Why+are+financial+intermediaries

Why+are+financial+intermediaries - Thoughts on the Current...

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1 Thoughts on the Current Financial Turmoil presentation by Richard Rosen, Federal Reserve Bank of Chicago April 18, 2008 The views expressed here are those of the author and may not represent those of the Federal Reserve Bank of Chicago or the Federal Reserve System.
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2 Outline What caused the recent financial turmoil? What do we mean by turmoil? What does this mean for the broader economy? What did the Fed do?
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3 Causes of the turmoil. Financial markets seemed strong going into 2007. Equity markets had at least partially recovered from the 2001 declines. The IPO market was healthy. Measures of expected equity market volatility were at historically low levels. Bond markets were growing, with bond spreads at low levels. But housing markets were beginning to show signs of weakness. Home prices had stopped their rapid increase.
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4 The period of rising home prices comes to an end. OFHEO price index Case-Shiller Home Price Index Home price index change (percent change over prior year)
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5 MBS total outstanding compared to total mortgage debt MBS outstanding are a growing share of total mortgage debt. 0.0 2.0 4.0 6.0 8.0 10.0 12.0 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 $ trillions Total single-family residential mortgages Total MBS Source: Inside Mortgage Finance, “The 2007 Mortgage Market Statistical Annual”
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6 The share of non-agency securities in total MBS issuance Privately-issued MBS have grown in importance, especially in the last few years through 2005. Source: Inside Mortgage Finance, “The 2007 Mortgage Market Statistical Annual” 0% 10% 20% 30% 40% 50% 60% 1995 1997 1999 2001 2003 2005
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7 The share of non-agency securities in total MBS issuance by type of mortgage Subprime and Alt-A mortgages have grown in share in the last few years, both overall and as a fraction of non-agency MBS through 2006. Source: Inside Mortgage Finance, “The 2007 Mortgage Market Statistical Annual” 0% 5% 10% 15% 20% 25% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Prime Subprime Alt A
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8 Causes of the turmoil. Then, in 2007, there were a series of problems related to subprime mortgage investments that spooked the markets. In addition, home prices started to decrease in some markets and homes became more difficult to sell.
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9 Housing prices decelerate . . . Case-Shiller Home Price Index Home price index change (percent change over prior year) OFHEO price index
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10 with larger declines in some markets (percent change over prior year) Miami Case-Shiller Home Price Index Phoenix San Diego National
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11 Housing sales decline and inventories rise Inventory of Unsold Homes (months supply) Existing homes Single-family Home Sales (thousands) Existing New homes New
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The share of non-agency securities in total MBS issuance Private issuance of MBS fell off sharply in 2007.
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This note was uploaded on 05/20/2010 for the course DOF AAf001-6 taught by Professor Changchungdo during the Spring '10 term at 카이스트, 한국과학기술원.

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Why+are+financial+intermediaries - Thoughts on the Current...

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