... mature 2010-08-04 Cultural History of the Seto ? Korean sweet photo 2010-08-19 Tomorrow Song Seung Heon challenge \Wappoo by ... Westward 202 560 201 139 Outlaws of the Marsh Dragon Valley 48 470 132 570 Genghis Khan, knockoff louis vuitton handbags , ...
Story - antoq - 10/18/2010 - 13:46 - 155 comments - 0 attachments
The recent housing market crisis has brought attention to the so&called subprime mortgage market, which ex& perienced exponential growth over the past few years. The share of subprime mortgages to total originations increased from 6% in 2002 to 20% in 2006. As of 2006, the value of U.S. subprime mortgages was estimated at $1.5 trillion, or 15% of the $10 trillion residential mortgage market.1 Subprime mortgages account for a significant part of the recent increase in household mortgage debt in the United States, from about 60% of GDP in 2003 to above 75% of GDP in 2006.2 It is widely believed that subprime lending has played a major role in the housing market meltdown in 2007.
Unlike traditional prime mortgages, subprime mortgages are normally made out to higher&risk borrowers who buy pricey houses relative to their income level and make little or no downpayment. Often, these mortgages come with incentives including low initial teaser rates, which later reset to higher rates. As a result, subprime mortgage loans have a much higher rate of default than prime mortgage loans.
One of the primary questions related to the recent financial crisis is how losses on subprime mortgage assets of roughly $500 billion led to rapid and deep drops in both the value of a wide range of other financial assets and, increasingly, real economic output. The disproportionate size of total losses compared to the relatively small size of the initial trigger points to the presence of amplification mechanisms that allowed losses centered in one market to cause a system-wide downturn. A further question is why subprime mortgage backed securities (MBS) in particular, rather than any other asset, led to the downturn. Blanchard (2009) identifies the interaction between general market conditions, such as high leverage, under-pricing of risk, and high interconnectedness, with particular features of subprime MBS, such as opacity and a belief in ever rising housing prices, as key factors leading to the crisis.
In this paper, we examine how these conditions identified by Blanchard and others led to widespread losses in financial markets by focusing on two financial amplification mechanisms of relevance to the crisis. We also interpret the actions of the Federal Reserve (the “Fed”) in the context of these mechanisms, and we provide new empirical evidence on the effectiveness of the Fed’s liquidity supply during the crisis.
The extent of the 1990s bad loan problems of Japanese banks has received extensive press coverage. By the end of 1995, it was reasonably well-agreed that these problem loans amounted to some 100 trillion yen, or roughly 15% of outstanding loans. However, there is still little systematic analysis of the causes of the loan problem.
That is the task of this paper. We present evidence that, in the late 1980s and early 1990s, the approaching 1992 BIS capital standards, based as they are on accounting measures, had the perverse effect of giving banks an incentive to increase the risk of their loan portfolios; that the loan loss and bad debt write-off procedures helped banks pursue that incentive; that the incentive was compounded by the decline in profitability of banks' traditional business; and that the incentives could be acted upon, given the degree of deregulation in bank lending, i.e. relaxation of "window guidance," in the early 1980s.
