Berkeley Financial Crisis Luncheon Talk

Berkeley Law School Auditorium, Thursday, noon:

http://igov.berkeley.edu/

Treasury-Eurodollar Spread:

Non-Financial Borrowing:

Liveblogging:

The Fed is allowing George Akerlof to moderate this in spite of his status as First Spouse of the Federal Reserve Bank of San Francisco. I am surprised that Michelle Smith has not sent her henchmen to take him to an Undisclosed Location...

Nothing George Akerlof says on the webcast should be taken as representing in any way the position of the Federal Reserve System.

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Sponsored by: Berkeley Center for Law, Business, and the Economy and the Institute for Governmental Studies Center for Institutions and Governance

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John Quigley: Mortgage Market and the Current Mess

• Financial innovation (read Liar's Poker)
• Behavioral modeling of mortgage holder behavior
• Computers

Hence, more complete markets...

Hence, separation of functions...

Subprime lending

• Risk-Based Pricing
• First sustained increase in homeowner rates since 1960s
  • Especially for minorities
• FHA and VA run out of the business
• But, transactions-oriented not performance-oriented fee structures
  • Why?
  • Continuously-rising housing prices since mid-1990s

Cost of Housing to Homeowners

• Periods of housing price increase are periods of very low housing user cost
• A reduction in the rate of increase of housing prices is all you need to trigger a disaster...

Why Is This "Systemic"?

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Nancy Wallace: $11T, $600B delinquencies, $200B foreclosures

Borrowers, brokers, finance companies, investment banks, special-purpose vehicles, (rating agencies), residential-mortgage pools, collateralized debt obligations, investors...

GSAMP 2006-NC2: A subprime RMBS SPV...

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Brad DeLong:

• $11T if U.S. mortgages
• $60T of global financial assets
• Even if we had $2T of losses on mortgage-backed securities that shouldn't pose a big problem for Wall Street--actually 48th and Park Avenue
• $300B in flow-of-funds to non-financial business in 2007Q2, $150B in 2008Q2, less in 2008Q3, 0 in 2008Q4?

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Barry Eichengreen: Six points:

1. Failure of leadership: election season, Treasury failed to explain, failed to craft plan, congress failed to display common sense, media could have done better...
2. Fixing the problem is very urgent: everyone's employment is at stake; no more cutting-off-my-nose-to-spite-my-face...
3. Will TARP do it? No. Another holding action. We will have to recapitalize the banking system: be above board about what you are doing...
4. Marty Feldstein and Glenn Hubbard say we need to address the housing market first; I'm not opposed to preventing housing prices from overshooting on the downside; I'm not opposed to helping the homeowner; but fixing housing won't fix the problem...
5. How bad will it get? Heard Dean Baker on Fresh Air saying "unemployment could reach 7%." No. 10%. And I'm not telling Great Depression stories... yet...
6. Don't fight the last war: fight the current war with the right weapons--banking sector recapitalization...

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Aaron Edlin:

Comments

[Ken Houghton]

The Flow of Funds table you might want to look at for the long term is R.102 "Change in Net Worth of Nonfarm Nonfinancial Corporate Business," most especially the "Net Investment" data.

And this is with the "R&D tax credit."

[Matt]

I am not quite understanding why treasury is not leaning more on short term bills to finance debt in the current period. At least we would lower our debt maintenance costs. It might also force short term interest rates up and long term down, a version of twist that might work.

I know we fear such a move might kill the dollar and force a wrenching re-orientation to long term export investment, but so what?

[Cosma Shalizi]

Picking out the single line from that table which we're supposed to attend to would be immensely easier if it was a simple little graph.

Just saying.

[ogmb]

Poor Aaron's got nothing to say?

[Michael Carroll]

It must have been a tough choice between this event and the Asteroid Extinction Event Brunch.

[nathan]

Banks want to shoot the messenger over fair value rules
By Lynn Turner
Published: October 2 2008 03:00 |
Last updated: October 2 2008 03:00
Financial Times

Excerpt:
The reality is that the bankers are trying to shoot the messenger. They loaned out more cash than they are now collecting. If you make a loan for $100 but only get back $60, that is a problem. But when you do this repeatedly, using money borrowed in the first place, it becomes a crisis as banks run out of cash. It is the same thing that happens at home when month after month you spend more than you get in your paycheck.