Part 1
Enduring the
uncertain global
environment
Enduring the uncertain global
environment
Anatomy of a global crisis
The global economic slowdown has its roots in a boom-bust cycle in the
United States (US) subprime mortgage market—a relatively small niche
in the financial sector. Several critical points are evident in the evolution
from subprime mortgage market failures to a widespread financial crisis
that eventually erupted into today’s global crisis (Figure 1.1.1). Movements
in the risk premium on interbank lending (the TED spread) point to the
main events along the path.
This chapter was written by William James, Shikha Jha, Juthathip Jongwanich, Donghyun Park,
Lea Sumulong, Akiko Terada-Hagiwara, and Joseph E. Zveglich, Jr. Rana Hasan provided
material on the poverty impact of the economic slowdown on developing Asia. All writers are
from the Economics and Research Department, ADB, Manila.
1.1.1 TED Spread and timeline of key events over the period
0
1
2
3
4
5
Jan
09
Jul
Jan
08
Jul
Jan
2007
%
Worldwide credit crunch as subprime
mortgage-backed securities of banks
and hedge funds are discovered;
central banks (US, Japan, EU, Australia,
Canada) increase liquidity
Bear Stearns halts
redemptions of two
hedge funds
Morgan Stanley announces
$9.4 billion in writedowns;
RBS announces possible
writedown of £1.25 billion
Investment firms report
subprime-related losses;
Federal Reserve cuts rates by
75 basis points to 2.25%
JP Morgan Chase
acquires Bear Stearns;
Indymac Bank placed
into receivership of FDIC
Eurozone officially
in recession; central
banks of PRC and
European countries
cut rates
Takeover of mortgage loan giants; collapse
of Lehman Brothers; TARP signed into law; G7
leaders agree to urgent coordinated action
United Kingdom
United States
Note: The TED spread is the difference between 3-month LIBOR and the yield on 3-month Treasuries.
EU = European Union; FDIC = Federal Deposit Insurance Corporation; PRC = People’s Republic of China; RBS = Royal Bank of Scotland; TARP = Troub