tailieunhanh - Deciphering the Liquidity and Credit Crunch 2007–2008

In the early years of Moody’s, Standard, Poor’s, and Fitch, they earned revenue by selling their assessments of creditworthiness to investors. This occurred in the era before the Securities and Exchange Commission (SEC) was created in 1934 and began requiring corporations to issue standardized fifi nancial statements. These judgments come in the form of “ratings,” which are usually a letter grade. The best-known scale is that used by Standard & Poor’s and some other rating agencies: AAA, AA, A, BBB, BB, and so on, with pluses and minuses as well | Journal of Economic Perspectives Volume 23 Number 1 Winter 2009 Pages 77-100 Deciphering the Liquidity and Credit Crunch 2007-2008 Markus K. Brunnermeier The financial market turmoil in 2007 and 2008 has led to the most severe financial crisis since the Great Depression and threatens to have large repercussions on the real economy. The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. At the same time the stock market capitalization of the major banks declined by more than twice as much. While the overall mortgage losses are large on an absolute scale they are still relatively modest compared to the 8 trillion of . stock market wealth lost between October 2007 when the stock market reached an all-time high and October 2008. This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets and describes common economic threads that explain the plethora of market declines liquidity dry-ups defaults and bailouts that occurred after the crisis broke in summer 2007. To understand these threads it is useful to recall some key factors leading up to the housing bubble. The . economy was experiencing a low interest rate environment both because of large capital inflows from abroad especially from Asian countries and because the Federal Reserve had adopted a lax interest rate policy. Asian countries bought . securities both to peg the exchange rates at an export-friendly level and to hedge against a depreciation of their own currencies against the dollar a lesson learned from the Southeast Asian crisis of the late 1990s. The Federal Reserve Bank feared a deflationary period after the bursting of the Internet bubble and thus did not counteract the buildup of the housing bubble. At the same time the banking system underwent an important transformation. The Markus K. .

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