Many factors directly and indirectly caused the ongoing Financial crisis of 2007-2010 (which started with the US subprime mortgage crisis), with experts placing different weights upon particular causes. The complexity and interdependence of many of the causes, as well as competing political, economic and organizational interests, have resulted in a variety of narratives describing the crisis. One category of causes created a vulnerable or fragile financial system, including complex financial securities, a dependence on short-term funding markets, and international trade imbalances. Other causes increased the stress on this fragile system, such as high corporate and consumer debt levels. Still others represent shocks to that system, such as the ongoing foreclosure crisis and the failures of key financial institutions. Regulatory and market-based controls did not effectively protect this system or measure the buildup of risk. Some causes relate to particular markets, such as the stock market or housing market, while others relate to the global economy more broadly. In July 2009, the U.S. announced the members of the Financial Crisis Inquiry Commission to investigate the causes of the crisis. Its report is expected at the end of 2010.
1. Housing Market
The U.S. housing bubble and foreclosures
Between 1997 and 2006, the price of the typical American house increased by 124%. During the two decades ending in 2001, the national median home price ranged from 2.9 to 3.1 times median household income. This ratio rose to 4.0 in 2004 and 4.6 in 2006. This housing bubble resulted in quite a few homeowners refinancing their homes at lower interest rates, or financing consumer spending by taking out second mortgages secured by the price appreciation.
By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. Easy credit, and a belief that house prices would continue to appreciate, had encouraged many subprime borrowers to obtain adjustable-rate mortgages. These mortgages enticed borrowers with a below market interest rate for some predetermined period, followed by market interest rates for the remainder of the mortgage’s term. Borrowers who could not make the higher payments once the initial grace period ended would try to refinance their mortgages. Refinancing became more difficult, once house prices began to decline in many parts of the USA. Borrowers who found themselves unable to escape higher monthly payments by refinancing began to default. During 2007, lenders had begun foreclosure proceedings on nearly 1.3 million properties, a 79% increase over 2006. This increased to 2.3 million in 2008, an 81% increase vs. 2007. As of August 2008, 9.2% of all mortgages outstanding were either delinquent or in foreclosure.
The Economist described the issue this way: “No part of the financial crisis has received so much attention, with so little to show for it, as the tidal wave of home foreclosures sweeping over America. Government programmers have been ineffectual and private efforts not much better.” Up to 9 million homes may enter foreclosure over the 2009-2011 periods, versus one million in a typical year. At roughly U.S. $50,000 per foreclosure according to a 2006 study by the Chicago Federal Reserve Bank, 9 million foreclosures represents $450 billion in losses.
The term subprime refers to the credit quality of particular borrowers, who have weakened credit histories and a greater risk of loan default than prime borrowers. The value of U.S. subprime mortgages was estimated at $1.3 trillion as of March 2007, with over 7.5 million first-lien subprime mortgages outstanding.
In addition to easy credit conditions, there is evidence that both government and competitive pressures contributed to an increase in the amount of subprime lending during the years preceding the crisis. Major U.S. investment banks and government sponsored enterprises like Fannie Mae played an important role in the expansion of higher-risk lending.
Subprime mortgages remained below 10% of all mortgage originations until 2004, when they spiked to nearly 20% and remained there through the 2005-2006 peak of the United States housing bubble. A proximate event to this increase was the April 2004 decision by the U.S. Securities and Exchange Commission (SEC) to relax the net capital rule, which encouraged the largest five investment banks to dramatically increase their financial leverage and aggressively expand their issuance of mortgage-backed securities. Subprime mortgage payment delinquency rates remained in the 10-15% range from 1998 to 2006, then began to increase rapidly, rising to 25% by early 2008.
In addition to considering higher-risk borrowers, lenders offered increasingly risky loan options and borrowing incentives. Mortgage underwriting standards declined gradually during the boom period. The use of automated loan approvals allowed loans to be made without appropriate review and documentation. In 2007, 40% of all subprime loans resulted from automated underwriting. The chairman of the Mortgage Bankers Association claimed that mortgage brokers, while profiting from the home loan boom, did not do enough to examine whether borrowers could repay. Mortgage fraud by lenders and borrowers increased enormously.
A study by analysts at the Federal Reserve Bank of Cleveland found that the average difference between subprime and prime mortgage interest rates (the “subprime markup”) declined significantly between 2001 and 2007. The quality of loans originated also worsened gradually during that period. The combination of declining risk premier and credit standards is common to boom and bust credit cycles. The authors also concluded that the decline in underwriting standards did not directly trigger the crisis, because the gradual changes in standards did not statistically account for the large difference in default rates for subprime mortgages issued between 2001-2005 (which had a 10% default rate within one year of origination) and 2006-2007 (which had a 20% rate). In other words, standards gradually declined but defaults suddenly jumped. Further, the authors argued that the trend in worsening loan quality was harder to detect with rising housing prices, as more refinancing options were available, keeping the default rate lower.
In 2004, the Federal Bureau of Investigation warned of an “epidemic” in mortgage fraud, an important credit risk of nonprime mortgage lending, which, they said, could lead to “a problem that could have as much impact as the S&L crisis”.
Down payments and negative equity
A down payment refers to the cash paid to the lender for the home and represents the initial homeowner’s equity or financial interest in the home. A low down payment means that a home represents a highly leveraged investment for the homeowner, with little equity relative to debt. In such circumstances, only small declines in the value of the home result in negative equity, a situation in which the value of the home is less than the mortgage amount owed. In 2005, the median down payment for first-time home buyers was 2%, with 43% of those buyers making no down payment whatsoever. By comparison, China has down payment requirements that exceed 20%, with higher amounts for non-primary residences.
Economist Nouriel Roubini wrote in Forbes in July 2009: “Home prices have already fallen from their peak by about 30%. Based on my analysis, they are going to fall by at least 40% from their peak, and more likely 45%, before they bottom out. They are still falling at an annualized rate of over 18%. That fall of at least 40%-45% percent of home prices from their peak is going to imply that about half of all households that have a mortgage—about 25 million of the 51 million that have mortgages—are going to be underwater with negative equity and will have a significant incentive to walk away from their homes.”
Economist Stan Leibowitz argued in the Wall Street Journal that the extent of equity in the home was the key factor in foreclosure, rather than the type of loan, credit worthiness of the borrower, or ability to pay. Although only 12% of homes had negative equity (meaning the property was worth less than the mortgage obligation), they comprised 47% of foreclosures during the second half of 2008. Homeowners with negative equity have less financial incentive to stay in the home.
The L.A. Times reported the results of a study that found homeowners with high credit scores at the time of entering the mortgage are 50% more likely to “strategically default” — abruptly and intentionally pull the plug and abandon the mortgage—compared with lower-scoring borrowers. Such strategic defaults were heavily concentrated in markets with the highest price declines. An estimated 588,000 strategic defaults occurred nationwide during 2008, more than double the total in 2007. They represented 18% of all serious delinquencies that extended for more than 60 days in the fourth quarter of 2008.
Predatory lending refers to the practice of unscrupulous lenders, to enter into “unsafe” or “unsound” secured loans for inappropriate purposes. A classic bait-and-switch method was used by Countrywide, advertising low interest rates for home refinancing. Such loans were written into mind-numbingly detailed contracts, and swapped for more expensive loan products on the day of closing. Whereas the advertisement might state that 1% or 1.5% interest would be charged, the consumer would be put into an adjustable rate mortgage (ARM) in which the interest charged would be greater than the amount of interest paid. This created negative amortization, which the credit consumer might not notice until long after the loan transaction had been consummated.
Countrywide, sued by California Attorney General Jerry Brown for “Unfair Business Practices” and “False Advertising” was making high cost mortgages “to homeowners with weak credit, adjustable rate mortgages (ARMs) that allowed homeowners to make interest-only payments.” When housing prices decreased, homeowners in ARMs then had little incentive to pay their monthly payments, since their home equity had disappeared. This caused Countrywide’s financial condition to deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to seize the lender.
Countrywide, according to Republican Lawmakers, had involved itself in making low-cost loans to politicians, for purposes of gaining political favors.
Former employees from Ameriquest, which was United States’ leading wholesale lender, described a system in which they were pushed to falsify mortgage documents and then sell the mortgages to Wall Street banks eager to make fast profits. There is growing evidence that such mortgage frauds may be a cause of the crisis.
2. Risk-Taking Behavior .
In a June 2009 speech, U.S. President Barack Obama argued that a “culture of irresponsibility” was an important cause of the crisis. He criticized executive compensation that “rewarded recklessness rather than responsibility” and Americans who bought homes “without accepting the responsibilities.” He continued that there “was far too much debt and not nearly enough capital in the system. And a growing economy bred complacency.”
A key theme of the crisis is that many large financial institutions did not have a sufficient financial cushion to absorb the losses they sustained or to support the commitments made to others. Using technical terms, these firms were highly leveraged (i.e., they maintained a high ratio of debt to equity) or had insufficient capital to post as collateral for their borrowing. A key to a stable financial system is that firms have the financial capacity to support their commitments. Michael Lewis and David Einhorn argued: “The most critical role for regulation is to make sure that the sellers of risk have the capital to support their bets.”
Consumer and household borrowing
U.S. households and financial institutions became increasingly indebted or overleveraged during the years preceding the crisis. This increased their vulnerability to the collapse of the housing bubble and worsened the ensuing economic downturn.
- USA household debt as a percentage of annual disposable personal income was 127% at the end of 2007, versus 77% in 1990.
- U.S. home mortgage debt relative to gross domestic product (GDP) increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.
- In 1981, U.S. private debt was 123% of GDP; by the third quarter of 2008, it was 290%.
Home equity extraction
This refers to homeowners borrowing and spending against the value of their homes, typically via a home equity loan or when selling the home. Free cash used by consumers from home equity extraction doubled from $627 billion in 2001 to $1,428 billion in 2005 as the housing bubble built, a total of nearly $5 trillion dollars over the period, contributing to economic growth worldwide. U.S. home mortgage debt relative to GDP increased from an average of 46% during the 1990s to 73% during 2008, reaching $10.5 trillion.
Speculative borrowing in residential real estate has been cited as a contributing factor to the subprime mortgage crisis. During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchases were not intended as primary residences. David Lereah, NAR’s chief economist at the time, stated that the 2006 decline in investment buying was expected: “Speculators left the market in 2006, which caused investment sales to fall much faster than the primary market.”
Housing prices nearly doubled between 2000 and 2006, a vastly different trend from the historical appreciation at roughly the rate of inflation. While homes had not traditionally been treated as investments subject to speculation, this behavior changed during the housing boom. Media widely reported condominiums being purchased while under construction, then being “flipped” (sold) for a profit without the seller ever having lived in them. Some mortgage companies identified risks inherent in this activity as early as 2005, after identifying investors assuming highly leveraged positions in multiple properties.
Nicole Gelinas of the Manhattan Institute described the negative consequences of not adjusting tax and mortgage policies to the shifting treatment of a home from conservative inflation hedge to speculative investment. Economist Robert Shiller argued that speculative bubbles are fueled by “contagious optimism, seemingly impervious to facts, that often takes hold when prices are rising. Bubbles are primarily social phenomena; until we understand and address the psychology that fuels them, they’re going to keep forming.”
Pro-cyclical human nature
Keynesian economist Hyman Minsky described how speculative borrowing contributed to rising debt and an eventual collapse of asset values. Economist Paul McCulley described how Minsky’s hypothesis translates to the current crisis, using Minsky’s words: “…from time to time, capitalist economies exhibit inflations and debt deflations which seem to have the potential to spin out of control. In such processes, the economic system’s reactions to a movement of the economy amplify the movement–inflation feeds upon inflation and debt-deflation feeds upon debt deflation.” In other words, people are momentum investors by nature, not value investors. People naturally take actions that expand the apex and nadir of cycles. One implication for policymakers and regulators is the implementation of counter-cyclical policies, such as contingent capital requirements for banks that increase during boom periods and are reduced during busts.
Corporate risk-taking and leverage
The former CEO of Citigroup Charles O. Prince said in November 2007: “As long as the music is playing, you’ve got to get up and dance.” This metaphor summarized how financial institutions took advantage of easy credit conditions, by borrowing and investing large sums of money, a practice called leveraged lending. Debt taken on by financial institutions increased from 63.8% of U.S. gross domestic product in 1997 to 113.8% in 2007.
A 2004 SEC decision related to the net capital rule allowed USA investment banks to issue substantially more debt, which was then used to help fund the housing bubble through purchases of mortgage-backed securities. From 2004-07, the top five U.S. investment banks each significantly increased their financial leverage (see diagram), which increased their vulnerability to a financial shock. These five institutions reported over $4.1 trillion in debt for fiscal year 2007, about 30% of USA nominal GDP for 2007. Lehman Brothers was liquidated, Bear Stearns and Merrill Lynch were sold at fire-sale prices, and Goldman Sachs and Morgan Stanley became commercial banks, subjecting themselves to more stringent regulation. With the exception of Lehman, these companies required or received government support.
Fannie Mae and Freddie Mac, two U.S. Governments sponsored enterprises, owned or guaranteed nearly $5 trillion in mortgage obligations at the time they were placed into conservatorship by the U.S. government in September 2008.
These seven entities were highly leveraged and had $9 trillion in debt or guarantee obligations, an enormous concentration of risk, yet were not subject to the same regulation as depository banks.
In a May 2008 speech, Ben Bernanke quoted Walter Bagehot: “A good banker will have accumulated in ordinary times the reserve he is to make use of in extraordinary times.” However, this advice was not heeded by these institutions, which had used the boom times to increase their leverage ratio instead.
3. Financial Market Factors .
In its “Declaration of the Summit on Financial Markets and the World Economy,” dated 15 November 2008, leaders of the Group of 20 cited the following causes related to features of the modern financial markets.
During a period of strong global growth, growing capital flows, and prolonged stability earlier this decade, market participants sought higher yields without an adequate appreciation of the risks and failed to exercise proper due diligence. At the same time, weak underwriting standards, unsound risk management practices, increasingly complex and opaque financial products, and consequent excessive leverage combined to create vulnerabilities in the system. Policy-makers, regulators and supervisors, in some advanced countries, did not adequately appreciate and address the risks building up in financial markets, keep pace with financial innovation, or take into account the systemic ramifications of domestic regulatory actions.
Financial product innovation
The term financial innovation refers to the ongoing development of financial products designed to achieve particular client objectives, such as offsetting a particular risk exposure (such as the default of a borrower) or to assist with obtaining financing. Examples pertinent to this crisis included: the adjustable-rate mortgage; the bundling of subprime mortgages into mortgage-backed securities (MBS) or collateralized debt obligations (CDO) for sale to investors, a type of securitization; and a form of credit insurance called credit default swaps(CDS). The usage of these products expanded dramatically in the years leading up to the crisis. These products vary in complexity and the ease with which they can be valued on the books of financial institutions.
The CDO in particular enabled financial institutions to obtain investor funds to finance subprime and other lending, extending or increasing the housing bubble and generating large fees. Approximately $1.6 trillion in CDO’s were originated between 2003-2007. A CDO essentially places cash payments from multiple mortgages or other debt obligations into a single pool, from which the cash is allocated to specific securities in a priority sequence. Those securities obtaining cash first received investment-grade ratings from rating agencies. Lower priority securities received cash thereafter, with lower credit ratings but theoretically a higher rate of return on the amount invested.
For a variety of reasons, market participants did not accurately measure the risk inherent with this innovation or understand its impact on the overall stability of the financial system. For example, the pricing model for CDOs clearly did not reflect the level of risk they introduced into the system. The average recovery rate for “high quality” CDOs has been approximately 32 cents on the dollar, while the recovery rate for mezzanine CDO’s has been approximately five cents for every dollar. These massive, practically unthinkable, losses have dramatically impacted the balance sheets of banks across the globe, leaving them with very little capital to continue operations.
Others have pointed out that there were not enough of these loans made to cause a crisis of this magnitude. In an article in Portfolio Magazine, Michael Lewis spoke with one trader who noted that “There weren’t enough Americans with [bad] credit taking out [bad loans] to satisfy investors’ appetite for the end product.” Essentially, investment banks and hedge funds used financial innovation to synthesize more loans using derivatives. “They were creating [loans] out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans.”
Princeton professor Harold James wrote that one of the byproducts of this innovation was that MBS and other financial assets were “repackaged so thoroughly and resold so often that it became impossible to clearly connect the thing being traded to its underlying value.” He called this a “…profound flaw at the core of the U.S. financial system…”
Another example relates to AIG, which insured obligations of various financial institutions through the usage of credit default swaps. The basic CDS transaction involved AIG receiving a premium in exchange for a promise to pay money to party A in the event party B defaulted. However, AIG did not have the financial strength to support its many CDS commitments as the crisis progressed and was taken over by the government in September 2008. U.S. taxpayers provided over $180 billion in government support to AIG during 2008 and early 2009, through which the money flowed to various counterparties to CDS transactions, including many large global financial institutions.
Author Michael Lewis wrote that CDS enabled speculators to stack bets on the same mortgage bonds and CDO’s. This is analogous to allowing many persons to buy insurance on the same house. Speculators that bought CDS insurance were betting that significant defaults would occur, while the sellers (such as AIG) bet they would not. In addition, Chicago Public Radio and the Huffington Post reported in April 2010 that market participants, including a hedge fund called Magnetar Capital, encouraged the creation of CDO’s containing low quality mortgages, so they could bet against them using CDS. NPR reported that Magnetar encouraged investors to purchase CDO’s while simultaneously betting against them, without disclosing the latter bet.
Inaccurate credit ratings
Credit rating agencies are now under scrutiny for having given investment-grade ratings to MBSs based on risky subprime mortgage loans. These high ratings enabled these MBS to be sold to investors, thereby financing the housing boom. These ratings were believed justified because of risk reducing practices, such as credit default insurance and equity investors willing to bear the first losses. However, there are also indications that some involved in rating subprime-related securities knew at the time that the rating process was faulty.
An estimated $3.2 trillion in loans were made to homeowners with bad credit and undocumented incomes (e.g., subprime or Alt-A mortgages) between 2002 and 2007. Economist Joseph Stiglitz stated: “I view the rating agencies as one of the key culprits…They were the party that performed the alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the rating agencies.” Without the AAA ratings, demand for these securities would have been considerably less. Bank write downs and losses on these investments totaled $523 billion as of September 2008.
The ratings of these securities was a lucrative business for the rating agencies, accounting for just under half of Moody’s total ratings revenue in 2007. Through 2007, ratings companies enjoyed record revenue, profits and share prices. The rating companies earned as much as three times more for grading these complex products than corporate bonds, their traditional business. Rating agencies also competed with each other to rate particular MBS and CDO securities issued by investment banks, which critics argued contributed to lower rating standards. Interviews with rating agency senior managers indicate the competitive pressure to rate the CDO’s favorably was strong within the firms. This rating business was their “golden goose” (which laid the proverbial golden egg or wealth) in the words of one manager. Author Upton Sinclair (1878-1968) famously stated: “It is difficult to get a man to understand something when his job depends on not understanding it.”
Critics allege that the rating agencies suffered from conflicts of interest, as they were paid by investment banks and other firms that organize and sell structured securities to investors. On 11 June 2008, the SEC proposed rules designed to mitigate perceived conflicts of interest between rating agencies and issuers of structured securities. On 3 December 2008, the SEC approved measures to strengthen oversight of credit rating agencies, following a ten-month investigation that found “significant weaknesses in ratings practices,” including conflicts of interest.
Between Q3 2007 and Q2 2008, rating agencies lowered the credit ratings on $1.9 trillion in mortgage backed securities. Financial institutions felt they had to lower the value of their MBS and acquire additional capital so as to maintain capital ratios. If this involved the sale of new shares of stock, the value of the existing shares was reduced. Thus ratings downgrades lowered the stock prices of many financial firms.
The limitations of a widely-used financial model also were not properly understood. This formula assumed that the price of CDS was correlated with and could predict the correct price of mortgage backed securities. Because it was highly tractable, it rapidly came to be used by a huge percentage of CDO and CDS investors, issuers, and rating agencies. According to one wired.com article: “Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li’s formula hadn’t expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system’s foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril… Li’s Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.”
As financial assets became more and more complex, and harder and harder to value, investors were reassured by the fact that both the international bond rating agencies and bank regulators, who came to rely on them, accepted as valid some complex mathematical models which theoretically showed the risks were much smaller than they actually proved to be in practice. George Soros commented that “The super-boom got out of hand when the new products became so complicated that the authorities could no longer calculate the risks and started relying on the risk management methods of the banks themselves. Similarly, the rating agencies relied on the information provided by the originators of synthetic products. It was a shocking abdication of responsibility.”
Off-balance sheet financing
Complex financing structures called structured investment vehicles (SIV) or conduits enabled banks to move significant amounts of assets and liabilities, including unsold CDO’s, off their books. This had the effect of helping the banks maintain regulatory minimum capital ratios. They were then able to led anew, earning additional fees. Author Robin Blackburn explained how they worked.
Institutional investors could be persuaded to buy the SIV’s supposedly high-quality, short-term commercial paper, allowing the vehicles to acquire longer-term, lower quality assets, and generating a profit on the spread between the two. The latter included larger amounts of mortgages, credit-card debt, student loans and other receivables…For about five years those dealing in SIV’s and conduits did very well by exploiting the spread…but this disappeared in August 2007, and the banks were left holding a very distressed baby.
Banks had established automatic lines of credit to these SIV and conduits. When the cash flow into the SIV’s began to decline as subprime defaults mounted, banks were contractually obligated to provide cash to these structures and their investors. This “conduit-related balance sheet pressure” placed strain on the banks’ ability to lend, both raising interbank lending rates and reducing the availability of funds.
In the years leading up to the crisis, the top four U.S. depository banks moved an estimated $5.2 trillion in assets and liabilities off-balance sheet into these SIV’s and conduits. This enabled them to essentially bypass existing regulations regarding minimum capital ratios, thereby increasing leverage and profits during the boom but increasing losses during the crisis. Accounting guidance was changed in 2009 that will require them to put some of these assets back onto their books, which will significantly reduce their capital ratios. One news agency estimated this amount to be between $500 billion and $1 trillion. This effect was considered as part of the stress tests performed by the government during 2009.
During March 2010, the bankruptcy court examiner released a report on Lehman Brothers, which had failed spectacularly in September 2008. The report indicated that up to $50 billion was moved off-balance sheet in a questionable manner by management during 2008, with the effect of making its debt level (leverage ratio) appearing smaller. Analysis by the Federal Reserve Bank of New York indicated big banks mask their risk levels just prior to reporting data quarterly to the public.
Certain financial innovation may also have the effect of circumventing regulations, such as off-balance sheet financing that affects the leverage or capital cushion reported by major banks. For example, Martin Wolf wrote in June 2009: “…an enormous part of what banks did in the early part of this decade – the off-balance-sheet vehicles, the derivatives and the ‘shadow banking system’ itself – was to find a way round regulation.”
Financial sector concentration
Niall Ferguson wrote that the financial sector became increasingly concentrated in the years leading up to the crisis, which made the stability of the financial system more reliant on just a few firms, which were also highly leveraged.
Between 1990 and 2008, according to Wall Street veteran Henry Kaufman, the share of financial assets held by the 10 largest U.S. financial institutions rose from 10 percent to 50 percent, even as the number of banks fell from more than 15,000 to about 8,000. By the end of 2007, 15 institutions with combined shareholder equity of $857 billion had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion—a total leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion. These firms had once been Wall Street’s “bulge bracket,” the companies that led underwriting syndicates. Now they did more than bulge. These institutions had become so big that the failure of just one of them would pose a systemic risk.
4. Macroeconomic Conditions .
Two important factors that contributed to the United States housing bubble were low U.S. interest rates and a large U.S. trade deficit. Low interest rates made bank lending more profitable, while trade deficits resulted in large capital inflows to the U.S. Both made funds for borrowing plentiful and relatively inexpensive.
From 2000 to 2003, the Federal Reserve lowered the federal funds rate target from 6.5% to 1.0%. This was done to soften the effects of the collapse of the dot-com bubble and of the September 2001 terrorist attacks, and to combat the perceived risk of deflation. The Fed then raised the Fed funds rate significantly between July 2004 and July 2006. This contributed to an increase in 1-year and 5-year adjustable-rate mortgage (ARM) rates, making ARM interest rate resets more expensive for homeowners. This may have also contributed to the deflating of the housing bubble, as asset prices generally move inversely to interest rates and it became riskier to speculate in housing.
In 2005, Ben Bernanke addressed the implications of the USA’s high and rising current account (trade) deficit, resulting from USA imports exceeding its exports. Between 1996 and 2004, the USA current account deficit increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits required the USA to borrow large sums from abroad, much of it from countries running trade surpluses, mainly the emerging economies in Asia and oil-exporting nations.
The balance of payments identity requires that a country (such as the USA) running a current account deficit also have a capital account (investment) surplus of the same amount. Hence large and growing amounts of foreign funds (capital) flowed into the USA to finance its imports. This created demand for various types of financial assets, raising the prices of those assets while lowering interest rates. Foreign investors had these funds to lend, either because they had very high personal savings rates (as high as 40% in China), or because of high oil prices. Bernanke referred to this as a “saving glut.” A “flood” of funds (capital or liquidity) reached the USA financial markets. Foreign governments supplied funds by purchasing USA Treasury bonds and thus avoided much of the direct impact of the crisis. USA households, on the other hand, used funds borrowed from foreigners to finance consumption or to bid up the prices of housing and financial assets. Financial institutions invested foreign funds in mortgage-backed securities. USA housing and financial assets dramatically declined in value after the housing bubble burst.4.3 Chinese mercantilism
Martin Wolf has argued that “inordinately mercantilist currency policies” were a significant cause of the U.S. trade deficit, indirectly driving a flood of money into the U.S. as described above. In his view, China maintained an artificially weak currency to make Chinese goods relatively cheaper for foreign countries to purchase, thereby keeping its vast workforce occupied and encouraging exports to the U.S. One byproduct was a large accumulation of U.S. dollars by the Chinese government, which were then invested in U.S. government securities and those of Fannie Mae and Freddie Mac, providing additional funds for lending that contributed to the housing bubble.
Economist Paul Krugman also wrote similar comments during October 2009, further arguing that China’s currency should have appreciated relative to the U.S. dollar beginning around 2001.Various U.S. officials have also indicated concerns with Chinese exchange rate policies, which have not allowed its currency to appreciate significantly relative to the dollar despite large trade surpluses. In January 2009, Timothy Geithner wrote: “Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency…the question is how and when to broach the subject in order to do more good than harm.”
5. Capital Market Pressures .
Private capital and the search for yield
In a Peabody Award winning program, NPR correspondents argued that a “Giant Pool of Money” (represented by $70 trillion in worldwide fixed income investments) sought higher yields than those offered by U.S. Treasury bonds early in the decade, which were low due to low interest rates and trade deficits discussed above. Further, this pool of money had roughly doubled in size from 2000 to 2007, yet the supply of relatively safe, income generating investments had not grown as fast. Investment banks on Wall Street answered this demand with the mortgage-backed security (MBS) and collateralized debt obligation (CDO), which were assigned safe ratings by the credit rating agencies. In effect, Wall Street connected this pool of money to the mortgage market in the U.S., with enormous fees accruing to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. By approximately 2003, the supply of mortgages originated at traditional lending standards had been exhausted. However, continued strong demand for MBS and CDO began to drive down lending standards, as long as mortgages could still be sold along the supply chain. Eventually, this speculative bubble proved unsustainable.
6. Boom & Collapse of The Shadow Banking System
Significance of the parallel banking system
In a June 2008 speech, U.S. Treasury Secretary Timothy Geithner, then President and CEO of the NY Federal Reserve Bank, placed significant blame for the freezing of credit markets on a “run” on the entities in the “parallel” banking system, also called the shadow banking system. These entities became critical to the credit markets underpinning the financial system, but were not subject to the same regulatory controls. Further, these entities were vulnerable because they borrowed short-term in liquid markets to purchase long-term, illiquid and risky assets. This meant that disruptions in credit markets would make them subject to rapid deleveraging, selling their long-term assets at depressed prices. He described the significance of these entities: “In early 2007, asset-backed commercial paper conduits, in structured investment vehicles, in auction-rate preferred securities, tender option bonds and variable rate demand notes, had a combined asset size of roughly $2.2 trillion. Assets financed overnight in triparty repo grew to $2.5 trillion. Assets held in hedge funds grew to roughly $1.8 trillion. The combined balance sheets of the then five major investment banks totaled $4 trillion. In comparison, the total assets of the top five bank holding companies in the United States at that point were just over $6 trillion, and total assets of the entire banking system were about $10 trillion.” He stated that the “combined effect of these factors was a financial system vulnerable to self-reinforcing asset price and credit cycles.”
Run on the shadow banking system
Nobel laureate Paul Krugman described the run on the shadow banking system as the “core of what happened” to cause the crisis. “As the shadow banking system expanded to rival or even surpass conventional banking in importance, politicians and government officials should have realized that they were re-creating the kind of financial vulnerability that made the Great Depression possible—and they should have responded by extending regulations and the financial safety net to cover these new institutions. Influential figures should have proclaimed a simple rule: anything that does what a bank does, anything that has to be rescued in crises the way banks are, should be regulated like a bank.” He referred to this lack of controls as “malign neglect.”
For example, investment bank Bear Stearns was required to replenish much of its funding in overnight markets, making the firm vulnerable to credit market disruptions. When concerns arose regarding its financial strength, its ability to secure funds in these short-term markets was compromised, leading to the equivalent of a bank run. Over four days, its available cash declined from $18 billion to $3 billion as investors pulled funding from the firm. It collapsed and was sold at a fire-sale price to bank JP Morgan Chase March 16, 2008.
American homeowners, consumers, and corporations owed roughly $25 trillion during 2008. American banks retained about $8 trillion of that total directly as traditional mortgage loans. Bondholders and other traditional lenders provided another $7 trillion. The remaining $10 trillion came from the securitization markets, meaning the parallel banking system. The securitization markets started to close down in the spring of 2007 and nearly shut-down in the fall of 2008. More than a third of the private credit markets thus became unavailable as a source of funds. In February 2009, Ben Bernanke stated that securitization markets remained effectively shut, with the exception of conforming mortgages, which could be sold to Fannie Mae and Freddie Mac.
The Economist reported in March 2010: “Bear Stearns and Lehman Brothers were non-banks that were crippled by a silent run among panicky overnight “repo” lenders, many of them money market funds uncertain about the quality of securitized collateral they were holding. Mass redemptions from these funds after Lehman’s failure froze short-term funding for big firms.”
7. Mortgage Compensation Model, Executive Pay & Bonuses .
During the boom period, enormous fees were paid to those throughout the mortgage supply chain, from the mortgage broker selling the loans, to small banks that funded the brokers, to the giant investment banks behind them. Those originating loans were paid fees for selling them, regardless of how the loans performed. Default or credit risk was passed from mortgage originators to investors using various types of financial innovation. This became known as the “originate to distribute” model, as opposed to the traditional model where the bank originating the mortgage retained the credit risk. In effect, the mortgage originators were left with nothing which was at risk, giving rise to moral hazard in which behavior and consequence were separated.
The New York State Comptroller’s Office has said that in 2006, Wall Street executives took home bonuses totaling $23.9 billion. “Wall Street traders were thinking of the bonus at the end of the year, not the long-term health of their firm. The whole system—from mortgage brokers to Wall Street risk managers—seemed tilted toward taking short-term risks while ignoring long-term obligations. The most damning evidence is that most of the people at the top of the banks didn’t really understand how those [investments] worked.”
Investment banker incentive compensation was focused on fees generated from assembling financial products, rather than the performance of those products and profits generated over time. Their bonuses were heavily skewed towards cash rather than stock and not subject to “claw-back” (recovery of the bonus from the employee by the firm) in the event the MBS or CDO created did not perform. In addition, the increased risk (in the form of financial leverage) taken by the major investment bank were not adequately factored into the compensation of senior executives.
8. Regulation & Deregulation .
Critics have argued that the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing. In other cases, laws were changed or enforcement weakened in parts of the financial system. Several critics have argued that the most critical role for regulation is to make sure that financial institutions have the ability or capital to deliver on their commitments.
Key examples of regulatory failures include:
- In 1999, the U.S. Congress passed the Gramm-Leach-Bliley Act, which repealed part of the Glass-Steagall Act of 1933. This repeal has been criticized for reducing the separation between commercial banks (which traditionally had a conservative culture) and investment banks (which had a more risk-taking culture).
- In 2004, the Securities and Exchange Commission relaxed the net capital rule, which enabled investment banks to substantially increase the level of debt they were taking on, fueling the growth in mortgage-backed securities supporting subprime mortgages. The SEC has conceded that self-regulation of investment banks contributed to the crisis.
- Financial institutions in the shadow banking system are not subject to the same regulation as depository banks, allowing them to assume additional debt obligations relative to their financial cushion or capital base. This was the case despite the Long-Term Capital Management debacle in 1998, where a highly-leveraged shadow institution failed with systemic implications.
- Regulators and accounting standard-setters allowed depository banks such as Citigroup to move significant amounts of assets and liabilities off-balance sheet into complex legal entities called structured investment vehicles, masking the weakness of the capital base of the firm or degree of leverage or risk taken. One news agency estimated that the top four U.S. banks will have to return between $500 billion and $1 trillion to their balance sheets during 2009. This increased uncertainty during the crisis regarding the financial position of the major banks. Off-balance sheet entities were also used by Enron as part of the scandal that brought down that company in 2001.
- The U.S. Congress allowed the self-regulation of the derivatives market when it passed the Commodity Futures Modernization Act of 2000. Derivatives such as credit default swaps (CDS) can be used to hedge or speculate against particular credit risks. The volume of CDS outstanding increased 100-fold from 1998 to 2008, with estimates of the debt covered by CDS contracts, as of November 2008, ranging from US$33 to $47 trillion. Total over-the-counter (OTC) derivative notional value rose to $683 trillion by June 2008.Warren Buffett famously referred to derivatives as “financial weapons of mass destruction” in early 2003.
9. Conflicts of Interest & Lobbying .
A variety of conflicts of interest have been argued as contributing to this crisis:
- Credit rating agencies are compensated for rating debt securities by those issuing the securities, which have an interest in seeing the most positive ratings applied. Further, changing the debt rating on a company that insures multiple debt securities such as AIG or MBIA, requires the re-rating of many other securities, creating significant costs. Despite taking on significantly more risk, AIG and MBIA retained the highest credit ratings until well into the crisis.
- There is a “revolving door” between major financial institutions, the Treasury Department, and Treasury bailout programs. For example, the former CEO of Goldman Sachs was Henry Paulson, who became President George W. Bush’s Treasury Secretary. Although three of Goldman’s key competitors either failed or were allowed to fail, it received $10 billion in Troubled Asset Relief Program (TARP) funds (which it has since paid back) and $12.9 billion in payments via AIG, while remaining highly profitable and paying enormous bonuses. The first two officials in charge of the TARP bailout program were also from Goldman.
- There is a “revolving door” between major financial institutions and the Securities and Exchange Commission (SEC), which is supposed to monitor them. For example, as of January 2009, the SEC’s two most recent Directors of Enforcement had taken positions at powerful banks directly after leaving the role. The route into lucrative positions with banks places a financial incentive on regulators to maintain good relationships with those they monitor. This is sometimes referred to as regulatory capture.
Banks in the U.S. lobby politicians extensively. A November 2009 report from economists of the International Monetary Fund (IMF) writing independently of that organization indicated that.
- Firms that lobby aggressively are more likely to engage in risky securitization of their loan books, have faster-growing mortgage loan portfolios as well as poorer share performance and larger loan defaults;
- Thirty-three legislative proposals that would have increased regulatory scrutiny over banks were the targets of intense and successful lobbying;
- US business spends $4.2 billion over the four-year election cycle on “targeted political activity”, with finance, insurance and real estate (“FIRE”) firms accounting for 15% of that total ($479,500 per firm) in 2006; and
- The “lobbying intensity” of the FIRE sector also “increased at a much faster pace relative to the average lobbying intensity over 1999-2006.”
The study concluded that: “the prevention of future crises might require weakening political influence of the financial industry or closer monitoring of lobbying activities to understand better the incentives behind it.”
The Boston Globe reported during that during January-June 2009, the largest four U.S. banks spent these amounts ($ millions) on lobbying, despite receiving taxpayer bailouts: Citigroup $3.1; JP Morgan Chase $3.1; Bank of America $1.5; and Wells Fargo $1.4.
10. Other Factors .
Economist James D. Hamilton has argued that the increase in oil prices in the period of 2007 through 2008 was a significant cause of the recession. He evaluated several different approaches to estimating the impact of oil price shocks on the economy, including some methods that had previously shown a decline in the relationship between oil price shocks and the overall economy. All of these methods “support a common conclusion; had there been no increase in oil prices between 2007:Q3 and 2008:Q2, the US economy would not have been in a recession over the period 2007:Q4 through 2008:Q3.” Hamilton’s own model, a time-series econometric forecast based on data up to 2003, showed that the decline in GDP could have been successfully predicted to almost its full extent given knowledge of the price of oil. The results imply that oil prices were entirely responsible for the recession; however, Hamilton himself acknowledged that this was probably not the case but maintained that it showed that oil price increases made a significant contribution to the downturn in economic growth.
Commodity price volatility
A commodity price bubble was created following the collapse in the housing bubble. The price of oil nearly tripled from $50 to $140 from early 2007 to 2008, before plunging as the financial crisis began to take hold in late 2008. Experts debate the causes, which include the flow of money from housing and other investments into commodities to speculation and monetary policy. An increase in oil prices tends to divert a larger share of consumer spending into gasoline, which creates downward pressure on economic growth in oil importing countries, as wealth flows to oil-producing states.
Inaccurate economic forecasting
A cover story in BusinessWeek magazine claims that economists mostly failed to predict the worst international economic crisis since the Great Depression of 1930s. The Wharton School of the University of Pennsylvania online business journal examines why economists failed to predict a major global financial crisis. An article in the New York Times informs that economist Nouriel Roubini warned of such crisis as early as September 2006, and the article goes on to state that the profession of economics is bad at predicting recessions. According to The Guardian, Roubini was ridiculed for predicting a collapse of the housing market and worldwide recession, while The New York Times labeled him “Dr. Doom”. However, there are examples of other experts who gave indications of a financial crisis.
Monetary expansion and uncertainty
An empirical study by John B. Taylor concluded that the crisis was: (1) caused by excess monetary expansion; (2) prolonged by an inability to evaluate counter-party risk due to opaque financial statements; and (3) worsened by the unpredictable nature of government’s response to the crisis.
The appropriate valuation of complex and illiquid securities such as MBS and CDO held as assets on the books of financial institutions has been an ongoing debate during the crisis. The debate arises because accounting rules require companies to adjust the value of such securities to market value, as opposed to the original price paid. Many large financial institutions recognized significant losses during 2007 and 2008, as a result of marking-down MBS asset prices to market value. For some institutions, this also triggered a margin call, where lenders that had provided the funds using the MBS as collateral had contractual rights to get their money back. The combination of losses and margin calls resulted in further forced sales of MBS and emergency efforts to obtain cash (liquidity). Markdowns may also reduce the value of bank regulatory capital, requiring additional capital rising and creating uncertainty regarding the health of the bank. In other words, writing down the assets presented both liquidity and solvency challenges. Advocates argued that the rule enabled the most accurate estimate of the financial health of the banks.
11. Systemic Crisis .
Another analysis, different from the mainstream explanation, is that the financial crisis is merely a symptom of another, deeper crisis, which is a systemic crisis of capitalism itself. According to Samir Amin, an Egyptian economist, the constant decrease in GDP growth rates in Western countries since the early 1970s created a growing surplus of capital which did not have sufficient profitable investment outlets in the real economy. The alternative was to place this surplus into the financial market, which became more profitable than productive capital investment, especially with subsequent deregulation. According to Samir Amin, this phenomenon has led to recurrent financial bubbles (such as the internet bubble) and is the deep cause of the financial crisis of 2007-2009.
John Bellamy Foster, a political economy analyst and editor of the Monthly Review, believes that the decrease in GDP growth rates since the early 1970s is due to increasing market saturation.
John C. Bogle wrote during 2005 that a series of unresolved challenges face capitalism that have contributed to past financial crises and have not been sufficiently addressed: “Corporate America went astray largely because the power of managers went virtually unchecked by our gatekeepers for far too long…They failed to ‘keep an eye on these geniuses’ to whom they had entrusted the responsibility of the management of America’s great corporations.” He cites particular issues, including:
- “Manager’s capitalism” which he argues has replaced “owner’s capitalism,” meaning management runs the firm for its benefit rather than for the shareholders, a variation on the principal-agent problem;
- Burgeoning executive compensation;
- Managed earnings, mainly a focus on share price rather than the creation of genuine value; and
- The failure of gatekeepers, including auditors, boards of directors, Wall Street analysts, and career politicians.
12. Interaction of The Housing & Financial Markets .
One of the unique features of this crisis is the linkage of global investors and financial institutions to the price of U.S. housing, through financial innovations such as MBS, CDO, and CDS described above. As borrowers stop paying their mortgages (due to the inability to refinance, negative equity, or loss of employment), foreclosures and the supply of homes for sale increases. This places downward pressure on housing prices, which further lowers homeowners’ equity. The decline in mortgage payments also reduces the value of mortgage-backed securities, which erodes the net worth and financial health of banks. This reduces the amount of lending that banks can support, which slows down business investment. When consumers do not spend, business earnings are impacted, which increases unemployment. This vicious cycle or self-reinforcing loop is at the heart of the crisis.
Thomas Friedman summarized some of this interaction in November 2008.
When these reckless mortgages eventually blew up, it led to a credit crisis. Banks stopped lending. That soon morphed into an equity crisis, as worried investors liquidated stock portfolios. The equity crisis made people feel poor and metastasized into a consumption crisis, which is why purchases of cars, appliances, electronics, homes and clothing have just fallen off a cliff. This, in turn, has sparked more company defaults, exacerbated the credit crisis and metastasized into an unemployment crisis, as companies rush to shed workers.
Effects on The Global Economy .
1. Global effects
A number of commentators have suggested that if the liquidity crisis continues, there could be an extended recession or worse. The continuing development of the crisis has prompted in some quarters fears of a global economic collapse although there are now many cautiously optimistic forecasters in addition to some prominent sources who remain negative. The financial crisis is likely to yield the biggest banking shakeout since the savings-and-loan meltdown. Investment bank UBS stated on October 6 that 2008 would see a clear global recession, with recovery unlikely for at least two years. Three days later UBS economists announced that the “beginning of the end” of the crisis had begun, with the world starting to make the necessary actions to fix the crisis: capital injection by governments; injection made systemically; interest rate cuts to help borrowers. The United Kingdom had started systemic injection, and the world’s central banks were now cutting interest rates. UBS emphasized the United States needed to implement systemic injection. UBS further emphasized that this fixes only the financial crisis, but that in economic terms “the worst is still to come”. UBS quantified their expected recession durations on October 16: the Euro zone’s would last two quarters, the United States’ would last three quarters, and the United Kingdom’s would last four quarters. The economic crisis in Iceland involved all three of the country’s major banks. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.
At the end of October UBS revised its outlook downwards: the forthcoming recession would be the worst since the Reagan recession of 1981 and 1982 with negative 2009 growth for the U.S., Euro zone, UK; very limited recovery in 2010; but not as bad as the Great Depression.
The Brookings Institution reported in June 2009 that U.S. consumption accounted for more than a third of the growth in global consumption between 2000 and 2007. “The US economy has been spending too much and borrowing too much for years and the rest of the world depended on the U.S. consumer as a source of global demand.” With a recession in the U.S. and the increased savings rate of U.S. consumers, declines in growth elsewhere have been dramatic. For the first quarter of 2009, the annualized rate of decline in GDP was 14.4% in Germany, 15.2% in Japan, 7.4% in the UK, 18% in Latvia, 9.8% in the Euro area and 21.5% for Mexico.
Some developing countries that had seen strong economic growth saw significant slowdowns. For example, growth forecasts in Cambodia show a fall from more than 10% in 2007 to close to zero in 2009, and Kenya may achieve only 3-4% growth in 2009, down from 7% in 2007. According to the research by the Overseas Development Institute, reductions in growth can be attributed to falls in trade, commodity prices, investment and remittances sent from migrant workers (which reached a record $251 billion in 2007, but have fallen in many countries since). The has stark implications and has led to a dramatic rise in the number of households living below the poverty line, be it 300,000 in Bangladesh or 230,000 in Ghana.
By March 2009, the Arab world had lost $3 trillion due to the crisis. In April 2009, unemployment in the Arab world is said to be a ‘time bomb’. In May 2009, the United Nations reported a drop in foreign investment in Middle-Eastern economies due to a slower rise in demand for oil. In June 2009, the World Bank predicted a tough year for Arab states. In September 2009, Arab banks reported losses of nearly $4 billion since the onset of the global financial crisis.
2. U.S. economic effects
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — decreased at an annual rate of approximately 6 percent in the fourth quarter of 2008 and first quarter of 2009, versus activity in the year-ago periods. The U.S. unemployment rate increased to 10.1% by October 2009, the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours per work week declined to 33, the lowest level since the government began collecting the data in 1964.
3. Official economic projections
On November 3, 2008, the European Commission at Brussels predicted for 2009 an extremely weak growth of GDP, by 0.1 percent, for the countries of the Euro zone (France, Germany, Italy, etc.) and even negative number for the UK (-1.0 percent), Ireland and Spain. On November 6, the IMF at Washington, D.C., launched numbers predicting a worldwide recession by -0.3 percent for 2009, averaged over the developed economies. On the same day, the Bank of England and the European Central Bank, respectively, reduced their interest rates from 4.5 percent down to three percent, and from 3.75 percent down to 3.25 percent. As a consequence, starting from November 2008, several countries launched large “help packages” for their economies.
4. 2010 European sovereign debt crisis
One of the long-term worldwide consequences of the economic breakdown is the 2010 European sovereign debt crisis. This crisis primarily impacted the four counties known as the PIGS and of those four countries, primarily Greece. The PIGS are Portugal, Italy, Greece and Spain, and are called that because they habitually run large government budget deficits. Other Euro zone countries include: France, Ireland, Belgium, The Netherlands, Luxembourg, Germany, Finland, Austria, and Italy. Fear that Greece’s debt problems would cause lenders to stop lending to it, with the result that Greece would default on its sovereign debt, sparked speculation that such a default would cause lenders to stop loaning money to the other PIGS as well, with the result that they would also eventually default on their sovereign debt. A sovereign default by Spain, Portugal, Italy and Greece would result in bank losses so large that almost every bank in Europe would become insolvent due to the now uncollectible outstanding loans to those four countries.
On Friday, May 7, 2010 a long-desired financial aid package for Greece was constructed; however, it was obvious that other states, because of their extremely large debts, would have – or already had – financial difficulties. Therefore, the following Sunday a large group of ministers of Euro zone gathered in Brussels, decided on a mutual financial aid package of €750 billion; and the European Central Bank announced that in the future it would support by explicit monetary help, if necessary, government bonds of the Euro zone countries (which was not allowed before, because of fears of inflation).
Already on May 21, 2010 the German parliament, only with a slight majority, was the first one to accept the new rules.
While this aid package has so far averted a financial panic, the PIGS continue to have difficulties.
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Vol. 21, No. 2-3.
2. Ivry, Bob (2008-09-24). “(quoting Joshua Rosner as stating “It’s not a liquidity problem, it’s a valuation problem.””.Bloomberg.com. http://www.bloomberg.com/apps/news?pid=20601170&refer=home&sid=aGT_xTYzbbQE.
3. “Brookings-Financial Crisis” (PDF). http://www.brookings.edu/~/media/Files/rc/papers/2009/0615_economic_crisis_baily_elliott/0615_economic_crisis_baily_elliott.pdf.
4. “World Economic Outlook: Crisis and Recovery, April 2009″ (PDF). http://www.imf.org/external/pubs/ft/weo/2009/01/pdf/text.pdf. Retrieved 2010-05-01.
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