The Americas since 2001
The Great Recession in the US
Changing financial intermediation
● Adrian and Shin (2010) - post-1980s, securitisation transformed the US
mortgage market
○ A bank sells mortgages into a “mortgage pool” - a passive firm holding
securities
○ The mortgages are repackaged into mortgage-backed securities
■ Liabilities are issued against the mortgage assets
○ MBSs are owned by a company that issues asset-backed securities
(CDOs)
○ A securities firm (investment bank) buys the ABSs
■ Finances the purchase via a repurchase agreement with a larger
commercial bank - supposed to be SR and relatively safe
○ Commercial banks finance the repurchase agreement by issuing
commercial paper
■ Bought by money-market mutual funds (e.g. for retirement)
○ Households then own shares of these funds
● By 2007, mortgage pools and government-sponsored enterprises held more
assets than banks e.g. the Federal National Mortgage Association
Phase 1 - the subprime mortgage crisis
● Mishkin (2011) - US house prices peaked in 2005 and MBSs experienced
losses
○ Buyers could walk away from mortgages
○ Subprime - paying higher than prime mortgage rates
■ “Teaser” rates for the first few years ended
● 07/08/07 - BNP Paribas suspends redemption of some shares in its money
market funds
● 2007/8 - runs on financial institutions, starting with money market funds
● The value of MBSs fell and the “haircut” demanded rose as high as 50%
○ Haircut - when borrowers have collateral worth more than the loan
○ Caused a “fire sale” dynamic - selling assets to generate the collateral
which decreases the value of assets further
● 03/08 - Bear Stearns collapses
○ The Fed brokers a deal for JPM to buy Bear and takes on $30 billion of
its toxic assets
● Forecasters think the worst is over - subprime mortgages were only a small
part of capital markets
○ Losses seemed manageable
, Phase 2 - the Global Financial Crisis
● Mishkin (2011) - 15/09/08 - Lehman Brothers filed for bankruptcy
○ Treasury and Fed let Lehman fail (moral hazard)
● American International Group (AIG) had written over $400 billion in credit
default swaps (insurance contracts paying out when MBSs suffer losses)
○ 16/09/08 - the Fed pays $85 billion to keep AIG afloat
● 16/09/08 - run on the Reserve Primary Fund (money market fund holding
$785 billion of Lehman paper)
○ Causes a run on other money market funds
● US GDP declined at an annualised rate of 6.4% in Q1 2009
○ UE reached 10% by 10/09
● The real economy was affected because:
○ Credit spreads rose
■ If the Fed cut interest for Treasury bonds, interest rates faced by
households / businesses rise
○ Declining asset prices reduced the value of collateral
■ Reduced access to credit for non-financial firms (credit crunch)
○ Greater uncertainty increased asymmetric information and decreased
access to credit
Who suffered?
● Hoynes et al (2012) - median family income fell by 6% (2007-10)
○ Poverty rose from 12.5% to 15.1%
● Largest impacts for men, black/Hispanic workers, youth and low-education
workers
○ Due to the variation in cyclicality across industries
● Construction and manufacturing are more cyclical than services
○ Similar pattern to previous business cycles but larger and longer
■ Deeper trough in 2008
China and the US economy
China’s rise
● Autor et al (2016) - Wall Street Journal predicts Bangladesh, Thailand and
Zimbabwe will be growth leaders in the next 25 years - China would lag
● Chinese hardliners re-established control over economic policy
○ Exports took off
○ Deng’s 1992 “Southern tour” highlighted SEZ success
■ Expanded from 20 to 150 (1991-2010)
● China has an advantage in industrial goods
The Great Recession in the US
Changing financial intermediation
● Adrian and Shin (2010) - post-1980s, securitisation transformed the US
mortgage market
○ A bank sells mortgages into a “mortgage pool” - a passive firm holding
securities
○ The mortgages are repackaged into mortgage-backed securities
■ Liabilities are issued against the mortgage assets
○ MBSs are owned by a company that issues asset-backed securities
(CDOs)
○ A securities firm (investment bank) buys the ABSs
■ Finances the purchase via a repurchase agreement with a larger
commercial bank - supposed to be SR and relatively safe
○ Commercial banks finance the repurchase agreement by issuing
commercial paper
■ Bought by money-market mutual funds (e.g. for retirement)
○ Households then own shares of these funds
● By 2007, mortgage pools and government-sponsored enterprises held more
assets than banks e.g. the Federal National Mortgage Association
Phase 1 - the subprime mortgage crisis
● Mishkin (2011) - US house prices peaked in 2005 and MBSs experienced
losses
○ Buyers could walk away from mortgages
○ Subprime - paying higher than prime mortgage rates
■ “Teaser” rates for the first few years ended
● 07/08/07 - BNP Paribas suspends redemption of some shares in its money
market funds
● 2007/8 - runs on financial institutions, starting with money market funds
● The value of MBSs fell and the “haircut” demanded rose as high as 50%
○ Haircut - when borrowers have collateral worth more than the loan
○ Caused a “fire sale” dynamic - selling assets to generate the collateral
which decreases the value of assets further
● 03/08 - Bear Stearns collapses
○ The Fed brokers a deal for JPM to buy Bear and takes on $30 billion of
its toxic assets
● Forecasters think the worst is over - subprime mortgages were only a small
part of capital markets
○ Losses seemed manageable
, Phase 2 - the Global Financial Crisis
● Mishkin (2011) - 15/09/08 - Lehman Brothers filed for bankruptcy
○ Treasury and Fed let Lehman fail (moral hazard)
● American International Group (AIG) had written over $400 billion in credit
default swaps (insurance contracts paying out when MBSs suffer losses)
○ 16/09/08 - the Fed pays $85 billion to keep AIG afloat
● 16/09/08 - run on the Reserve Primary Fund (money market fund holding
$785 billion of Lehman paper)
○ Causes a run on other money market funds
● US GDP declined at an annualised rate of 6.4% in Q1 2009
○ UE reached 10% by 10/09
● The real economy was affected because:
○ Credit spreads rose
■ If the Fed cut interest for Treasury bonds, interest rates faced by
households / businesses rise
○ Declining asset prices reduced the value of collateral
■ Reduced access to credit for non-financial firms (credit crunch)
○ Greater uncertainty increased asymmetric information and decreased
access to credit
Who suffered?
● Hoynes et al (2012) - median family income fell by 6% (2007-10)
○ Poverty rose from 12.5% to 15.1%
● Largest impacts for men, black/Hispanic workers, youth and low-education
workers
○ Due to the variation in cyclicality across industries
● Construction and manufacturing are more cyclical than services
○ Similar pattern to previous business cycles but larger and longer
■ Deeper trough in 2008
China and the US economy
China’s rise
● Autor et al (2016) - Wall Street Journal predicts Bangladesh, Thailand and
Zimbabwe will be growth leaders in the next 25 years - China would lag
● Chinese hardliners re-established control over economic policy
○ Exports took off
○ Deng’s 1992 “Southern tour” highlighted SEZ success
■ Expanded from 20 to 150 (1991-2010)
● China has an advantage in industrial goods
