Tiền tệ ngân hàng FTU - Lý thuyết chương 7

Content Lecture 7 Financial Crises Readings • Mishkin (2021), The Economics of Money, Banking, and Financial Markets, 13th edition, Pearson, Chapters 12 + 13 • Introduction • What happens to the financial system in a crisis • Financial crises and the economy • The Great Depressions in 1930s • The U.S. financial crisis of 2007 - 2009 • Financial crisis in emerging countries • Eurozone financial crisis Introduction • Financial crises are major disruptions in financial markets characterized by sharp declines in asset prices and firm failures – For example, the Great Depression in 1930s, the Mexican crisis in 1994, the Asian financial crisis in 1997-1998, the Russia’s in 1998, the Argentina’s in 2001-2, the Global financial crisis in 2007-2009, the Greece’s crisis in 2009–2011 and the Euro debt crisis in 2012 • Financial crises are complex events. To understand them, we must understand the workings of financial markets and the banking system, the behaviour of the aggregate economy, and the policies of central banks Introduction What is a Financial Crisis? • Why does a financial crisis occur? What happens in a financial crisis? Why have financial crises been so prevalent throughout history, and what insights do they provide on the current crisis? Why are financial crises almost always followed by severe contractions in economic activity? • We will look at the events in a typical financial crisis and the various ways in which governments and central banks respond • A financial crisis occurs when there is a particularly large disruption to information flows in financial markets, with the result that financial frictions increase sharply and financial markets stop functioning • Then we use this background to explain the course of events in a number of past financial crises throughout the world, including the most recent subprime crisis in the United States and the European debt crisis Dynamics of Financial Crises in Advanced Economies • Stage One: Initiation of Financial Crisis – Credit boom and bust: Mismanagement of financial liberalization/innovation – Asset price boom and bust – Increase in uncertainty • Stage two: Banking Crisis • Stage three: Debt Deflation P LRAS P0 A B SRAS AD Y* Y Figure 1 Sequence of Events in Financial Crises in Advanced Economies Financial crises and the economy • Asset Markets Effects on Balance Sheets – Stock market decline • Decreases net worth of corporations. – Unanticipated decline in the price level • Liabilities increase in real terms and net worth decreases. – Unanticipated decline in the value of the domestic currency • Increases debt denominated in foreign currencies and decreases net worth. – Asset write-downs. Financial crises and the economy • If a financial crisis causes a recession, the recession can then exacerbate the crisis. Asset prices are likely to fall further: stock prices fall because the recession reduces firms’ expected profits, for example, and real estate prices fall because of lower demand for real estate • Because of these feedbacks, a financial crisis can trigger a vicious circle of falling output and worsening financial problems. Once a crisis starts, it can sustain itself for a long time • Financial crises have both direct and indirect costs – The direct costs include losses to asset holders when asset prices fall. They also include losses from financial institution failures – Although these direct costs can be large, the greatest costs from financial crises come from their indirect effects. A crisis can set off a chain of events that plunges the whole economy into a recession Financial crises and the economy APPLICATION The Mother of All Financial Crises: The Great Depression Figure 2 Stock Price Data During the Great Depression Period • In U.S. economic history, the Great Depression stands out as a unique disaster. The unemployment rate rose from 3% in 1929 to 25% in 1933, and it was still 15% in 1940. The Depression pushed millions of middleclass families into poverty • How did a financial crisis unfold during the Great Depression and how it led to the worst economic downturn in U.S. history? • This event was brought on by: – Stock market crash – Bank panics – Continuing decline in stock prices – Debt deflation Figure 3 Credit Spreads During the Great Depression Source: Federal Reserve Bank of St. Louis FRED database; http://research.stlouisfed.org/fred2/categ ories/22. Source: Dow-Jones Industrial Average (DJIA). Global Financial Data; www.globalfinancialdata.com/index_tabs.php?action=detailedinfo&id=1165. APPLICATION The Mother of All Financial Crises: The Great Depression • A special twist in this episode was a sharp fall in the money supply • The fall in the money supply reduced aggregate expenditure, reinforcing the effects of the stock market crash and lower bank lending • The fall in the money supply also led to deflation: the aggregate price level fell by 22 percent from 1929 to 1933 • Deflation in turn increased debt burdens: a given nominal debt became larger in real terms – Debt deflation • The depression was made “Great” because so many problems occurred at the same time The Global Financial Crisis of 2007-2009 Causes: • Financial innovations emerge in the mortgage markets – Subprime and Alt-A mortgages – Mortgage-backed securities – Collateralized debt obligations (CDOs) • Housing price bubble forms – Increase in liquidity from cash flows surging to the United States – Development of subprime mortgage market fueled housing demand and housing prices. FYI Collateralized Debt Obligations (CDOs) • The creation of a collateralized debt obligation involves a corporate entity called a special purpose vehicle (SPV) that buys a collection of assets such as corporate bonds and loans, commercial real estate bonds, and mortgagebacked securities • The SPV separates the payment streams (cash flows) from these assets into buckets that are referred to as tranches The Global Financial Crisis of 2007-2009 • Agency problems arise – “Originate to distribute” model is subject to principal (investor) agent (mortgage broker) problem. – Borrowers had little incentive to disclose information about their ability to pay – Commercial and investment banks (as well as rating agencies) had weak incentives to assess the quality of securities FYI Collateralized Debt Obligations (CDOs) • The highest rated tranches, referred to as super senior tranches are the ones that are paid off first and so have the least risk • The lowest tranche of the CDO is the equity tranche and this is the first set of cash flows that are not paid out if the underlying assets go into default and stop making payments. This tranche has the highest risk and is often not traded Was the Fed to Blame for the Housing Price Bubble? • Some economists have argued that the low rate interest policies of the Federal Reserve in the 2003–2006 period caused the housing price bubble • Taylor argues that the low federal funds rate led to low mortgage rates that stimulated housing demand and encouraged the issuance of subprime mortgages, both of which led to rising housing prices and a bubble The Global Financial Crisis of 2007 - 2009 • Information problems surface • Housing price bubble bursts Source: Case-Shiller U.S. National Composite House Price Index; www.macromarkets.com/csi_housing/index.asp. Was the Fed to Blame for the Housing Price Bubble? • Federal Reserve Chairman Ben Bernanke countered this argument, saying the culprits were the proliferation of new mortgage products that lowered mortgage payments, a relaxation of lending standards that brought more buyers into the housing market, and capital inflows from emerging market countries • The debate over whether monetary policy was to blame for the housing price bubble continues to this day. The Global Financial Crisis of 2007 - 2009 • Crisis spreads globally – Sign of the globalization of financial markets – TED spread (3 months interest rate on Eurodollar minus 3 months Treasury bills interest rate) increased from 40 basis points to almost 240 in August 2007.