Wednesday, 5 December 2012

Readings on the History of the Financial Crisis 2007-2009

Worth reading:  summary of the "how it happened" of the financial crisis 2007-2009 - Getting up to Speed on the Financial Crisis: A One‐Weekend‐Reader’s Guide by Gary Gorton and Andrew Metrick

  • "... changes  in  credit  supply  (bank  loans)  are  a  strong  predictor  of  financial  crises, particularly  when  these  changes  are  accelerating... "
  • "Credit booms seem to often coincide with house price increases."
  • "House  price  run‐ups  prior  to  crises  are  common."
  • "... the financial crisis of 2007‐2009 was not special, but follows a pattern of build‐ups of fragility that is typical."
  • "... banks cut back on credit supply, although the demand for credit also
    " and the availability of credit is how the real economy was harmed - companies reduced expenditures and cut employees
  • "The  financial  crisis  of  2007‐2009  was  perhaps  the  most  important  economic  event  since  the  Great Depression."
  • "The  crisis  was  exacerbated  by  panics  in  the  banking  system,  where various  types  of  short‐term  debt suddenly became subject to runs.  This, also, was a typical part of historical crises.  The novelty here was in the location  of  runs,  which  took  place  mostly  in  the  newly  evolving “shadow  banking”  system, including  money‐market  mutual  funds, commercial  paper,  securitized  bonds,  and  repurchase agreements.  This  new  source  of  systemic  vulnerability  came  as  a  surprise  to policymakers and economists ..."
The report summarizes the mechanisms through which the relatively tiny (in global financial system terms) rising defaults in sub-prime mortgages set off a chain of contagion that almost brought down the global financial system and the dire real economy consequences we are still living with. The good and the faultless get side-swiped along with the bad and the guilty.

This kind of report is a salutary dispassionate counterpoint to ones like The Big Banks' Big Secret from the Canadian Centre for Policy Alternatives, which paints the Canadian government's intervention in providing liquidity, primarily through CMHC buying bank-owned mortgages, as a reprehensible and un-necessary bank bailout. Canada's actions were so minor in a global scale that it does not even figure as one of the 13 key countries in the IMF's Chapter III. Market Interventions during the Financial Crisis: How Effective and How to Disengage? referenced in the Gorton paper. Canada's actions were exactly in line with those of all the other countries, however. Canada, and Canadian banks, didn't cause the crisis but everyone has suffered, and could have suffered a lot more without intervention.

1 comment: said...

These derivatives strike me as a major problem. They create "worth" where there really is no worth, and there sure is a ton of it!

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