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Deciphering the liquidity and credit crunch 2007-2008 (2009)
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| Venue: | Journal of Economic Perspectives |
| Citations: | 372 - 5 self |
BibTeX
@ARTICLE{Brunnermeier09decipheringthe,
author = {Markus K. Brunnermeier},
title = {Deciphering the liquidity and credit crunch 2007-2008},
journal = {Journal of Economic Perspectives},
year = {2009},
pages = {77--100}
}
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Abstract
T he financial market turmoil in 2007 and 2008 has led to the most severefinancial crisis since the Great Depression and threatens to have largerepercussions on the real economy. The bursting of the housing bubble forced banks to write down several hundred billion dollars in bad loans caused by mortgage delinquencies. At the same time, the stock market capitalization of the major banks declined by more than twice as much. While the overall mortgage losses are large on an absolute scale, they are still relatively modest compared to the $8 trillion of U.S. stock market wealth lost between October 2007, when the stock market reached an all-time high, and October 2008. This paper attempts to explain the economic mechanisms that caused losses in the mortgage market to amplify into such large dislocations and turmoil in the financial markets, and describes common economic threads that explain the plethora of market declines, liquidity dry-ups, defaults, and bailouts that occurred after the crisis broke in summer 2007. To understand these threads, it is useful to recall some key factors leading up to the housing bubble. The U.S. economy was experiencing a low interest rate environment, both because of large capital inflows from abroad, especially from Asian countries, and because the Federal Reserve had adopted a lax interest rate policy. Asian countries bought U.S. securities both to peg the exchange rates at an export-friendly level and to hedge against a depreciation of their own currencies against the dollar, a lesson learned from the Southeast Asian crisis of the late 1990s. The Federal Reserve Bank feared a deflationary period after the bursting of the Internet bubble and thus did not counteract the buildup of the housing bubble. At the same time, the banking system underwent an important transformation. The
Keyphrases
credit crunch asian country market decline severefinancial crisis overall mortgage loss real economy absolute scale all-time high housing bubble forced bank late 1990s financial market liquidity dry-ups u.s. security federal reserve major bank export-friendly level u.s. stock market wealth low interest rate environment u.s. economy deflationary period mortgage market lax interest rate policy large dislocation great depression large capital inflow important transformation financial market turmoil economic mechanism key factor exchange rate banking system federal reserve bank stock market mortgage delinquency common economic thread bad loan stock market capitalization housing bubble southeast asian crisis
