Intelligent Documents

1
A ringside view of the economic crisis David
Fenton, Senior Economist March 2012
2
Was the Greenspan put a shot in the foot?
Policy rates, UK and US
Source Datastream
3
Goodbye dot-com bubble, hello housing bubble
Equity prices, house prices
Source Datastream
4
(Taylor) rules are made to be broken?
Housing starts (millions of units)
Federal funds rate ()
Source Housing and monetary policy, Jackson
Hole conference 2007
5
Signs of a property bubble difficult to miss
Commercial property and gilt yields,
9.0
Comm prop yield
8.0
7.0
6.0
5.0
4.0
10y gilt yield
3.0
2.0
Normal (c200 bps)
Nuts (inverted!)
Nasty! (c400bps)
1.0
0.0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source Datastream, IPD
6
The Great Moderation made us complacent
GDP growth, standard deviation
Source Datastream, RBS calcs
7
The price of risk fell sharply
RBS net interest margin ()
Source Bloomberg
8
The loan to deposit ratio shot up
RBS loan to deposit ratio ()
Source Bloomberg
9
We saw it coming...sort of

• Unlike previous scenarios, the main source of
  the economic downturn is in the banking
  system...it is the resultant credit crunch that
  propagates this initial shock, and turns
  recession into depression.
• RBS stress scenario, July 2006

10
Strange things afoot in the inter-bank market
Spread between 3m LIBOR and bank rate (bps)
Source Datastream
11
Did we really think Greece was like Germany?
10y bond yields ()
Source Datastream
12
Where do we from here?
Strong demand
Goldilocks Returns V
Return of macro instability W

Not much spare capacity
Lots of spare capacity
Slow Grind Higher U
Deflation L
Weak demand
13
The long road to recovery
14
Fiscal rebalancing a good start, but still far
to go
Net borrowing, GDP
Source HM Treasury
15
Plan A requires a private sector response
Net financial surplus/deficit, GDP (flow of
funds)
Source Datastream, RBS calcs
16
Rates expectations fade into the distance
UK policy rate
7
6
5
4
3
2
1
0
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source Datastream, Bank of England
17
Are we turning Japanese?
Market expectations of policy rate ()
1996
1998
Actual
Source Fathom
18
Drastic times?

• Increase demand (symptom)
• Massive fiscal stimulus
• QE max
• Liquidity unbounded
• Use it or lose it deposit tax
• PFI v2.0
• Beg to China

• Reduce debt (cause)
• (Big) bad bank
• Debt forgiveness
• Financial repression
• Monetise debt
• Raise interest rates
• Outright default

19
The darkest hour is just before the dawn?

• Initial projections for a V-shaped recovery are
  subsequently revised to a U-shaped recovery and
  eventually to an L-shape just as the recovery
  arrives.
• Blanchflower, Feb 2009

20
Keep in touch!
Internet www.rbs.com/economics
E-mail www.rbs.com/economics/registration
Social media _at_rbs_economics
21
Legal disclaimer
This material is published by The Royal Bank of
Scotland plc (RBS) which is authorised and
regulated by the Financial Services Authority for
the conduct of regulated activities in the UK.
It has been prepared for information purposes
only and does not constitute a solicitation or an
offer to buy or sell any securities, related
investments, other financial instruments or
related derivatives (Securities). It should
not be reproduced or disclosed to any other
person, without our prior consent. This material
is not intended for distribution in any
jurisdiction in which its distribution would be
prohibited. Whilst this information is believed
to be reliable, it has not been independently
verified by RBS and RBS makes no representation,
express or implied, nor does it accept any
responsibility or liability of any kind, with
regard to the accuracy or completeness of this
information. Unless otherwise stated, any views,
opinions, forecasts, valuations, or estimates
contained in this material are those solely of
the RBS Groups Group Economics Department, as of
the date of publication of this material and are
subject to change without notice. Recipients of
this material should make their own independent
evaluation of this information and make such
other investigations as they consider necessary
(including obtaining independent financial
advice), before acting in reliance on this
information. This material should not be
regarded as providing any specific advice. RBS
accepts no obligation to provide any advice or
recommendations in respect of the information
contained in this material and accepts no
fiduciary duties to the recipient in relation to
this information.