The background to the financial crisis文档格式.docx

The background to the financial crisis文档格式.docx

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Publishedonline:

19February2008

#Springer-Verlag2007

1Introduction

Therehavebeenmanyfacetstothecurrentfinancialcrisis.Itisdifficultforasinglepersontoputtogetheracompletelycoherentstoryofeverythingthathashappened,unlesstheyhavebeenworkingforoneofthebanksatthecentreofthestorm.Ratherliketheblindmenwhofeelaspectsoftheelephant,commentators,likemyself,arelikelytohaveapersonalview;

itmaytakequitealongtimebeforeacomprehensivehistoryofthiscrisiscanbewritten,andthisisnotsuchacompletehistory.Subjecttothatcaveat,letmebeginwithasurveyofsomeofthebackgroundinfluencesthatleduptothiscrisis.

2Themis-pricingofrisk

Inmanyrespects,thiscrisiswasforeseeninadvance.AlmosteverycentralbankwhichpublishedaFinancialStabilityReview,andinternationalfinancialinstitutions,suchastheBISandIMF,whichdidthesame,hadbeenpointingforsometimepriortothemiddleof2007toaseriousunder-pricingofrisk.Thiswascharacterisedbyverylowriskspreads,withdifferentialsbetweenriskyassetsandsafeassets,havingdeclinedtohistoricallylowlevels.Volatilitywasunusuallylow.Leveragewashigh,asfinancialinstitutionssoughttoaddtoyield,inthefaceofverylowinterestrates.Thosesameinstitutionswereapparentlypreparedtomoveintoincreasinglyriskyassetsinordertodoso,oftenleveragingthemselvesseveraltimesinpursuitofthatobjective.Indeed,atthebeginningofthecrisis,thatispriortoAugust2007,therewassomegeneralsatisfactionamongthemonetaryauthoritiesthattheundesirableandexcessiveunder-pricingofriskwasintheprocessofbeingreversed.

IEEP（2008）4:

331–346

Howhadthiscomeabout?

（a）Verylowinterestrates,2001–2005

Inpart,thisunder-pricingofriskhadresultedfromthelongperiodofextraordinarilylownominal,andverylowreal,interestratesthathadcontinuedfromtheendingoftheTechbubblein2001,untilcentralbanksgenerallybegantoraiseinterestratesagainin2005.Figure1showsthetimepathofinterestratesintheUSA,intheEurozoneandintheUK.

IntheaftermathoftheTechbubble,therewasaconsiderablefearintheUSAthatpricedeflationmightensue.Moreover,thereappearedtobeaworldglutofsavings,drivingdownrealinterestratesallaroundtheworld,（Bernanke2005）.

Thefearofdeflation,andthesavingsglut,ledtoaperiodofexpansionarymonetarypolicies,withnominalpolicyinterestratesatverylowlevels,andwithacceleratingmonetarygrowthinseveralcountries.InFig.2,areshowntheratesofmonetarygrowthfortheUSA,theEurozoneandtheUKovertheyearsfrom2001tothepresent.

（b）Thegreatmoderation/stability

Thisperiodofmonetaryexpansion,andlowinterestrates,didnotleadondirectlytoanyincreaseininflationingoodsandservicesprices,i.e.intheCPIorRPIinthemajornations.Indeed,theseyearswereacontinuationofwhathasbecomeknownastheGreatModerationortheGreatStability.Eversincetheearly1990s,themajordevelopedcountriesintheworld,withthepossibleexclusionofJapan,haveenjoyedaGoldenAge.DuringthisGoldenAge,inflationhasbeenkeptlowandstable,veryclosetotheinflationtargets,eitherexplicitorimplicit,thatthemonetaryauthoritieshavemaintained.Thishasnotbeenattheexpenseofgreatervolatilityofoutput;

ratherthecontrary,asoutputhasremainedgrowingsteadilyandwithfew,ifany,cycles.AlthoughgrowthinEuropehasbeenslightlydisappointing,growthinotherpartsoftheworld,notablyintheUSA,butalsoinex-JapanAsia,hasbeenremarkablystableandstrong.Thispersistentmacro-economicstabilityledmanytobelievethatmacro-economicriskshadbeensignificantlyreduced.Theimplicationwasthatinvestmentgenerally,andfinancialconditionsinparticular,weresubjecttolessaggregate,macro-economicriskthaninthepast.

（c）TheGreenspanput（?

）

Moreover,wheneverfinancialmarketsintheUSAhadweakenedsharplyovertheprevious20years,orso,forexampleBlackMondayofOctober19,1987;

thehousingcrisisin1992;

theAsianCrisisin1997/1998;

orthecollapseoftheTechBubbleattheendof2001,theFederalReservehadalwaysmovedinswiftlytopreventthefinancialdownturnspreadingmorewidelyintotheeconomy.AviewhadbeendevelopingthattheFedwouldsupportfinancialmarketssuccessfullyfromanyseriouscollapse.Ifthedownsidewasprotected,bywhatbecametermed‘theGreenspanput’,thenequivalentlytheriskstofinancialinvestmentwouldbeconsiderablyless.Theexistenceofsucha‘Greenspanput’remainscontentious.

Some,suchasAlanGreenspanhimself,denythatsuchaprotectivefloortothefinancialmarketseverexisted.Alternatively,thereisanargument,asmadebyKohn2007,thattheFedbehavedmoresymmetricallythanitscriticshaveclaimed.Theyarguethattherewasnosuchasymmetry;

financialmarketstendtodeclinemuchmorerapidlythantheyrise,soanysymmetricoffsetwouldbemuchmorevisibleintermsofcutsininterestratesduringsharpassetpricedeclines,thanintheformofoffsettingincreasesininterestratesduringperiodsofmarketupturns.Bethatasitmay,manycriticisetheFed,inparticular,forbehavinginanasymmetricmanner.And,suchbehaviour,whetherimaginedornot,waspartoftheframeworkthatledmanyinvestorstoseetheworldaslessriskyinthenewMillenniumthanithasbeeninthetwentiethcentury.Theconclusionofallthesefactors,however,wasthattherewasaclearandapparentwidespreadunder-pricingofrisk.Thiscanbeillustratedinavarietyofways,someofwhichareshowninthechartsinFig.3a–dbelow.

3Thenewfinancialstructure

Liberalisedfinancialmarketsareveryinnovative.Thelast10yearshaveseenenormousstridesinthedevelopmentandextensionofnewformsofsecuritizationandthegrowinguseofderivativesofallkinds.Thisisnottheplacetodocumentthesemanifoldchanges,butthegrowthofvariouscollateraliseddebtinstruments,intheformofcollateralisedmortgages,etc.,hasbeenfastandwidespreadinrecentyears.

Thishasbeencombinedwitharevisedbankingstrategy,thatbeganintheUSA,buthasspreadrecentlytoEuropeandabroad.Thisgoesbythegeneraltitleof‘OriginateandDistribute’.Underthisstrategythebanksoriginateloanbusiness,forexampleintheformofresidentialmortgages,andthenpoolbasketsoftheseloans,togetherinvariousways,andsecuritiseanddistributethem,sothatsuchloans,changedintonewsecuritisedformat,leavetheirbalancesheet.Sotheyoriginatetheloans,securitisethem,andthendistributethemtovariousnon-bankfinancialinstitutions.Allthisleadstoadisintermediationofassetsoffbanks’balancesheets.Tosomedegree,thistransferofsuchassetsoffbalancesheetsismoreartificialthanreal.Banksestablishconduits,whichtheyownedandwerenon-banksubsidiaries,whichheldmanyofthesesecuritisedassets.Theyalsoformedcloseconnectionswithmanystructuredinvestmentvehicles（SIVs）,which,thoughtheydidnotownthemdirectly,theyhadcloselinkswiththemassponsors.Allthiswasdoneinsomelargepartforreasonsofregulatoryarbitrage.

TheseconduitsandSIVswerelargelyfinancedbyassetbackedcommercialpaper（ABCP）.TheassetsonthebooksoftheseSIVs,etc.,hadalongmaturity,whereastheABCPwereusuallyofashortmaturity,rangingfrom1to3months.Therewasclearlyasignificantfundingriskinvolvedinsuchfinancialinstitutions.Inordertoprotectthemselves,insomepart,fromsuchfundingrisk,theseinstitutionsusuallyhadcontingentarrangementswiththeirsponsoringbank,whereby,ifitwasnotpossibletorollovertheABCP,thecommercialbankswithwhomtheyhadaconnectionwouldstepinandprovidethefundinginstead.

Indeed,ingeneral,commercialbanksmaintaincontingentliabilitiesaslendersoflastresorttocapitalmarkets,andindeedasunderwriterstocapitalmarkets,forexampleintheissueofvariouskindsofprivateequityobligationsandotherformsofbuy-outsoftheequityofcompanies.

Fig.3（continued）

Theroleofbanksasholdingcontingentliabilitiesandunderwritingcapitalmarketswasespeciallyvulnerablewhentheyhadclosedirectconnections,forexampletheBearSternshedgefundswhichranintotroubleinthemiddleofthesummer,theBanqueNationaledeParis,whichhadproblemswithitsrelatedinstitutionsinJune,theLandesbankenIKBandSachsenConduits,andthesubsequentSIVs,etc.

Onecontinuingaccusationisthattheprocessof‘OriginateandDistribute’madetheoriginatingbanklessconcernedaboutthequalityofcreditassessmentandmonitoringoftheborrowers’conditionsduringthecourseoftheoutstandingloan,sinceitwasnolongerontheoriginatingbank’sbooks.TherearemanyanecdotalsuggestionsthatsuchadeclineincreditassessmentandmonitoringhasoccurredalongsidethenewprocedureofOriginateandDistribute;

however,thereisonlyjustnowbeginningtobeacademicresearchtoassesswhetherthismayindeedhavehappened.But,creditqualitywasnotonlysupposedtobeassessedandcheckedbytheoriginatingbank;

itwasalsosupposedtobeassessedbythecreditratingagencies.Indeed,theabilitytodistributethesevariousformsofcollateraliseddebtdependedveryheavilyindeedonthereputationandabilityofthecreditratingagenciestodoso.Giventhescaleandvolumeofthemarket,andthegrowthofthemarkettoencompassmanylenderswhowereunabletocheckthecreditqualityoftheoriginalloanpoolthemselves,thewholesys