paper about MBS

Financial stability if the treasury were to be

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Unformatted text preview: financial stability if the Treasury were to be granted emergency authorities to take over the GSEs and avoid a disorderly liquidation by markets (Henry M. Paulson, Jr., 2010, On the Brink , Business Plus). 147 41 The authors are grateful to Kim Schoenholtz for useful discussions regarding this point. See also David H. Small and James A. Clouse (2004) “The Scope of Monetary Policy Actions Authorized Under the Federal Reserve Act”, Working Paper, Board of Governors of the Federal Reserve, for understanding the ways and extent to which the Federal Reserve Act limits (and does not limit) the Fed from taking credit risk onto its balance sheet. 42 Chairman of the Board of Governors of the Federal Reserve, Ben Bernanke, called this the “portfolio balance channel” and attributed success to Fed’s quantitative easing program to altering the mix of investors’ portfolio mix (“The Economic Outlook and Monetary Policy”, Remarks at the Federal Reserve Bank of Kansas City Economic Symposium at Jackson Hole, Wyoming, August 27, 2010). 43 See He, Khang and Arvind Krishnamurthy “Balance Sheet Adjustments in the 2008 Crisis”, IMF Economic Review , forthcoming. It details how the overall adjustment of the financial sector’s balance sheet took place as far as mortgage-backed securities were concerned between commercial banks, investment banks, hedge funds, insurance firms, the GSEs, and the Federal Reserve. 44 Kocherlakota, Narayana, “Economic Outlook and Economic Choices”, Speech by the President of the Federal Reserve Bank of Minneapolis, May 13, 2010. 45 For a more complete description of how the Dodd-Frank Act of 2010 limits the scope of the Federal Reserve’s emergency lending facilities, see Cooley et al. (2010). 46 Eric Leeper calls this situation an “era of fiscal stress” and highlights the risk that it may be especially likely when governments do not have a well-stated (or well-understood) fiscal policy, as in the case of United States, for example, with respect to dealing with its huge, currently off-balance sheet, entitlements to health care and pensions. (“Monetary Science, Fiscal Alchemy”, presentation at the Federal Reserve Bank of Kansas City Economic Symposium at Jackson Hole, Wyoming, August 28, 2010). 47 Examples include recent work by Gary Gorton and Andrew Metrick who argue that securitization is a rework on traditional banking and has not developed to transfer the credit risk away from banks, while work by NYU Stern School on the crisis describes securitization as an important tool for banks to exploit loopholes in capital requirements, i.e., regulatory arbitrage. (Gorton, Gary B. and Andrew Metric, 2010, Securitized Banking and the Run on Repo, working paper no. 09-14, Yale, and Acharya, Viral V. and Matthew Richardson, ed., 2009, “Restoring Financial Stability: How to Repair a Failed System,” Wiley.) 48 For an explanation of the fluctuations in the share of fixed rate mortgages in the U.S. over time, see “Mortgage Timing” by Koijen, Ralph, Van Hemert, Otto and Stijn Van Nieuwerburgh, 2009, Journal of Financial Economics...
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financial stability if the Treasury were to be granted...

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