By Michele Chandler
STANFORD GRADUATE SCHOOL OF BUSINESS—As a longtime banker from Latin America, Manuel Medina-Mora says he knows a thing or two about economic crises like the one savaging today’s global financial markets.
“This is the fifth crisis of my career. Financial crises are not something that are unique; they happen,” said Medina-Mora, chairman and chief executive officer of Citigroup Latin America and Mexico, speaking to an audience of Business School students on November 6.
Once economic downturns fade and the economy blossoms again, people tend to forget about the hard times. But, he added, “Economic cycles are always there, and those of us who understand that well can profit from it.”
During his talk, part of the Global Speaker Series, Medina-Mora, who earned his MBA at the Business School in 1976, outlined how the current crisis came about, how it is similar to historical economic fallouts, and how the current downturn differs from other economic slowdowns of years past.
“It’s not just a subprime crisis as some people have thought. It’s much more than that,” he said, adding that the current financial instability is also not just a U.S. crisis: “It is a global crisis affecting people all over the world.”
Imbalances in three key areas—the financial world, the housing sector, and the commodity markets—created the current meltdown, Medina-Mora said.
Following the extremely low interest rates of recent years, “there was a reduced sense of risk,” he said. “People felt that risk was something that was not to be considered significant. But it was a bomb waiting to explode.”
Subsequent years saw a significant dip in the U.S. personal savings rate, which has fallen from about 6 percent in the early ’90s to less than 1 percent today. At the same time, American household debt soared. In the early ’90s the total debt of all U.S. households represented about 55 percent of the GDP. Today it has reached 98 percent, Medina-Mora said, citing figures from the Federal Reserve.
The U.S. housing bubble played a major role in today’s financial troubles.
Data collected from about a dozen developed regions including the United States, Canada, Western Europe, and Japan showed that housing prices took off in recent years while interest rates fell. In the United States, however, the past two years have seen a rising inventory of houses on the market and a resulting decline in home prices.
“If we don’t find stability in the prices, the turnaround cannot happen. That’s the key part for all of us to try to understand—when a turnaround in the economy is going to happen,” he said.
The economic slowdown first hit large banks in the United States and Europe. The second wave emerged as declining liquidity that impacted regional U.S. banks, culminating in the U.S.-government orchestrated rescue of lenders Fannie Mae, Freddie Mac, and AIG, the world’s insurer, while allowing global investment bank Lehman Bros to declare bankruptcy.
The third wave of the slowdown hit Europe, with the United Kingdom announcing a partial nationalization of its banking system. The last wave bashed emerging markets. And it’s only gone down from there.
Government intervention is one major difference between the Great Depression and the current-day financial crisis, said Medina-Mora. The hope is that “public policy responses, which were not present at the time of the Great Depression, will start creating key points in which financial markets don’t go down that much,” he said. “That only can happen if the financial markets anticipate that sometime in the next year, between the second and the third quarter, the housing sector in the U.S. will reach stability. If that doesn’t happen then we are dealing with a much bigger crisis.”
Medina-Mora said he can empathize with MBA students today, who are faced with the prospect of graduating in the midst of a down economy.
“Thirty years ago, I was where you are now,” he said, recalling his graduation in the midst of a downturn that started with the Mideast Oil Crisis in 1973 and didn’t end until 1977.
He urged the students to pay close attention to how things play out.
“What you can learn from what is happening today is going to serve you all your life. You are now witnessing something that is so important to understand in terms of economic cycles,” he said. “No matter what part of the world economy you decide to make your careers, this is a great moment to learn.”
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