Manager in the southern california office the authors

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manager in the Southern California office.The authors wish to thank Robert Uhlaner for hiscontributions to this article.Copyright © 2018 McKinsey & Company.All rights reserved.3If a company produces exactly the expected cash flows,the returns to shareholders (including dividend payouts) will bethe discount rate used to value the company.4Werner Rehm and Anurag Srivastava, “Are your strategydiscussions stuck in an echo chamber?,”McKinsey on Finance,April 2018, McKinsey.com.5Mehrdad Baghai, Sven Smit, and S. Patrick Viguerie, “Thegranularity of growth,”McKinsey Quarterly, May 2007,McKinsey.com.Seeing your way to better strategy
8McKinsey on FinanceNumber 68, December 2018Susan LundTen years after the Great Recession, any new downturns look to be more localized. But thereare risks to be aware of.What have we learned from the2008 credit crisis?© d3sign/Getty Images
9shows us that real-estate bubbles and banking crisesgo hand in hand and have plagued countries through-out history. It would be foolish to say that thiscombination couldn’t rear its ugly head again, but itis worth noting how the landscape has changedsince 2008.Most notably, the global financial system is lessinterconnected than it was. The average amount ofmoney crossing borders has shrunk by about halfsince 2007. Banks have sold foreign assets; they haveexited some foreign markets. Before the crisis,two-thirds of German banking assets would have beenoutside Germany; today only about a third are.Banks are more stable: they hold more capital andliquid assets, they are subject to a host of newregulations, and they have reduced the risk on theirbalance sheets in regard to the assets they holdand the activities, like proprietary trading, that theyengage in. In addition, the complex derivativesthat allowed the crisis to ripple across the globalsystem have shrunk substantially.Overall, the minders of the global financial systemdid well in responding to the 2008 crisis. Theybattened down the hatches, managed over timeto restore trust in institutions, and createda stronger financial system to guard against thoseparticular risks. But old risks remain, and newones have arisen.The ingredients of the world’s worst financialcrisis in 70 years, we now know, had been simmeringfor some time, mercurial and unattended. Evenbefore the global credit crisis exploded in September2008, obliterating storied financial institutionsand enveloping financial markets, factories, andhomeowners, the formative elements of theGreat Recession were in plain view. Simply put,surplus global liquidity, combined with aninterconnected global financial system, had helpedset the conditions for a massive housing bubble.Banks gave out mortgages at very low interest ratesto increasingly risky borrowers. Trillions ofcomplex, opaque derivative securities were built atopthese underlying mortgage assets, and investorsaround the world bought them. Households were bor-rowing more than they could afford, and whenthe economy fell into a recession and people lost jobs,

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