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The CFR’s financial crisis guide

by Brad Setser
July 3, 2009

It isn’t quite a yield curve mambo, but Paul Swartz and I did pull together a few Google motion charts to help illustrate the origins — at least in our view — of the financial crisis of 2007-08. Click on motion charts after following this link.

What’s more, the Council’s website has an interactive tool that lets you play with the charts …

Enjoy the charts over the holiday weekend (at least in the United States). And let me know what you think. Are there any charts that we used that didn’t work? Are there charts that we should have included but didn’t?

51 Comments

  • Posted by yoda

    before, it was shadow banking originating cheap money with cheap rate for junk rate borrower and sell toxic financial product (toxic loan) to Asia and Europe. now, it is FED and Treasury originating cheap money (treasury) or just printing cheap money for junk rate USA gov and export toxic funny paper (dollar & treasury) to Asia and Europe. Have we have enough fun? are Asia and Europe morons?

  • Posted by yoda

    http://globaleconomicanalysis.blogspot.com/2009/07/sweden-cuts-deposit-rate-to-negative-25.html

    you have deposit on any sweden banks? take your deposit out before they charge you .25% interest rate.

  • Posted by yoda

    when will the world learn treasury originated by USA treasury factory is as toxic as toxic RMBS or CMBS?

  • Posted by Mark G.

    How about a motion chart tracking not only GDP but the internal components that add or subtract from GDP since WW II. For example, I’ve seen a chart showing that MEW allowed for positive GDP growth in the US in the early 2000′s, without MEW’s GDP would of been negative.How have the components adding to GDP changed over the last 60 years? Not onlyt for the US but globally.

  • Posted by yoda

    California IOUs Will Pay 3.75%, State Panel Decides
    http://www.bloomberg.com/apps/news?pid=20601015&sid=a3RcbccPHQhU

    what is capital structure of IOUs? at mere 3.755%, do these IOUs have strong protection on those who accept them? which idiots will accept for if lack of protection?

  • Posted by yoda

    lets not balance budget, lets originate IOUs, may be suckers will accept these IOUs like they done with RMBS, CMBS, CDO, treasury, bla toxic funny paper?

  • Posted by glory

    ooooo, the politics of blame interpretation ;)

    Asia Officials Dispute Savings Glut Theory
    Asian officials and scholars say lax U.S. financial regulation is to blame for the financial crisis, rather than their countries’ high savings rates.

    cheers!

  • Posted by menomnon

    In the video (nice production values) Benn Steil’s (of CFR) assertions that the forces of destabilization were (are) exogenous to the system (as he sees it) would seem to fly in the face of Minsky’s views that in fact these forces of instability are part of the warp and woof of _financial_ capitalism (i.e. endogenous except that by my choice of words I’m insisting upon this point).

    It also makes him sound like an apologist.

    None of which is to say that things can’t be fixed. But the task is enormous.

  • Posted by menomnon

    Look, for the sake of (much more than) convenience why don’t we just accept the explanation (laying of blame) that Walt Kelly (Pogo) offered us long ago:

    “We Have Met the Enemy, and He is Us”.

    Fat chance – eh? And there’s probably some game-theoretic explanation of just why this is (or won’t be). Or more like behavioral economics. Funny how these all come to the rescue after-the-fact.

  • Posted by jonathan

    Your tie is crooked but the graphs and the entire presentation are simply awesome.

  • Posted by Qingdao

    Here’s Zhou Xiaochuan again (speech, Jul 3): “There is no available data on the flow of global savings.” Maybe you could e mail him; he works for the bank.

  • Posted by Rien Huizer

    Very amusing stuff!

    It would have been useful to have EU and Euroland as well. There is an Eastern Europe..

    Also, my Safari browser crashed when I tried tracing the investment banks. Is that a coincidence? Incidentally, that tracing tool is very useful, especially if you want to show something to people who do not spend all their time filling Brad’s comments section.

  • Posted by Rien Huizer

    Glory,

    The quetion of what caused the current slump is bogus. All you can say is that BOP surpluses of EMs could have been avoided (by higher levels of domestic spending or by non EMs importing less, or by non EMs giving their workers such an enormous pay cut that (a) they became more competitive and (b) caused imports to decline. Clearly, it is the authoritarian and dominant party (ADPs)s\ regimes that are more successful in repressing wages and consumption (sorry, I am no marxist). The non EMs generally cannot mimic those policies because their electorates would not accept them. Crude but true.

    The crisis could also have been avoided by the US financial system (and a few others) being less generous to weak borrowers, or (the root cause) those countries restricting competition between financial services firms, as well as containing the shadow banking system. Apparently no one had the political will to rein in a clearly reckless private financial system that was racing towards a crisis that would lead to fiscalization of financial firm liabilities. Reining in finance would have been bad for certain sectors of the economy and impopular but the result is even worse.

    So, no one is to blame in isolation, except the policymakers on both sides that should have known that this was not sustainable. The ADP policymakers are still there, but will spin in their favor (like the Asian oficials) in your post; the non ADP ones are generally gone or on the way out.

  • Posted by John Booke

    Brad
    Why not graph the huge spike in new Social Security retirees this year? What is the cause (1946 sex craze)? Unemployment? Stock market crash? Big jump in COLA? How will the sharp increase effect the economy?

  • Posted by paul

    brad, i’m interested in benn steil’s comment that US is doomed to run deficits since it provides the global medium of exchange (dollar). do you know or can you ask him how does that mechanism work exactly? does brazil call b-nanke and ask him to print some more? or does he monitor the international flows?

  • Posted by OGT

    menomnon- The rule is that if something becomes a problem, it gets deemed ‘exogenous.’ It’s never the financier’s fault, the Fed or the Chinese, or fiat money made them do bad things. On the other hand, if things go well it’s bonus time!

  • Posted by yoda

    http://sendables.jibjab.com/originals/hes_barack_obama

    Obama will cut unemployment by half, by taxing on middle-class and expanding federal gov employment, hehe haha.

    :)

  • Posted by yoda

    my bad, is cut the deficit, hehe haha.

  • Posted by Judy Yeo

    impressive, beginning to rival a certain financial site which is curiously going in the opposite direction

  • Posted by Cedric Regula

    Yoda

    Cut 3.5 trillion budget they not! To the bone it is already cut!

    Print money they think they must!

    Tax poor people into the dust!

    Bond Jedi awaken they will. Foresee it, I can!

    ====================
    “The odometer-style “debt clock” near Times Square — put in place in 1989 when the debt was a mere $2.7 trillion — ran out of numbers and had to be shut down when the debt surged past $10 trillion in 2008.

    The clock has since been refurbished so higher numbers fit. There are several debt clocks on Web sites maintained by public interest groups that let you watch hundreds, thousands, millions zip by in a matter of seconds.”

    http://finance.yahoo.com/news/MOUNTAIN-OF-DEBT-Rising-debt-apf-3665768070.html?x=0&sec=topStories&pos=4&asset=&ccode=

  • Posted by yoda
  • Posted by yoda

    with ballooning gov debt (local, state, federal level), it is hard to imagine that money supply will have no choice but to balloon by same amount in future. this is scary stuff, USA economy and currency all in toilet.

  • Posted by bsetser

    During the original bretton woods system the us dollar was unquestionably the world reserve currency and the us (until 70) ran current account surpluses, so i am not sure I agree with benn. back then l-term capital outflows from the us provided the dollars the rest of the world needed for its reservse, not current account deficits ….

    moreover, from 1980 to until say 97, the world´s need for dollar reserves were met by modest us current account deficits — not the kind of deficits that characterized the past decade.

  • Posted by menomnon

    brad> a motion chart I’d like to see is how the yield curve fluttered over the yrs, say, 2000-2007.

    If I’m not mistaken, when the Fed finally starting putting rates back up again (2004?) the long end of the curve, for some time and with varying behavior, refused to ‘respond’ normally – i.e. go up. In fact, during the yrs 2004-2007, there were times when the curve inverted. In the midst of a so-called boom.

    Very interesting.

    And while it’s not the main point, it would seem that the Fed doesn’t have the control over the money supply (read: allocation of credit) that traditional macroeconomics claims.

    Of course without the long end of the curve behaving as it did, the housing boom would have come to and end much sooner.

  • Posted by menomnon

    OK maybe I had it right in front of me to being with.

    I’m now studying more closely what the “yield curve mambo” is telling me.

  • Posted by Cedric Regula

    Yoda

    I think there is potential to recruit 10s of millions of Bond Jedi, perhaps even 100s of millions worldwide we if count asians and arabs.

    Most of the old gang wants to get back together too. The exceptions being C3PO and R2D2. C3PO “came out of the closet” and started seeing Barney Frank’s vacuum cleaner, so he’s no help. R2D2 took it kind of bad, but then joined the Jonas Brothers as a background singer. Now he spends all his time with teenage girls. No help there either.

    But Luke and Princess Leia are up for it. Han too, he hates it when people tell him his money is no good. And Chewey is howlin’ mad that his bonds don’t pay hardly no interest. Says he’ll pull TG’s arms off if he ever sees him around anywhere.

    So you can mobilize a whole lot of pissed off people when you tell them their wealth is worth nothing.

  • Posted by Indian Investor

    So, the redoubtable Jagdish Bhagwati sits down at a table and chair with the cameraman. The table and chair are placed in a wickerworks basket, and the basket is floating in the skyline, dangling down from a hot air balloon. The hot air balloon has a big label on it called “DOHA TALKS”. Whenver Dr. Bhagwati talks in favor of the Doha talks, his feet under the table are braced; he goes all crouchy, seemingly expecting a loud whistle from the punctured hot air balloon above, with the wickerworks basket suddenly falling through the dark matter gravity.

  • Posted by Indian Investor

    Dr. Setser, I have a useful suggestion for you. You’re making a very useful and valid point. But my perception is that the point isn’t really getting anywhere in the CFR, or amongst the other ‘policymakers’, who’re your audience. The fundamental reason for this perhaps is that you’re more of an Excel Analysis Toolpak kind of guy.Whereas those policymakers are more like Roman History kind of folks.
    I noticed that in your latest missive on the US dollar, you reiterated your old Suez Canal example from your Sovereign Debt paper. This sort of reiteration of the same example should be replaced with a big barrage of historical examples, going down from Marcus Aurelius through Spain, to the Soviet Union running out of its ‘hard currency rubles’. That’s when you become a really trustworthy ‘expert’. All the Mandarins will wake up from their Roman Reverie and start listening to you more carefully and respectfully.
    Secondly it’s better not to venture into modern examples in those papers, because things are much more complicated than you perhaps imagine. e.g. your example of how China may stop buying Treasuries because of US support for Tibet independence may just cause a nice chuckle amongst the geopoliticians, and they will forget the rest of your valuable Excel analysis because of that example.

  • Posted by yoda

    Bond Jedis will be led into another massacre setup. Dark emperor will be victorious. I will still be in exile.

  • Posted by menomnon

    well if the US Govt Swap Spreads are a measure of perceived risk in US govt debt, what mambo is saying is that spreads were at a certain level, let’s say x, at the beginning of 2003; they flattened almost to zero (or even below) in 2005 and stayed there for a while; and then returned to something not unlike the original x starting in 2007 and with mambo ending June 1, 2009.

    So that’s interesting. The flattening (in 2005-2006) is notable (no risk). Further, given all the current talk about current and future risk in US govt debt, I would have thought that spreads would have gone higher now as opposed to the beginning of 2003.

    I used to have a Bloomberg box on my desk but in the end it proved a distraction. I design, hmm, complex data structures (non-relational databases etc). Sometimes the occasional relational db if that’s warranted.

    So it would appear that mambo doesn’t, as best I understand, tell me where long term rates were relative to short term rates for, say, 2004 through 2007.

    This much simpler graph (the only one here):

    http://en.wikipedia.org/wiki/Federal_funds_rate

    does tell me, roughly, that the Fed began raising (short of course) term rates again near the start of 2004.

    So I suppose I need to go to some FRB data location. Except would they give me long term rates as well?

    Whatever.

  • Posted by menomnon

    So anyway, back to the vast, qualitative disparagements.

  • Posted by Rien Huizer

    A good explanation of why swap spread over treasuries should always be positive:

    http://insight.kellogg.northwestern.edu/index.php/finance/blog/fundamental_value_and_the_swap_spread_anomaly/

    US gvt default risk as an explanation for abnormal spread hould really be at the bottom of anyone’s list. Illiquidity, market failure and market perversities as demonstrated here should be greater concern (impact of mispricing on many other, more important things as diverse as pension fund liablities valuation, markin to market of very large swap books in institutions with posible capital deficiencies, etc.) than the risk that the US will pay less then 1 dollar on a 1 dollar bond 30 years from now..

  • Posted by Judy Yeo

    Huizer:than the risk that the US will pay less then 1 dollar on a 1 dollar bond 30 years from now..

    is that optimism really warranted? would all those stimulus and rescue packages not contribute to the already difficult financing conundrum? shifting debt on public shoulders doesn’t make it disappear. of course this ois a traditional conservative speaking. ;p

  • Posted by Rien Huizer

    Judy, the people who do swaps these prices are accepting US gvt risk too (collateral). I meant that the spread (in my opinion) reflect market problems, rather than the market’s concern with US gvt credit. And also in my opinion, if I were the market, I would be more worried about those irrational spreads than US gvt default risk, because those spreads distort all kinds of important ratios and indirectly, the capital adequacy of financial institutions.

    As to the risk that the US is will not pay coupons and principal of US gvt debt, I do not believe that risk wrrants any kind of serious thought. The risk that the purchasing power of that dollar will be different from now (especially the international purchasing power), that is different matter. Look at the latest BIS report..

  • Posted by Indian Investor

    menomnon/Dr. Setser,
    Apologize if my comments above came out as disparaging. My point really was that it’s scientifically examined, if not proven, that there are a lot of people who don’t get influenced by seeing charts, or numerical reports. But a piece of reasoning in words can influence them quite a lot.
    My suggestion on including more examples from economic history is that people who specialize in social sciences of some sort – even economics used to have a very large social science content till the predominance of econometrics emerged.
    And the point is more easily conveyed to people without a deep numerical orientation by providing more and better historical examples of the effect of debt – both public debt and external debt.
    I’m quite sure Dr. Jagdish Bhagwati is quite tired of everybody referring to him with a humungous amount of awe and respect just about all the time. There are some people who are naturally quite genial, witty and brainy – yet they need to put up with being referred to in that way all the time. In India, even the Parliamentarians who aren’t known for respecting anybody easily will take names like Brajesh Mishra and Jagdish Bhagwati with a lot of fear and respect.

  • Posted by Indian Investor

    Rien: The risk that the purchasing power of that dollar will be different from now (especially the international purchasing power), that is different matter.

    Me: How is it a different matter, Mr Rien? If the purchasing power of the dollar is heading for an inevitable collapse, especially its international purchasing power – that leaves only one option for the US Treasury – to default on its obligations – a route they took before by shutting down the Fed’s gold discount window.
    If your yardstick is that any government is always solvent because its legal tender writ and exclusive previlege over issuing currency is intact, then by that yardstick, there should never be any sovereign defaults. But Sovereign debt, in large chunks, is always in default when you look at global data over a period of time. Don’t take my word for it. Read Dr. Kenneth Rogoff’s detailed data analysis of sovereign debt default.

  • Posted by DJC

    In practical terms the only things the ordinary American person can do during the economic depression are:

    1. Spend only on essentials.
    2. Postpone major purchases (I would like a new car but find that my 14 year old Toyota Corolla, which starts first time every morning, has good bodywork and will do for several years yet.)
    3. Stay where you are – do not be suckered into the housing market in the hope of getting a bargain. There will be even bigger bargains to be found in the years ahead).
    4. Pay off debt as fast as you can.
    5. Steer well clear of the stock market. The knives are still falling, whatever you might be told to the contrary.
    6. If you are showing profits on any stock or share investment, realise them.
    7. Do not tie your savings up in any long-term schemes.
    8. Invest in a good burglar alarm and gun. Urban crime will rise steeply in the years ahead.

  • Posted by DJC

    The issue is not whether Asian central banks will continue to have confidence in the dollar, but why Asian central banks should see their mandate as supporting the continuous expansion of the dollar economy through dollar hegemony at the expense of their own non-dollar economies. Why should Asian economies send real wealth in the form of goods to the US for Federal Reserve paper of declining value instead of selling their goods in their own economy? Without dollar hegemony, Asian economies can finance their own economic development with sovereign credit in their own currencies and not be addicted to export for fiat dollars that repeatedly lose purchasing power because of US monetary and fiscal indiscipline.

    At long last, jolted by the global financial crisis that began in July 2007, China is finally demanding that its export be paid in Chinese yuan. But this demand should not be interpreted as a push to make the RMB a reserved currency for international trade. China only wants to denominate its bilateral trade in yuan. It has no desire in making the yuan a reserve currency for international trade in which China is not directly involved.

    http://www.henryckliu.com/page196.html

  • Posted by yoda

    “Why should Asian economies send real wealth in the form of goods to the US for Federal Reserve paper of declining value instead of selling their goods in their own economy” indeed why? and indeed why should exporting economies around the world? and indeed, if exporting economies around the world start to trade in exporting currency, then demand for dollar and dollar denominated public debt will have to go down in value. all this while Fed is printing dollars and Treasury is originating t-bill, notes, and treasury like there is no tomorrow.

  • Posted by Cedric Regula

    Yoda:
    “Bond Jedis will be led into another massacre setup. Dark emperor will be victorious. I will still be in exile.”

    “…then demand for dollar and dollar denominated public debt will have to go down in value. all this while Fed is printing dollars and Treasury is originating t-bill, notes, and treasury like there is no tomorrow”

    Dark Emperor victorious, you say? Alter the deal, yes, but temporary this is. Exile is where you want to be! Bond re-pricing this battle is. The true Jedi will return, and on terms more favorable will the Empire take back, yes?

    Keep the Dollar we will, interest rate valuable it makes. USG debt default then a problem will be, but that episode we play out when the time comes.

  • Posted by FG

    DJC: The issue is not whether Asian central banks will continue to have confidence in the dollar, but why Asian central banks should see their mandate as supporting the continuous expansion of the dollar economy through dollar hegemony at the expense of their own non-dollar economies.

    FG: The answer is obviously because they see their mandates as keeping their currency artificially low to subsidize their exporters.

    The Chinese want the benefits of a low currency but don’t want the risks associated with buying dollars. For a while they thought they had only the advantages but clearly they don’t.

    Get over it. You can’t have it both ways.

  • Posted by FG

    DJC: Why should Asian economies send real wealth in the form of goods to the US for Federal Reserve paper of declining value instead of selling their goods in their own economy?

    FG: Good question. Why are the Chinese authorities punishing their own population by forcing them to invest their savings in a currency that is losing its value (according to you)? If they cared about the Chinese population they would raise their purchasing power by letting the currency rise.

  • Posted by Michael

    DJC,

    Your 8:13 AM post is the best comment I have ever seen you make (excluding #8, for which there is no depression-related historical evidence in the U.S.).

  • Posted by DJC

    “India Joins Russia, China in Questioning U.S. Dollar Reserve Currency Status”

    “The major part of Indian reserves are in dollars — that is something that’s a problem for us,”

    “your currency is likely to become my problem,

    http://www.bloomberg.com/apps/news?pid=20601091&sid=aSx4wlTQzexM

  • Posted by DJC

    Michael,

    Railway Transportation of Cargo across the United States is at DEPRESSION levels. (Year on Year Statistics).

    Only Bernanke keeps repeating the tired mantra of “green shoots”. The green shoots are yellow weeds!

    Auto Shipments Down 51%
    Metals Shipment Down 52%
    Intermodal Shipment Down 21%
    Lumber Shipments Down 35%
    Chemical shipments Down 21%

    http://globaleconomicanalysis.blogspot.com/2009/07/railfax-rail-carloading-report-june-27.html

  • Posted by Rien Huizer

    Indian Investor

    “But Sovereign debt, in large chunks, is always in default when you look at global data over a period of time. Don’t take my word for it. Read Dr. Kenneth Rogoff’s detailed data analysis of sovereign debt default.”

    Where is the Rogoff material? I’v seen quite a bit of Rogoff writing about sovereign debt problems, but never on the US. He has, not so long ago repeated thre three options available to a government in financial distress. But that did not suggest in my view that he would consider a US debt default remotely feasible. In general, countries have four options to deal with excessive debt: default, inflation repudiation and targeted taxation (or confiscation). Governments borrowing in a foreign country will generally blackmail creditors by threatening default, in order to get rescheduling or relief. Countries borrowing in their own currency with mainly domestic creditors (like the US for its long term paper) typically monetize first and may ultimately move towards targeted taxation or involuntary swaps. Default is highly unlikely (and a country like the US has many easier options like modifying social programs which would free up revenue for debt repayment). The interesting thing is when a country has borrowed in its own currency and has mainly foreign creditors. Such a country can do a short burst of hyperinflation (with associated external depreciation) and then offer to buy the debt back in installments.

    I guess that there are plenty of reasons (especially for foreign investors not to buy long term US treasury paper, but default would be at the bottom of my list, because the US gvt has better tools to take advantage of your generosity.

  • Posted by yoda

    “like modifying social programs which would free up revenue for debt repayment” HAHAHAHA, USA modifying social programs and free up revenue??? HAHAHAHA, you are JOKING RIGHT? HAHAHA, HEHE HAHA. And if USA will not default, it will have to monetize the debt via Print Press.

  • Posted by yoda

    http://globaleconomicanalysis.blogspot.com/2009/07/obamas-cap-and-trade-energy-plan-will.html

    here is USA modifying cap & trade program that will suck up more revenue. free up revenue, you said? HAHAHAHA, HEHE HAHA.

  • Posted by FG

    DJC: India Joins Russia, China in Questioning U.S. Dollar Reserve Currency Status

    Whatever the reserve currency, the dollar will become cheaper relative to China Russia and India’s currencies unless they accumulate large quantity of it, which is what they are trying to avoid.
    This simply doesn’t depend on what you call the “reserve currency”.
    You can’t at the same time profit of a system and complain about the very mechanisms that make this system work.
    You can’t have it both ways.

  • Posted by Judy Yeo

    Huizer: risk that the purchasing power of that dollar will be different from now

    true, there may be little doubt that the US gov will pay coupon and all necessary payments – but the factor u mentioned above does come into play n increasingly the us gov is expected to “take care” of this pesky side problem

  • Posted by Stephen Douglass

    sorry for the late post… catching up on my RSS reader after vacation. here’s a cool yield curve chart

    http://4.bp.blogspot.com/_FM71j6-VkNE/Sh6XqKgPTvI/AAAAAAAAC44/1yHc1ROfJVo/s1600-h/bond+matrix.png

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