2011 Kickoff FED CHALLENGE: THE CAUSES OF THE FINANCIAL CRISIS

2011 Kickoff

FED CHALLENGE:THE CAUSES OF THE

FINANCIAL CRISIS

HOUSING TROUBLES

•Housing bubble: - Price doubled between 2000 and 2006•Home equity loans:- Home as ATM•Opinion that prices would always go up:-Home as an investment, vacancy ratio•Poor lending standards:- Liars loans, bonus structure, insurance

Vacancy Ratio: 1.4 to 1.8%

PRICE OF HOMES(2000- PRESENT

U.S. LAWN

FINANCIAL SYSTEM

•Extremely complex system of pipes. •Lag times•Interdependent flows, dependencies. •Not even sure where the water will come out

•Mortgage backed securities (MBS’s)•Dilution of low quality mortgages•Insurance against uninsurable situation

•Even greater complexity of pipes•Backup water supply doesn’t have enough capacity to function in an emergency

FINANCIAL PROBLEMS

•Home prices stopped rising in the beginning of 2006

•People who were depending on continually rising prices, like those with large home equity loans, were no longer able to keep up with their payments.

•Rapidly declining home prices began to affect financial assets, equity values fell, and concerns grew over the complexity and sustainability of financial assets.

•Liquidity freeze, unpricable assets, crisis in insurance policies

•The pipes freeze•Although plenty of water is available, we cannot figure out how to release it•The lawn begins to dry up

THE EMERGENCY…

THE FED COMES ALONG…

•Inject liquidity. Lower Fed Funds, TAF

•Put more water into the system

FED SOLUTION

EXCESS RESERVES

•TSLF/PDCF•Interest on reserves•Increase confidence

•Build more pipes to target the frozen areas•Drop water from a helicopter•Add antifreeze

FED SOLUTION

END OF PRESENTATION