2009’s Winners and Losers
By Omer I. Esiner, Travelex Senior Currency Market Analyst
2009 marked another extremely difficult year in global financial markets and a year of unparalleled challenges for policymakers world-wide. Many global economies emerged from their worst downturn in generations late in 2009 thanks to the help of ultra-accommodative fiscal and monetary policies, historic credit easing by many of the world’s largest central banks and a deluge of government stimulus spending. In the wake of the historic storm that rocked the global economy, some clear winners and losers have emerged:
Winner: Ben Bernanke, Chairman of the Federal Reserve Bank
Mr. Bernanke was at the helm of the world’s most powerful central bank during the worst economic downturn in decades. Appointed to head the Federal Reserve Board of Governors in late 2005 by then President George W. Bush, Mr. Bernanke was soon charged with steering America’s economy through the unprecedented financial meltdown that brought the global financial system to the brink of collapse. Mr. Bernanke is credited with engineering and implementing a long list of extraordinary programs, which stabilized the banking system and global credit markets. Outside-the-box thinking and historic coordination with his counterparts from around the world helped bring order to financial markets and mitigate the impact of credit crisis on America’s economy.
However, Fed Chairman Bernanke’s policies have not been without significant controversy. Slashing lending rates to near zero percent, the bailout of a number of failing institutions, including AIG, quantitative easing, the questionable role of the Fed in the Bank of American-Merrill Lynch merger, and the Troubled Asset Relief Program have all been highly controversial and seen by many as only re-inflating the economy and doing little to address the core causes of the crisis. The potential for inflation to spiral out of control as a result of the Fed’s swelling balance sheet and the flood of liquidity it has pumped into the market suggests that the true test for Mr. Bernanke and the Fed will be the timely removal of policy accommodation and managing lawmakers’ growing influence over the central bank.
Winner: The People’s Republic of China
China’s economic downturn was minimized by its government’s and its central bank’s timely, targeted and massive stimulus schemes, which ultimately saw its economy grow by 8.7%, above Beijing’s target of 8.0% in 2009. Officials in China rightfully feared that the collapse in global trade, the key driver of the economy’s expansion over the past decade, could limit growth to as low as 5.0%, a pace of expansion that would not have been able to meet the needs of a rapidly urbanizing population. Public unrest and even talk of uprising in Chinese cities proved to be exaggerated. The surprising resilience of China’s economy in 2009 saw exports rise by over 17%(y/y), industrial production rise back toward 20%(y/y) expansion and domestic retail sales hold above 15%(y/y) in every month since May. 2009 saw China not only become a regional engine of growth, which helped keep key trade partners like Australia from slipping into recession, but also become a key driver of recovery in the globally that could overtake Japan as the world’s number two economy in 2010.
While the nation of over 1.3 billion was instrumental in helping the global economy avert an even worse downturn, the sustainability of its strength is suspect. Much of China’s surprisingly resilience in 2009 was the result of over $600 billion worth of government stimulus, an artificially weak currency and a command economy, which pushed for an inventory restocking that cannot be sustained. Suspect too, is the accuracy of official data on China’s economy, which in one instance showed a near 25% increase in auto sales in 2009, but no meaningful increase in gasoline consumption. Potential asset bubbles in equities and commercial and residential real estate, largely fueled by cheap money globally, added to the upward surge in China’s economy but raise the risk of a potentially destabilizing downturn in the not-too-distant future. Ultimately, given the nation’s dependence on exports, any sustainable expansion of China’s economy must be driven by improving external demand, a scenario that still seems unlikely amid a backdrop of double-digit unemployment in much of the developed world.
Winner: Risk Assets
While the first quarter of 2009 was marked by continued turmoil in global financial markets and wide-spread aversion to risk assets, budding signs of recovery prompted investors to seek higher returns in riskier investments during much of the past year. Cheap money, fueled by record low lending rates in much of the world and unprecedented levels of liquidity being pumped into the financial system encouraged investors to bid assets like equities, commodities and emerging market assets broadly higher. The Dow Jones is up over 50% off its March lows, as is London’s FTSE, 45% for Japan’s Nikkei, and over 65% for Shanghai’s SSE. Emerging markets like Brazil and Russia were broadly boosted by soaring commodity prices, also a product of cheap money chasing hard assets higher. Most of 2009 was characterized by largely indiscriminate buying of risk assets with cheap money, often financed by selling the low yielding U.S. dollar and Japanese yen.
Risk assets could face a difficult year in 2010 as government stimulus programs wind down, lending rates rise and the spigots of global liquidly are turned off. The lack of final demand in the industrialized world, due to high levels of global unemployment will likely see the actual pace of economic recovery undershoot the market’s elevated expectations, a scenario that could favor safer, more defensive assets in the second half of 2010.
Loser: The Federal Reserve Bank
While America’s central bank is generally seen as having helped avert a worst case “Great Depression” scenario through aggressive lending rate cuts and the use of creative non-standard policy tools, the swelling of its balance sheet, its bailout of a number of failing financial firms, controversial credit easing facilities and its lack of preemptive steps to avert the crisis in the first place have thrust the Fed into the spotlight and made it the target of a populist backlash. Lawmakers, who never miss an opportunity to jump on the populist bandwagon, have taken on the Federal Reserve in a number of new proposals that aim to make the central bank’s operations more transparent, but could ultimately politicize monetary policy decisions and lead to less independence for the Fed, a recipe for inflation. Easy monetary policy is widely blamed for sowing the seeds of the financial crisis, so policymakers’ response of slashing borrowing costs and flooding the system with liquidity has raised serious worry about the longer-term impact of its handling of the crisis.
While much of the Fed’s actions in the wake of the crisis are widely regarded as having been necessary to avert a potential collapse of the global financial system, the price for the expansion of the Fed’s traditional roles of setting monetary policy and regulation the banking industry, will likely be increased oversight and potential intrusion of Congress in its day-to-day actions. Even as Mr. Bernanke looks to be confirmed (barely) for another term as the Fed Chairman, his and the Fed’s credibility have been damaged by the crisis. Rightly or wrongly, numerous polls place much of the public’s blame of the crisis on the Fed’s shoulders.
Loser: The Banks
Scholars and pundits are likely to debate the causes of the global financial crisis for years to come, with excessively easy money, lax lending standards, the government’s push for increased home ownership, haphazard securitization and global economic imbalances all likely to find their way onto a list of causes. One cause of the crisis that is seldom overlooked is excessive risk taking in the financial industry. Highly leveraged banks jumped on the bandwagon of borrowing cheaply in short-term instruments to fund longer term obligations in overinflated commercial and residential mortgage-backed assets and complex derivatives like credit default swaps (CDS) and collateralized debt obligations (CDO). Most of those bets went sour when falling home values dragged down the price of many of the illiquid assets that remained stuck on banks’ books. Locked up credit markets exacerbated the problems, forcing Uncle Sam and taxpayer dollars to come to the rescue. The collapse of Bear Sterns, AIG and Lehman Brothers as well as a long list of other financial institutions nearly brought down the entire global financial system and resulted in the worst recession in generations and the loss of tens of millions of jobs world-wide.
The banks, particularly large institutions like Goldman Sachs, JP Morgan and Citigroup, have become that focus of public anger and outrage over irresponsible risk management that contributed to the global financial meltdown. Hundreds of billions of dollars in government bailouts and loans left a sour taste in the public’s mouth, a situation that was exacerbated by the fact that 2009 saw near record levels of bonuses being paid out to top traders and executives. The banks have now become the target of the Obama Administration through proposed bonus taxes, claw-backs and measures to limit proprietary trading operations in deposit taking institution. While there is no shortage of blame to go around when it comes to the causes of the crisis, the banks have become the face of greed and excess and at the top of most Americans’ list of causes for the downturn.
Loser: Fiscal Responsibility
The collapse of the private sector’s balance sheet in the wake of the global financial crisis was met with the slashing of global interest rates, the printing of money by a number of major central banks and historic fiscal stimulus. The expansion of the sovereign balance sheet to help mitigate the impact of collapsing private sector demand was a world-wide phenomenon, swelling national debt to frightening levels in nearly all industrialized and emerging market economies. Combined with decreased revenues from tax receipts amid a backdrop of the worst recession in generations, the spike in government spending has resulted in the sharp deterioration in the fiscal health of the U.S., the euro zone, Japan and the U.K. just to name a few. Swelling fiscal deficits have prompted major credit rating agencies to downgrade the sovereign debt of Greece, Ireland, warn on the outlook for Spain and Portugal, Japan and the U.K. Japan’s total public debt has reached over 200% of GDP, the highest in the industrialized world. Britain’s government has posted record monthly public sector borrowing for the better part of the last year, while the Congressional Budget Office recently unveiled a record $1.35 trillion deficit for the current fiscal year, a budget gap that has not been seen since World War Two.
The combination of reduced economic activity and tax revenues along with soaring government spending on stimulus program and entitlements has resulted in a broad-based abandonment of fiscal responsibility. Indeed, much of the government spending and programs were necessary to offset the collapse in private sector demand and to prop up a banking system that nearly collapsed, but skyrocketing government spending threatens to crowd out private sector investment and lead to an inevitable tightening of fiscal conditions that could ultimately choke off a budding global economic recovery. With unemployment in double digits in much of the industrialized world and incumbent politicians increasingly unpopular, slashing spending is a politically unpalatable option. Higher taxes are the most likely outcome, but one that in and of itself, will not meaningfully narrow the gap in government deficits for some time.
Media Contact: Kristen Lewko, +1-212-850-5756, Kristen.Lewko@fd.com
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