Liquidity excess was in the world from 2000 to 2006 USA wanted to close the budget and foreign trade deficit. Then liquidity of China became a part of an activity to finance USA economy. These situations prepare the basic of Minsky moment. The main basic of appreciation was securitisation. Cash flows centralize as a pool system and these cash flows are sold to another investment banks with more risk.
Liquidity excess was in the world from 2000 to 2006 USA wanted to close the budget and foreign trade deficit. Then liquidity of China became a part of an activity to finance USA economy. These situations prepare the basic of Minsky moment. The main basic of appreciation was securitisation. Cash flows centralize as a pool system and these cash flows are sold to another investment banks with more risk.
Liquidity excess was in the world from 2000 to 2006 USA wanted to close the budget and foreign trade deficit. Then liquidity of China became a part of an activity to finance USA economy. These situations prepare the basic of Minsky moment. The main basic of appreciation was securitisation. Cash flows centralize as a pool system and these cash flows are sold to another investment banks with more risk.
USA wanted to close the budget and foreign trade deficit. Then liquidity of China became a part of an activity to finance USA economy. Housing credits boom in USA. These situations prepare the basic of Minsky Moment. According to Minsky’s theory if there is long term stability, it brings unstability to economy. If economy is stable, interest rates are low. People can contract debts easily and they can make more risky investments. Asset prices start to increase. However system is blocked when the good atmosphere is removed in the economy Therefore asset prices go down rapidly. Debt rates start to increase and no one wants to give a debt to anyone. We can see from the graphic that house prices appreciated. The main basic of appreciation was securitisation. Securitisation means that cash flows centralize as a pool system and these cash flows are sold to another investment banks or mortgage companies with risk. Securitisation products include mortgage-backed securities, asset- backed securities and asset-backed commercial paper. The graphic shows us amount of commercial paper outstanding. Many of securitised mortgage products are sold to another companies or investment banks with more risk Subprime mortgage originations rose from $160 billion in 2001 to $600 billion in 2006. Then banks or companies which took these papers re-securitised these derivative products again.(CDO) In 2006 Moody which is a investment bank had 39.5 % of CDO pools which 70% were subprime mortgages. Reason of this boom foreclosure rates for subprime mortgages are believed low between 2002-2003. Ratings agencies supported their thought but they were wrong. However this was an unusual environment, and there was substantial risk implied by high foreclosure rates. Another problem was credit notes which were given to poor quality CDOs by ratings agencies. For example, one CDO product which had to be B note, but ratings agencies gave it A note. That’s why investors were mistaken in the market. Then investors who realized this situation did not trust the market, and they did not purchase these products. Thus liquidity declined in the market dramatically. Securitisation had produced great progress in the sharing of risk. Risks are transfered to banks’ and companies’ balance sheets to the market. That progress was real and these technological innovations will continue although it causes problems. Securitisations have had a bumpy ride for two decades. The financial system present for mortgage securitisation market to intermediating risk. There is likely to be a long term reduction in the credit which may be supplied per unit of equity capital in the financial system. When in the market shock occurred, investors do not want to share risks. According to Calomiris these things do not a financial crisis make in 23 November 2007. Calomiris said that housing prices may not be falling by as much as some economists say they are. Calomiris believed that Case-Schiller index which measure US house prices could not measure the prices well. He trust OFHEO’s index much more. The reduced supply of new housing should be a positive effect on housing prices going forward. Residential investment by household sector relative to GDP is shown in the graphic. Nonfinancial firms are highly liquid and not overleveraged. That’s why many companies must use their own resources to invest. Gross Corporate Leverage: Liabilities/Assets Net Corporate Leverage: Liabilities, less cash, / Assets All in all Calomiris was so well intentioned before the crisis happen. Calomiris was well intentioned but he noticed also new financial shocks. These shocks can be housing price declines, or substantial increases in defaults on other consumer loans. He said that substantial decline in credit supply will magnify the shocks turn them into a recession. Calomiris said ‘We have not (yet) arrived at a Minsky moment, but now?