1 / 19

Credit Crisis: How Did We Get Here, and What the Fed is Doing To Get Us Out of Here?

Credit Crisis: How Did We Get Here, and What the Fed is Doing To Get Us Out of Here?. Raymond W Stone Stone & McCarthy Research May 22, 2008. Too Easy for Too Long? (2003/2005). Low Mortgage Rate, Especially Adjustable Rate Mortgages, Provide a Boost to Home Sales.

sumi
Download Presentation

Credit Crisis: How Did We Get Here, and What the Fed is Doing To Get Us Out of Here?

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Credit Crisis: How Did We Get Here, and What the Fed is Doing To Get Us Out of Here? Raymond W Stone Stone & McCarthy Research May 22, 2008

  2. Too Easy for Too Long?(2003/2005)

  3. Low Mortgage Rate, Especially Adjustable Rate Mortgages, Provide a Boost to Home Sales

  4. In early August 2007 Structured Investment Vehicles were unable to roll over Commercial Paper

  5. Problems that were especially acute in the subprime mortgage market, weighed on the prices of MBS, reducing the collateral value of these securities for issuers of ABCP

  6. At the heart of the problem were falling home prices

  7. So Who Is To Blame? • The Fed for Keeping Rates Too Low for too Long • Clearly Regulators Including the Fed Should have been more proactive • Securitization of Mortgages, shifting risk from direct lenders to a broad spectrum of investors • Rating Agencies • Risky Mortgage Instruments, and little discipline on the part of Mortgage Brokers • Naïve Public—”If a bank is willing to make me a load they must think I will be able to repay”

  8. The inability of issuers to roll-over ABCP forced borrowers to show up at the doorsteps of banks

  9. Banks faced with increased funding requirements, aggressively attempted to increase so-called “Managed-Liabilities”

  10. Banks’ sudden surge in assets triggered funding/liquidity requirements rendering strains in the inter-bank funding market

  11. In response to funding strains and stress on bank capital positions, banks tightened lending standards

  12. Not only was credit less available, but it also became more costly

  13. Today the Fed’s duties fall into four general areas: • Conducting Monetary Policy in pursuit of dual mandate • Supervising and regulating banking institutions • Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets • Providing financial services to banks, the US government and foreign official institutions

  14. Why Should We Care About Financial Stability? • Because financial market strains impact on both the cost of credit, and the availability of credit. • Which can adversely influence the Fed’s ability to achieve maximum sustainable growth and employment • Thereby worsening financial strains, creating an “Adverse Feedback Loop”

  15. To Address Concerns Regarding Financial Market Stability and the Downside Risks to Economic Activity: • The FOMC has cut the Federal Funds Target from 5-/14% last summer to only 2% now. • Also the Fed has instituted a number of extraordinary measures to provide liquidity and insure an orderly functioning of the financial markets

  16. The Federal Reserve has instituted a number of innovations to reduced strains in the inter-bank funding market • Term Discount Window Program (August 17, 2007) • Term Auction Facility—TAF (Dec 12, 2007) • Single-Tranche OMO Program (March 7, 2008) • Term Security Lending Facility--TSLF (March 11, 2008) • Primary Dealer Credit Facility (March 16, 2008) • Lending Specific to Bear Stearns/JP Morgan Chase Deal

  17. Effectively the Fed has used its Balance Sheet in a creative fashion

  18. Has the Fed’s Balance Sheet Been Compromised?

  19. After Lots of Easing and Much Twisting of the Fed’s Balance Sheet, What’s Next?

More Related