Chronologically speaking what are the events, that contributed to the current crisis?
I found a book at home, it’s about 180 pages long, and I bought it in 2002 at a sale for $2 (had originally cost $24 but had not been sold at that price). The scenario was run on January 22, 2000 and is called “Stress testing the system - simulating the global consequences of the next financial crisis”. I never read it, the plot seemed far too outrageous, so I forgot about this scenario book - until now. The introduction starts off like this "Washington policymakers are suddenly confronted by a raft of economic and financial problems stemming from an outbreak of severe turbulence in U.S. and othe world stock markets. Compounding the mess are a number of delicate foreign policy issues, some with potentially damaging consequences … The author, Roger M. Kubarych, from the book: "First, we felt that the motivating factor had to be a shock to the American stock market. Nobody knows what causes stock market crashes. But we all know from history that they do happen. … In this case, foreign markets and businesses alike would be so terrified of a global recession they would look to U.S. leadership to get the world out of it. … So for the simulation to be a worthwhile exercise, the hypothesized financial shock, while serious, could not be catastrophic. … " “Secondly, we had to start out with the premise that the most straightforward and universally recommended policy response … an easing of monetary policy … would not in itself be sufficient to solve the market problem. … So we visualized a set of conditions that would inhibit, at least for some part of the simulation, an unconstrained effort by our Central Banking Group to stabilize the markets through monetary accomodation.” “One inhibitor was to hypothesize a sudden, sharp rize in the U.S. inflation rate. Another inhibitor was to put the dollar under downward pressure in the foreign exchange markets. Note that at least one astute participant thought a stronger dollar was the more realistic consequence. … Third, we had to allow other countries to become uncooperative …” "…One of the most important accelerants they identified was leverage. … A second accelerant might be forced selling, or involuntary liquidation of equity, bond, currency, or commodity position. … A second accelerant was a by-product of difficulties … by a U.S.-based securities affiliate of a major // insurance company. … The scenario revealed that this diversified financial institution had been actively making a market in equity derivatives. … When it announced it was temporarily withdrawing from that business … the disclosure had an electrifying effect on an already nervous market. … The third accelerant was an inflation scare. … The Scenario was predicated, however, on the assumption that an injection of liquidity by itself would not be enough to stabilize the market, and the Fed would be inhibited from easing monetary policy because of the upturn in inflation. " The second part of the simulation, part II, is about stabilizing the system. In this simulation, one country encounters severe financial trouble and stops servicing its hard-currency denominated debt, another country was in the middle of a presidential election at the outbreak of the crisis which in turn lead on to socio-economic problems, the Saudis started to signal a more assertive posture, the SIPC experienced a Cash Crunch… and /page 78/ “If it turned out more financial resources were necessary, Congress could provide those funds.” Later on during Part II of the simulation the renminbi is ultimately devalued … by 35% … then the scenario turns to difficulties experienced by a major banking institution’s entity for providing guarantees to creditors of trouble real estate projects. The last few chapters summarizes lessons and a few of Kubarych’s implications for policymaking.
I’ll check it out - Thanks.
You’re welcome. It’s ISBN 0-87609-271-7, by Council of Foreign Relations Press and “…distributed by Brookings Institution Press 1-800-275-1447…” it says, “…or call (212) 434-9400… www.cfr.org”
This was an interesting website. http://www.creditwritedowns.com/2008/09/dummys-guide-to-us-banking-crisis.html
When I am asked about the whole sub-prime mortgage / financial crisis by some of my friends (who are not in the finance field at all) I suggest that they watch this video. http://www.youtube.com/watch?v=5OtKt3ezHY0 It explains it all in a short, sharp and funny way.
MehdiOchre Wrote: ------------------------------------------------------- > I found a book at home, it’s about 180 pages long, > and … > > The introduction starts off like this "Washington > policymakers are suddenly confronted by a raft of > economic and financial problems stemming from an > outbreak of severe turbulence in U.S. … > > In this simulation, one country encounters severe > financial trouble and stops servicing its > hard-currency denominated debt, another country > was in the middle of a presidential election at > the outbreak … … Now (17 Oct) I have just read on www.ftd.de that Iceland does not intend to pay, and seeks help from IMF: | “Staatsbankrott | Island zahlt nicht mehr | Die verstaatlichte Glitnir-Bank | kann eine fällige Millionenanleihe | nicht zurückzahlen.” Good to know Kubarych knew his job when drafting that scenario back in 2000. I wonder what he is doing now.