more than whole of California…

  37. ….created a massive bubble…

  38. … which soon burst!

  39. Effect of Bubble Burst • Trillions of yens wiped out in markets • Spending slowed down • Economy sputtered to a halt

  40. Japanese Poorest and Weakest

  41. A side of Japan that is not often seen…

  42. Low interest rates, excess liquidity in 1990s Banks lent to Sub-prime borrowers Housing boom CDOs act as booster Sub-prime Mortgage Crisis

  43. Housing prices skyrocketed Interest rates rose CRASH! Borrowers go bust Sub-prime Mortgage Crisis (cont.)

  44. Total UK and US debt to GDP ratio of 300 %

  45. … 20% of total economic output used to pay interest

  46. Sub-prime Mortgage Crisis (cont.) Housing prices skyrocketed Interest rates rose CRASH! Borrowers go bust

  47. Lenders go bust Credit Crunch Global Recession? Sub-prime Mortgage Crisis (cont.)

  48. All in Serious Trouble…

  49. How serious is current crisis? • USD16.3 trillion wiped out • deep and prolonged recession • Major economies slowing down

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