43 see he khang and arvind krishnamurthy balance

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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 , vol. 93(2), 292-324. 49 The table is from Richard K. Green and Susan M. Wachter, 2005, The American Mortgage in Historical and International Context, Journal of Economic Perspectives , 19(4), 93-114. 50 These states are Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, and Washington. In some states such as California, home equity lines of credit and home equity loans are recourse loans even though original home loans are no-recourse. 51 One of the important factors that explain why banking balance sheets in some countries became excessively leveraged was the ease with which commercial banks could set up off-balance sheet vehicles and exploit loopholes in Basel capital requirements to reduce their regulatory capital requirements. See Acharya, Viral V. and Philipp Schnabl, “Do Global Banks Spread Global Imbalances? Asset-Backed Commercial Paper in the Financial Crisis of 2007-09”, International Monetary Fund Economic Review, forthcoming 2010 .
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