Back to the Future: Revisiting the European Crisis
Recent financial developments are calling into question the future of regional economic integration. Market confidence deteriorates across countries in a contagious way. The place is Europe, the time is . . . now? Or twenty years ago? In fact, in the early 1990s Europe went through a systemic crisis that displays remarkable similarities to today’s events. In this post, we go back to those momentous times and briefly recall how the last Europe-wide crisis started, unfolded, and concluded. The 1992 crisis was eventually resolved, suggesting that there may be some light at the end of the ...
Common Stock Repurchases during the Financial Crisis
Large bank holding companies (BHCs) continued to pay dividends to their shareholders well after the onset of the recent financial crisis. Academics, industry analysts, and policymakers have noted that these payments reduced capital at these firms at a time when there was considerable uncertainty about the full extent of losses facing individual banks and the banking industry. But dividends are not the only means to return capital to shareholders; stock repurchases serve much the same function. In this post, I examine common stock repurchases by large BHCs during the financial crisis and show ...
Evaluating the Rescue of Fannie Mae and Freddie Mac
In September 2008, the U.S. government engineered a dramatic rescue of Fannie Mae and Freddie Mac, placing the two firms into conservatorship and committing billions of taxpayer dollars to stabilize their financial position. While these actions were characterized at the time as a temporary ?time out,? seven years later the firms remain in conservatorship and their ultimate fate is uncertain. In this post, we evaluate the success of the 2008 rescue on several key dimensions, drawing from our recent research article in the Journal of Economic Perspectives.
New Report Assesses Structural Changes in Global Banking
The Committee on the Global Financial System, made up of senior officials from central banks around the world and chaired by New York Fed President William Dudley, recently released a report on ?Structural Changes in Banking after the Crisis.? The report includes findings from a wide-ranging study documenting the significant structural adjustments in banking systems around the world in response to regulatory, technological, and market changes after the crisis, while also assessing their implications for financial stability, credit provision, and capital markets activity. It includes a new ...
Did Subprime Borrowers Drive the Housing Boom?
The role of subprime mortgage lending in the U.S. housing boom of the 2000s is hotly debated in academic literature. One prevailing narrative ascribes the unprecedented home price growth during the mid-2000s to an expansion in mortgage lending to subprime borrowers. This post, based on our recent working paper, “Villains or Scapegoats? The Role of Subprime Borrowers in Driving the U.S. Housing Boom,” presents evidence that is inconsistent with conventional wisdom. In particular, we show that the housing boom and the subprime boom occurred in different places.
Shadow banking and the crisis of 2007-08
In recent decades, institutions that function much like traditional banks have grown outside regulatory oversight. Yet, as Daniel Sanches explains, these so-called shadow banks are as vulnerable to runs as regular banks. Because banking crises can inflict lasting economic harm, economists are interested in tracing how the panic ensued in the shadow system.
Flight to What? — Dissecting Liquidity Shortages in the Financial Crisis
We endogenize the liquidity and the quality of private assets in a tractable incomplete-market model with heterogeneous agents. The model decomposes the convenience yield of government bond into a "liquidity premium" (flight to liquidity) and a "safety premium" (flight to quality) over the business cycle. When calibrated to match the U.S. aggregate output fluctuations and bond premiums, the model reveals that a sharp reduction in the quality, instead of the liquidity, of private assets was the culprit of the recent financial crisis, consistent with the perception that it was the subprime ...
What Does Financial Crisis Tell Us About Exporter Behavior and Credit Reallocation?
Using Japanese firm data covering the Japanese financial crisis in the early 1990s, we find that exporters' domestic sales declined more significantly than their foreign sales, which in turn declined more significantly than non-exporters' sales. This stylized fact provides a new litmus test for different theories proposed in the literature to explain a trade collapse associated with a financial crisis. In this paper we embed the Melitz's (2003) model into a tractable DSGE framework with incomplete financial markets and endogenous credit allocation to explain both the Japanese firm-level data ...
Has the Relationship between Bank Size and Profitability Changed?
Kristen Regehr and Rajdeep Sengupta explore whether the relationship between bank size and profitability changed after the 2007?09 financial crisis.
The Lasting Damage from the Financial Crisis to U.S. Productivity
Michael Redmond and Willem Van Zandweghe find that tight credit conditions during the 2007?09 financial crisis dampened productivity, leaving it on a lower trajectory. The article is summarized in The Macro Bulletin.