User:Nick Gardner /Sandbox

The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not. The new entrants adopted a strategy of expanding manufactured exports to create employment. High rates of saving depressed domestic demand. So substantial trade surpluses were required to keep total demand in line with supply. Equally, the countries importing those manufactured goods ran trade deficits and required low saving rates to maintain balance in their economies. Everyone seemed to gain. High-saving countries created employment, and low-saving countries enjoyed faster consumption growth as cheap imports meant that living standards rose by more than the increase in production – worth around half a percentage point a year in the United Kingdom. These were the benefits of greater trade. But the pattern of poor countries saving a lot and rich countries borrowing was not sustainable. The consequences of our inability to cope with these capital flows did not show The origins of the crisis lay in our inability to cope with the consequences of the entry into the world trading system of countries such as China, India, and the former Soviet empire – in a word, globalisation. The benefits in terms of trade were visible; the costs of the implied capital flows were not. The new entrants adopted a strategy of expanding manufactured exports to create employment. High rates of saving depressed domestic demand. So substantial trade surpluses were required to keep total demand in line with supply. Equally, the countries importing those manufactured goods ran trade deficits and required low saving rates to maintain balance in their economies. Everyone seemed to gain. High-saving countries created employment, and low-saving countries enjoyed faster consumption growth as cheap imports meant that living standards rose by more than the increase in production – worth around half a percentage point a year in the United Kingdom. These were the benefits of greater trade. But the pattern of poor countries saving a lot and rich countries borrowing was not sustainable. The consequences of our inability to cope with these capital flows did not show

Jan 24 The Bank of England will set up a £50 billion ($69 billion) facility to buy private-sector assets such as corporate bonds and commercial paper. The government will also encourage more lending by guaranteeing up to £50 billion in asset-backed securities The heart of the Treasury’s package was an “asset-protection scheme”, a euphemism for dealing with the dodgy loans and assets that continue to hinder a return to banking health. Rather than setting up a “bad bank” to take these toxic assets off the banks’ balance-sheets, the Treasury has decided to turn itself, in effect, into a catastrophe insurer. In return for paying a premium—and carrying the first chunk of any loss—banks will pass the buck for 90% of any further write-down to taxpayers. Denmark extended DKr100 billion ($18 billion) in aid to its banks; Feb7 It concerns the new president’s plans for the “American Recovery and Reinvestment Plan”, the largest economic stimulus package ever devised: no less than $819 billion over the next two years The Bank of England reduced interest rates by half a percentage point, to 1%. See article Feb 14 The French government said it would provide separate €3 billion ($3.9 billion) five-year loans to both Renault and PSA Peugeot-Citroën in return for the companies agreeing to keep factories open in France. After a lot of bickering in Congress a final compromise stimulus bill, worth $789 billion, seemed to have been agreed on February 11th; it should be only days away from becoming law. The second, and more important, part of the rescue was team Obama’s scheme for fixing the financial mess, laid out in a speech on February 10th by Tim Geithner, the treasury secretary. Feb 28 America’s Treasury released details about the “stress tests” that are being applied under the new Capital Assistance Programme. These gauge the capacity of banks with more than $100 billion in assets to weather a downturn under an adverse scenario in which unemployment rises above 10% next year and house prices fall by 27% over two years. Denmark’s financial authorities seized control of Fionia Bank. It is the third Danish bank to be nationalised since the autumn Mar7 The Bank of England reduced interest rates by half a percentage point, to 0.5%. The central bank also announced the start of its unconventional policy of “quantitative easing”, ie, directly buying gilts as well as some private assets to boost the money supply. See article America’s Treasury released guidelines to the new “Making Home Affordable” scheme, which helps as many as 9m homeowners restructure their mortgages. The plan provides public money to lenders to reduce a borrower’s monthly payments to possibly as low as 31% of their monthly income. The Federal Reserve, meanwhile, launched a programme to revive securitisation markets by providing cheap financing for up to $1 trillion of non-bank lending, primarily to consumers. Mar14 The Bank of England’s first action under its quantitative easing programme was deemed a success when its offer to purchase £2 billion ($2.8 billion) of government bonds was five times oversubscribed. The central bank aims to buy back £75 billion of gilts and corporate bonds to boost the supply of credit, in effect creating new money. See article Mar21 The Federal Reserve said that it would buy up to $300 billion in long-term American treasury bonds and several hundred billions more in mortgage-backed securities in an attempt to see off the threat of deflation. The unanimous decision came at a meeting of the Fed’s Open Market Committee on March 18th. See article Turning the page Mar28 Tim Geithner unveiled long-awaited proposals to deal with toxic assets. The American treasury secretary’s plan mixes a little private capital with a lot of public money to buy possibly as much as $1 trillion of the bad assets, which Mr Geithner hopes will “get the securities markets…working again”. Five private funds will be approved by the Treasury to manage the programme. April4 Spain extended €9 billion ($12 billion) in government loans to Caja Castilla La Mancha. It is the first Spanish bank to be bailed out in 16 years. The governor of the Bank of Spain gave warning that more interventions may be needed. The Spanish economy is struggling more than most from a collapsing property market. See article April11 communiqué issued by the members of the G20 at the end of their summit in London. The agreement’s main points include a promise of more money for the IMF, taking its funding to $750 billion; an increase in countries’ access to Special Drawing Rights, the IMF’s synthetic currency; a promise to crack down on tax havens; and the establishment of a Financial Stability Board. The G20 members also committed themselves to supporting $250 billion-worth of new global-trade guarantees and gave assurances they would put a freeze on new protectionist measures. See article May7 The European Central Bank cut its main policy interest rate by a quarter of a percentage point, to 1%, as expected. The Bank of England held its rate at 0.5% but expanded its programme of “quantitative easing”. It said it would increase its bond purchases financed by new central-bank reserves from £75 billion ($113 billion) to £125 billion. Double trouble Jun4 General Motors entered bankruptcy protection. Although the recession helped push it under, the company had a long history of mismanagement and union intransigence. GM was once an emblem of America’s industrial might, but its bankruptcy, with debts of $172 billion, is the country’s biggest-ever industrial failure Jun 11 A significant point was reached in the American Treasury’s bank-rescue plan when it let ten financial companies repay a combined total of $68 billion in loans they had received under the Troubled Asset Relief Programme. The ten include JPMorgan Chase, Goldman Sachs, Morgan Stanley and American Express. Lloyds Banking Group repaid £2.3 billion ($3.8 billion) of the money it received from the British Treasury after raising fun The European Central Bank lent €3 billion ($4.2 billion) to Sweden’s central bank as part of an effort to avoid a meltdown in the Baltic region triggered by Latvia’s potential currency devaluation. Swedish banks dominate the Baltic financial sector. See article

Jun27 The European Central Bank provided a record €442 billion ($620 billion) to the euro area’s banking system through its offer of unlimited one-year funds at 1% interest. The measure has been dubbed a “stimulus by stealth” Aug13 America’s Federal Reserve decided not to increase its $300 billion programme of buying Treasury debt with newly printed money, though it did push back the completion date and left open the option of future purchases. The Bank of England decided recently to expand its plan to purchase assets, mostly gilts, by £50 billion ($83 billion), to £175 billion. Sepp24 The Federal Open Market Committee issued an upbeat statement on America’s economy and held interest rates at a record low. It also extended its $1.25 trillion programme of buying mortgage-backed securities into the first quarter of 2010. Oct8 The Reserve Bank of Australia raised its main interest rate by 25 basis points, to 3.25%, Nov5 The Bank of England decided to inject a further £25 billion ($42 billion) into the British economy through its quantitative easing programme, raising the cumulative total to £200 billion. The extra asset purchases will be made over the next three months, a slower rate than before. Dec3 Bank of America announced that it was ready to repay the $45 billion it received in government bail-out money, which it will finance by selling $18.8 billion in securities and tapping $26.2 billion of “excess liquidity”. The bank had to demonstrate to the Treasury that it was stable enough to obtain investment through the markets. By exiting the Troubled Asset Relief Programme, BofA The Bank of Japan held an emergency meeting following pressure from the government to take steps to counter deflation and the strengthening yen; the currency recently hit a 14-year high against the dollar. The central bank announced a ¥10 trillion ($115 billion) programme of new lending in three-month funds at a rate of 0.1%, which officials said was similar to the quantitative-easing measures it employed earlier this decade to fight deflation. But the sum fell short of market expectations. See article Dec 12 Greece’s credit rating was downgraded to BBB+, with a negative outlook, by Fitch, the first time in a decade that the country has received a rating below A. The downgrade caused stockmarkets to fall