Macro O Micro Solution To The Economic Global Revisado Abr09

Macro or Micro solution to
the Economic Global Crisis
Abel Hibert
Universidad Metropolitana de Monterrey
April, 2009
Index
What are the causes of the actual global
economic crisis?
How deep is the US economic recession?
How the US economic crisis is affecting Mexican
Economy?
Are the economic measures taken by
governments and central banks adequate?
Conclusions
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What are the causes of the economic
and financial crisis?
All the economic and financial crises in
the history of the mankind have the
same diagnosis:
•Ease Fiscal and Monetary policy
•Regulatory incentives to promote an specific
economic sector
•High liquidity in the system
•Assets bubble
•Sense of easy money
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Route to a financial crisis
Bubble
Search for higher
investment returns
The bubble bursts
Overrated assets
Lax monetary
conditions
Expectations shock:
The original
assumptions were
unrealistic
Credit boom above
available opportunities
Financial
Crisis
Financial
System
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Fiscal and
Monetary Effects
4
Government and Central Bank’s reaction
Governments and Central Banks all over the world
have implemented a number of economic measures to
reduce the impacts of economic and financial crisis.
Governments
Objective
Tools
Increase
aggregate
demand
•Increase Public
Spending
(Infrastructure)
•Tax cuts
•Taxes returns
Central Banks
Restore
Confidence
Bailout of critical
economic sectors
Financial
Automotive
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Maintain Banking
credit flows to private
sector
Reduce inter bank interest
rates by Central Banks
Redesign of Regulatory
Framework
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Avoid the bankruptcy of the financial system
Goals
Restarting the credit flows from the financial system
Increase the capitalization of banks
Mediums
Improve the quality of
banking assets
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Total Assets
Cash
Total Loans
Total Deposits
Trading account liabilities
Government transfer bad assets to
new financial entity
Past due loans
Allowance for loan
losses
Trading account
assets
Stockholders equity
Government capitalize
directly banking system
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Government and Central Bank’s
reaction
Fiscal Stimulus
• Tax returns
• Public spending mainly in infrastructure
Acquisition of Assets in trouble
• Federal Reserve create the Term Asset-Backed Securities Loan Facility
Banks with capitalization troubles have been rescued
Rescue of selected industries in trouble, like automotive industry
Central Banks lend directly to the firms
Mexico has implemented a program to improve the liquidity in the
system through:
• Switch the maturity of public debt from long run to short run
• Offering a warranty to the refinancing of private debt
• Intervention of Banco de Mexico in the foreign exchange market
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Government and Central Bank’s
reaction
President Barack Obama propose an ambitious stimulus
program by 825 bd in 2009 (5.5% of GDP), additional to the
700 bd asked by Bush Administration.
Canadian government signaled this week that it will run a $34
billion deficit this year, implying the stimulus will total about $20
billion.
The government is expected to cut taxes, spend on
infrastructure and retraining and help troubled industries in a
move to get consumers spending again and free up tight credit
markets.
The package represents about one per cent of Canada's gross
domestic product and only half the size of efforts presented in
other countries.
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Mexican Anticyclical program
President Felipe Calderon propose an
anticyclical program with a fiscal cost of
81 bd (1.0% GDP), focused on:
Public Spending in Infrastructure
Freeze of prices of public services
Support to temporal jobs
And supported by the Hedging the oil
revenues in 70 dollar per barrel
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Government and Central Bank’s
reaction
The outcome of these measures is uncertain
and the Fiscal and Monetary Policy has a little
room of maneuver in the next years.
In US, fiscal deficit will be 1.2 trillions dollars
(8.5% of GDP)
The target range for the federal funds rate was
established by the FOMC in 0 to ¼ percent.
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US Economy will be running the greater deficit (as
% of GDP) since the Second World War
-8.2%
2009
Source: Executive Office of the President of the United States (2008). Budget of the United States Government. Fiscal Year 2009. US
Government Printing Office. Washington DC: Retrieved January 20, 2009, from http://www.budget.gov/budget
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FED with limited options to fight
recession
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Mexican Economy will be running the
greater first fiscal deficit since 1990
Source: Secretaría de Hacienda y Crédito Público. Estadísticas Oportunas de Finanzas Públicas y Deuda Pública. Retrieved January 20,
2009, from http://www.apartados.hacienda.gob.mx/estadisticas_oportunas/esp/index.html
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Are all the macroeconomic and
financial measures the right
prescription to restore stability,
credibility and sustainable
economic growth?
All the massive flows of Fiscal and monetary resources
seem to be insufficient to solve the roots of the actual
global crisis
Worldwide Financial Sector is more damaged than the initial
belief:
Just in this year:
• The Irish government announced the full nationalization of Anglo Irish
Bank, the country’s third-largest lender.
• British government unveiled a potpourri of measures to stimulate
lending, including a guarantee scheme designed to protect banks
against losses on bad assets and an increase in its participation in
Royal Bank of Scotland (RBS) to 70%.
• Markets worry that Barclays may also need state support.
• On Tuesday January 20th, the French government agreed to provide
another €10.5 billion ($13.6 billion) of capital to its biggest lenders.
• After its predecessor hastily pumped more money into Bank of America
last week, the new American administration is working on fresh plans
to immunize banks from the effects of their infected assets. The Danes
have also reached into their pockets again.*
*Source: The Economist (Jan 21st 2009) Fears of nationalisation stalk the banking system. Retrieved Jan 22, 2009, from
http://www.economist.com/finance/displaystory.cfm?story_id=12974255
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Problems in the banking sector
While officials are concern in restarting flows of credit to private sector,
the natural and sensible inclination of the banks is to hold on to capital,
not to run it down further by ranking up lending.
Demand for credit is lower as companies and consumers retrench.
According to a survey conducted by McKinsey * in 1,424 executives
from all regions, industries and functional specialties, two-thirds of
respondents to this survey say their companies haven’t sought funds
from external sources since mid-September2—and 81 percent of those
say the reason is that their companies don’t need funds. The figures
are fairly consistent across regions, industries, and company size and
type. Even in the financial services industry, only a third of respondents
say their companies have sought funds.
* McKinsey (2008) McKinsey Global Survey Results. Economic conditions snapshots November 2008. The
McKinsey Quaterly.
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Losses in banks are surging as the
economic climate worsens
As shareholders realize that the price of
further intervention may result in
widespread dilution, it is difficult
politically for governments to keep
injecting money into banks without
wiping out their owners.
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Policy Makers are not telling us the small
caps of the prescription
Financial debt
service
Public
Debt
Fiscal Deficit
Interest rate
Non Financial
public spending
Economic
Growth
Crowding out effect
Must be very diplomatic
with your lenders
Taxes rates
Expansive
monetary policy
Interest
rate
Expansion in
aggregate
demand
Liquidity in the
system
Massive bailouts
of financial and
inefficient
industries
Perverse
incentives
Increase long
run inflation
expectations
Moral Hazard
We are
preparing the
next bubble
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And this story
will be
continued…..19
Source: http://www.economist.com/daily/kallery/displayStory.cfm?story_id=13185173&source=features_box4
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Is another solution available to meet
the actual global crisis?
Maybe we are looking for a new economic paradigm,
but meanwhile we found it, the best solution should
be the economic orthodoxy.
The diagnosis of the actual crisis tells us that the
origin was a huge liquidity in the system. But we are
trying to solve it with more liquidity.
The bailout of financial and industrial firms sends a
negative message to the competitive and “well
behaved” firms.
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Is another solution available to meet
the actual global crisis?
The huge expected fiscal deficit will increase the
previous fiscal pressures of Pension Fund and Health
Care Systems around the world, including Mexico.
In the US, several Union States have financial
problems and are looking for federal assistance
US and the other countries need to eliminate fiscal
deficit and contain the growth of public debt.
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Is another solution available to meet the
actual global crisis?
Governments all around the world must be
very honest with their citizens because it will
be necessary to take hard decisions in a very
near term, to contain the fiscal imbalances
Increase tax rates
Reducing public spending
It will be necessary to increase interest rate.
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Is another solution available to meet
the actual global crisis?
These economic measures will provoke an additional
reduction in economic activity and an increase in
unemployment in the near term.
But in the medium term, these economic measures
will return the economy to the equilibrium, and will
establish the fundamentals for a new period of
sustainable and stable economic growth worldwide.
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Additional measures
Review the regulatory
framework, in particular
in the financial system,
without disincentive for
innovation.
Use the competitive
advantage of every
country:
US Economic Enhancer
Rank in the World
Competitiveness Report
World Economic Forum
Higher education and
training
5
Goods Market efficiency
8
Labor market efficiency
1
Technological readiness
11
Market Size
1
Business sophistication
4
Innovation
1
Infrastructure
7
Intensity of local
competition
4
Source: World Economic Forum (2008) The Global Competitiveness Report 20082009. Countries Proflies. United States. Retrieved January 23, 2009, from
http://www.weforum.org/pdf/GCR08/GCR08.pdf
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In the case of Mexico
Mexican Economic Enhancer
Rank in the World Competitiveness
Report World Economic Forum
Domestic market size
12
Foreign market size
16
Government debt
34
Prevalence of foreign ownership
25
Strength of capital protection
26
Available seat kilometers
18
Education expenditure
31
Primary enrollment
23
Source: World Economic Forum (2008) The Global Competitiveness Report 2008-2009. Countries Proflies. Mexico. Retrieved
January 23, 2009, from http://www.weforum.org/pdf/GCR08/GCR08.pdf
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Governments should be working in the
countries competitiveness weakness
Competitiveness Weakness of the US
Economy
Rank in the World Competitiveness Report
World Economic Forum
Business cost of terrorism
127
Business cost of crime and violence
83
Crime and violence
83
National Saving rate
107
Government debt
102
Government deficit
97
Agricultural policy cost
69
Total taxes rate
74
Business impact on FDI
53
Source: World Economic Forum (2008) The Global Competitiveness Report 2008-2009. Countries Proflies.
United States. Retrieved January 23, 2009, from http://www.weforum.org/pdf/GCR08/GCR08.pdf
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In the case of Mexico our weaknesses are related to
violence and low quality in the education system
Competitiveness Weakness of the
Mexican Economy
Rank in the World Competitiveness
Report World Economic Forum
Organized crime
127
Quality of Math and Science education
127
Business cost of crime and violence
125
Reliability of police services
124
Burden of government regulation
121
Female participation in labor force
115
Quality of primary education
116
Efficiency of legal framework
111
Quality of the educational system
109
Availability of scientist and engineers
105
Trade weighted tariff rate
105
Gov’t procurement of advances tech product
104
Rigidity of employment
99
Effectiveness of antimonopoly policies
92
Non-wage cost
89
Source: World Economic Forum (2008) The Global Competitiveness Report 2008-2009. Countries Proflies.
Mexico. Retrieved January 23, 2009, from http://www.weforum.org/pdf/GCR08/GCR08.pdf
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Conclusions
We are in the middle of the worst global financial crisis.
It is difficult to have a conclusion about how deep is the actual
crisis and how long it will take the recovery
Governments and Central banks are reacting through measures
to increase liquidity in the system with the idea to push
aggregate demand
But, it was the main cause of the actual crisis
The urgent problem is to know about the real situation of the
worldwide banking system.
According to The Economist: “It may not be imminent o
desirable but the specter of nationalization haunts the sector” *
*Source: The Economist (Jan 21st 2009) Fears of nationalisation stalk the banking system. Retrieved Jan 22, 2009, from
http://www.economist.com/finance/displaystory.cfm?story_id=12974255
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Conclusion
Because of political reasons, governments are
trying to avoid fiscal adjustment and they are
not letting the market to do its job to clear
the economy
At the end, difficult measures in economic
policy must to be taken sooner or later.
Governments must be focused in the
competitive advantages of the countries and
review the regulatory framework without the
disincentive of innovation.
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It is the Microeconomics the
answer, not the
macroeconomics…stupid