Shiller, RJ. 2008. The subprime solution. Princeton University Press.
The subprime crisis is a real-estate bubble that spread to finance. It has produced conditions that are potentially catastrophic, and needs to be addressed in a serious and direct way.
This is not, however, a crisis that should signal the retreat from finance capitalism. In fact, we should be doing more to create infrastructures that promote markets that are designed to mitigate risk. We should also be increasing transparency and moving towards a situation where the system is able to avoid the promotion of bubbles through increased information. As in Shiller's other work, there is a heavy focus on the psychological aspects of market behavior.
"The key to the subprime solution, to preventing future crises like the current one, as well as mitigating its aftereffects, is democratizing finance--extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal" (115).
In the index, there is no mention of either derivatives or collateralized debt obligations.
Showing posts with label Financial Contraction 2008. Show all posts
Showing posts with label Financial Contraction 2008. Show all posts
Thursday, March 12, 2009
Thursday, January 22, 2009
Reinhart and Rogoff: Is the 2007 US Sub-Prime Financial Crisis so Different?
REINHART, CM, and K ROGOFF. 2008. Is the 2007 US Sub-Prime Financial Crisis so Different? an International Historical Comparison. NBER Working Paper.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
This paper explores the relationship between the sub-prime mortgage crisis and historical patterns that emerge before financial crises. The authors find that there is a great deal of parallels between these emerging patterns and other crises. Particularly, they find that large gluts in equity and housing prices are indicative of a pending crisis. The authors then engage in a historical comparison.
The results of the comparison are as follows: house prices followed similar patterns with other crises, though they rose more acutely and seem to be falling even more rapidly; real equity prices have yet to fall substantially as has been the case with other financial crises, though the growth trend is very sharply upward; the US current account balance is much less balanced than the average for other countries entering financial crises; real GDP growth per capita is following a similar, slightly contracted, trend as have other countries as they approach financial crises; public debt has also risen consistently, as was the case with previous crises.
The authors conclude by noting that all financial crises are surely different, and that most crises are preceded by a period of financial liberalization. While they note that there has not been substantial juridical liberalization, financial freedom can be seen in the removal of certain barriers and regulatory frameworks.
The authors also paralell the 1970s petro-dollar recycling that took place, and how that led to the debt crisis of the 1980s, where cheap money was freely given to countries. In the 1990s, however, the unsuitable debtor is not a de facto nation, but rather a slice of American borrowers who cannot afford to be home owners.
Reinhart and Rogoff: The Aftermath of Financial Crises
Reinhart, Carmen, and Kenneth Rogoff. 2008. The Aftermath of Financial Crises. NBER Working Paper (December 19).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
In an earlier publication, these authors explored a variety of factors relating to the US economy. All of these indicators pointed towards the onset of a financial crisis. This paper also uses history to explore current events by looking at what happens to economies after a banking crisis has occurred.
This analysis includes some emerging countries that have experienced financial crises. The argument is that there is not a very substantive difference between the characteristics of those crises and the crises that strike more financially complex nations.
In general, there are three characteristics that can be inferred form the aftermath of a financial crisis: "First, asset market collapses are deep and prolonged...Second, the aftermath of banking crises is associated with profound declines in output and employment...Third, the real value of government debt tends to explode, rising an average of 86 percent in the major post-World War II episodes...In fact, the big drivers of debt increases are the inevitable collapse in tax revenues that governments suffer in the wake of deep and prolonged output contractions, as well as often ambitious countercyclical fiscal policies aimed at mitigating the downturn" (2).
Decline in house prices is explored. In financial crises, there is typically a decline of about 35.5% in house prices from the peak to the trough of the contraction. The average length of time that the decline is experienced is 6 years. In terms of equity prices, there is an average drop of 55.9% and an average duration of 3.4 years. In terms of unemployment, there is an average increase of 7% and a duration of 4.8 years. Decrease in Real GDP averages 9.3% with an average duration of 1.9 years. After three years, there is an average governmental debt increase of 86%.
"How relevant are historical benchmarks for assessing the trajectory of the current global financial crisis? On the one hand, the authorities today have arguably more flexible monetary policy frameworks, thanks particularly to a less rigid global exchange rate regime...On the other hand, one would be wise not to push too far the conceit that we are smarter than our predecessors" (10).
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