The Subprime Solution
The Subprime Solution Robert J.Shiller How Global Financial Crisis Happened, and What to Do about it
Huiming GUO
December 3, 2008
The Subprime Solution
The Framework
The Bubble in Housing Market
The Subprime Solution
The Framework
The Bubble in Housing Market The Last Big Housing Crisis
The Subprime Solution
The Framework
The Bubble in Housing Market The Last Big Housing Crisis Mend it, NOT End it Bailout Financial Democracy
The Subprime Solution
The Framework
The Bubble in Housing Market The Last Big Housing Crisis Mend it, NOT End it Bailout Financial Democracy The Response Today
The Subprime Solution The bubble in housing market
The bubble in housing market
The Subprime Solution The bubble in housing market
The bubble in housing market
How the bubble came to us
The Subprime Solution The bubble in housing market
The bubble in housing market
How the bubble came to us Why the bubble burst right now
The Subprime Solution The bubble in housing market
The bubble in housing market
How the bubble came to us Why the bubble burst right now What is the result
The Subprime Solution The bubble in housing market How the bubble came to us
The housing markets
The Subprime Solution The bubble in housing market How the bubble came to us
Summary
/Rocket taking off0during 1997-2006; and the rocket might come crashing down.
The faster declined followed the more dramatically increased. The lowest price tier showed the biggest increases and the biggest drop afterward. The broad patterns are similar in Boston and London. Standard & Poor’s/ Case-Shiller Home Price Indices are updated all the way back to 1890. Data source: The Subprime Solution
The Subprime Solution The bubble in housing market How the bubble came to us
Home price index in China 2003Q1-2008Q2 quarterly data (Last year=100)
130 125 120 115 110 105 100 95 2003
2004
2005 Beijing Shanghai Shenzhen
2006
2007
Xi'an Chengdu Wuhan
The Subprime Solution The bubble in housing market How the bubble came to us
Home price index in China (Cont.) 1998-2007 yearly data (Last year=100)
125 120 115 110 105 100 95 98
99
00
01
02
Beijing Shanghai Shenzhen
03
04
05
Chengdu Xi'an Wuhan
06
07
The Subprime Solution The bubble in housing market How the bubble came to us
Allen Greenspan I would tell audiences that we were facing not a bubble but a forth – lots of local bubbles that never grew to a scale that could threaten the health of the overall economy.
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The Subprime Solution The bubble in housing market How the bubble came to us
Allen Greenspan I would tell audiences that we were facing not a bubble but a forth – lots of local bubbles that never grew to a scale that could threaten the health of the overall economy.
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Ben Bernanke Although speculative activity has increased in some areas, at a national level these price increases largely reflect strong economic fundamental, such as
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The Subprime Solution The bubble in housing market How the bubble came to us
How the bubble came
A contagion of ideas Conflate land values with housing values Price-story-price loop Information cascades
The Subprime Solution The bubble in housing market How the bubble came to us
How the bubble came
A contagion of ideas Conflate land values with housing values Price-story-price loop Information cascades Encouraging homeownership
The Subprime Solution The bubble in housing market How the bubble came to us
How the bubble came
A contagion of ideas Conflate land values with housing values Price-story-price loop Information cascades Encouraging homeownership Low interest rate
The Subprime Solution The bubble in housing market How the bubble came to us
How the bubble came
A contagion of ideas Conflate land values with housing values Price-story-price loop Information cascades Encouraging homeownership Low interest rate The failure of regulators
The Subprime Solution The bubble in housing market Why the bubble burst right now
Why the bubble burst
The home prices began to fall; Mortgage rates began to reset to higher levels; The subprime borrower began defaulting.
The Subprime Solution The bubble in housing market What is the result
What is the result
Subprime borrowers
The Subprime Solution The bubble in housing market What is the result
What is the result
Subprime borrowers Financial institutions
The Subprime Solution The bubble in housing market What is the result
What is the result
Subprime borrowers Financial institutions Other sectors
The Subprime Solution The bubble in housing market What is the result
What is the result
Subprime borrowers Financial institutions Other sectors Other countries
The Subprime Solution The bubble in housing market What is the result
U.S. foreclosures: actual and predicted
The Subprime Solution The bubble in housing market What is the result
Who should be blamed for Credit Rating Agencies
Subprime Borrowers Commercial Banks Mortgage Brokers
Fannie Mae Freddie Mac Investment Banks
Good(AAA-A) Not so good (BBB-B) Ugly Shell Company
Financial Institutions
The Subprime Solution The bubble in housing market What is the result
The process of mortgages in China
The Subprime Solution The bubble in housing market What is the result
The mortgages securitization in China?
The amount of mortgages Property-related loans are about
5trn($728bn)
The Subprime Solution The bubble in housing market What is the result
The mortgages securitization in China?
The amount of mortgages Property-related loans are about
5trn($728bn)
The commercial banks A minimum deposit of 30% in home values The economy is funded based on deposits Chinese bank loans amount only 65% of deposits
The Subprime Solution The bubble in housing market What is the result
The mortgages securitization in China?
The amount of mortgages Property-related loans are about
5trn($728bn)
The commercial banks A minimum deposit of 30% in home values The economy is funded based on deposits Chinese bank loans amount only 65% of deposits Institutional Investors Rating agencies
The Subprime Solution The Last Big Housing Crisis
The Last Big Housing Crisis
Most people borrowed with short-term mortgages of five years or less, which they expected to roll over shortly before they came due.
The Subprime Solution The Last Big Housing Crisis
The Last Big Housing Crisis
Most people borrowed with short-term mortgages of five years or less, which they expected to roll over shortly before they came due. As the crisis took hold, the borrowers were unable to refinance the mortgages and stood to lose their homes.
The Subprime Solution The Last Big Housing Crisis
The Last Big Housing Crisis
Most people borrowed with short-term mortgages of five years or less, which they expected to roll over shortly before they came due. As the crisis took hold, the borrowers were unable to refinance the mortgages and stood to lose their homes. In 1925-33 home prices fell a total of 30%, and the unemployment rate rose to 25% at the peak of the Great Depression
The Subprime Solution The Last Big Housing Crisis
The Last Big Housing Crisis
The Subprime Solution The Last Big Housing Crisis
Lessons from last big housing crisis The New Deal
The Subprime Solution The Last Big Housing Crisis
Lessons from last big housing crisis The New Deal The Federal Home Loan Bank System (early 1930s) The Appraisal Institute (1932) New bankruptcy law (1933)
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The Home owners Loan Corporation (1933)
The Subprime Solution The Last Big Housing Crisis
Lessons from last big housing crisis The New Deal The Federal Home Loan Bank System (early 1930s) The Appraisal Institute (1932) New bankruptcy law (1933)
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The Home owners Loan Corporation (1933) The Federal Housing Administration (1934) The Federal Deposit Insurance Corporation (1934) The Securities and Exchange Commission (1934) The Federal National Mortgage Association (1938)
The Subprime Solution Mend it, not end it
Mend it, not end it
Bailouts in short-run
The Subprime Solution Mend it, not end it
Mend it, not end it
Bailouts in short-run Financial democratization in long-run
The Subprime Solution Mend it, not end it
Henry B. Steagall We cannot stand by when a house is on fire to engage in lengthy debates over the methods to be employed in extinguishing the fire. In such a situation we instinctively seize upon and utilize whatever method is most available and offers assurance of speediest success.
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The Subprime Solution Mend it, not end it Bailouts
Bailouts
The importance of economic policies
The Subprime Solution Mend it, not end it Bailouts
Bailouts
The importance of economic policies The necessity for some bailouts
The Subprime Solution Mend it, not end it Bailouts
Bailouts
The importance of economic policies The necessity for some bailouts A new Home Owners
.Loan Corporation
The Subprime Solution Mend it, not end it Bailouts
Bailouts
The importance of economic policies The necessity for some bailouts A new Home Owners
.Loan Corporation
Getting the short-run solutions right
The Subprime Solution Mend it, not end it Bailouts
The importance of economic policies German was never able to pay the penalty in the treat,which could be one of the factors that led to World War II
The Treaty of Versailles
The Subprime Solution Mend it, not end it Bailouts
The necessity for some bailouts
The large magnitude of the subprime crisis
The Subprime Solution Mend it, not end it Bailouts
The necessity for some bailouts
The large magnitude of the subprime crisis The public perceptions of fairness
The Subprime Solution Mend it, not end it Bailouts
The necessity for some bailouts
The large magnitude of the subprime crisis The public perceptions of fairness The public confidence is being severely eroded
The Subprime Solution Mend it, not end it Bailouts
The necessity for some bailouts
The large magnitude of the subprime crisis The public perceptions of fairness The public confidence is being severely eroded The externality
The Subprime Solution Mend it, not end it Bailouts
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A new Home Owners Loan Corporation
Funnel money to mortgage lenders
The Subprime Solution Mend it, not end it Bailouts
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A new Home Owners Loan Corporation
Funnel money to mortgage lenders Attract leaders interested in fundamental change
The Subprime Solution Mend it, not end it Bailouts
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A new Home Owners Loan Corporation
Funnel money to mortgage lenders Attract leaders interested in fundamental change Signaling serious intent to solve the problem
The Subprime Solution Mend it, not end it Bailouts
Getting the solutions right
Leaders admit that serious problems exist
The Subprime Solution Mend it, not end it Bailouts
Getting the solutions right
Leaders admit that serious problems exist Many more tax rebates will be necessary
The Subprime Solution Mend it, not end it Bailouts
Getting the solutions right
Leaders admit that serious problems exist Many more tax rebates will be necessary Pay attentions to the capital adequacy of banks and broker dealers
The Subprime Solution Mend it, not end it Bailouts
Getting the solutions right
Leaders admit that serious problems exist Many more tax rebates will be necessary Pay attentions to the capital adequacy of banks and broker dealers Setting the policy focus properly
The Subprime Solution Mend it, not end it Bailouts
The Purpose
The essential purpose of the bailouts is to prevent fundamental loss of economic confidence, and to maintain a sense of social justice;not to
maintain high values in housing market or stock market.
The Subprime Solution Mend it, not end it Financial Democracy
Financial Democracy
Every crisis contains the seeds of change!
The Subprime Solution Mend it, not end it Financial Democracy
Financial Democracy
Every crisis contains the seeds of change! Regulatory and insurance institutions are the track that carries our financial and real estate markets
The Subprime Solution Mend it, not end it Financial Democracy
Financial Democracy
Technology
The Subprime Solution Mend it, not end it Financial Democracy
Financial Democracy
Technology New markets for risks that really matter
The Subprime Solution Mend it, not end it Financial Democracy
Financial Democracy
Technology New markets for risks that really matter Information infrastructure New retail risk-management institutions
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare New financial watchdog National Highway Traffic Safety Administration
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare New financial watchdog National Highway Traffic Safety Administration Default-option financial planning the HOLC extend the terms of mortgages
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare New financial watchdog National Highway Traffic Safety Administration Default-option financial planning the HOLC extend the terms of mortgages Improved financial disclosure
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare New financial watchdog National Highway Traffic Safety Administration Default-option financial planning the HOLC extend the terms of mortgages Improved financial disclosure Improved financial database
The Subprime Solution Mend it, not end it Financial Democracy
Information infrastructure
Comprehensive financial advance Co-payment arrangement like Medicare New financial watchdog National Highway Traffic Safety Administration Default-option financial planning the HOLC extend the terms of mortgages Improved financial disclosure Improved financial database New economic units of measurement
The Subprime Solution Mend it, not end it Financial Democracy
New retail risk-management institutions
Continuous-workout mortgages
The Subprime Solution Mend it, not end it Financial Democracy
New retail risk-management institutions
Continuous-workout mortgages Home equity insurance
The Subprime Solution Mend it, not end it Financial Democracy
New retail risk-management institutions
Continuous-workout mortgages Home equity insurance Livelihood insurance
The Subprime Solution The Response Today
The response today
The FHASecure bailouts
The Subprime Solution The Response Today
The response today
The FHASecure bailouts The Master Liquidity Enhancement Conduit
The Subprime Solution The Response Today
The response today
The FHASecure bailouts The Master Liquidity Enhancement Conduit The resetting of adjustable-rate mortgage
The Subprime Solution The Response Today
The response today
The FHASecure bailouts The Master Liquidity Enhancement Conduit The resetting of adjustable-rate mortgage Other measures Cutting interest rate The Term Auction Facility The Term Security Facility The Primary Dealer Credit Facility The Economic Stimulus Act
The Subprime Solution The Response Today
The response today
20th Sep.
Propose the bailouts to the Congress
The Subprime Solution The Response Today
The response today
20th Sep.
Propose the bailouts to the Congress
29th Sep.
Congress disapproved the $700 billion bailouts
The Subprime Solution The Response Today
The response today
20th Sep.
Propose the bailouts to the Congress
29th Sep.
Congress disapproved the $700 billion bailouts
5th Oct.
Congress approved to rescue the financial markets
The Subprime Solution The Response Today
The response today
20th Sep.
Propose the bailouts to the Congress
29th Sep.
Congress disapproved the $700 billion bailouts
5th Oct. 12nd Nov.
Congress approved to rescue the financial markets Abandoned the original strategy
The Subprime Solution The Response Today
The response today
20th Sep.
Propose the bailouts to the Congress
29th Sep.
Congress disapproved the $700 billion bailouts
5th Oct.
Congress approved to rescue the financial markets
12nd Nov.
Abandoned the original strategy
24th Nov.
Obama Planning Second Stimulus Package
The Subprime Solution The Response Today
Concluding Remarks
None of these proposals represents a true institutional innovation The US congress has been slow to react the crisis
The Subprime Solution The Response Today
Concluding Remarks
None of these proposals represents a true institutional innovation The US congress has been slow to react the crisis As the crisis worsens and begins to consume significant amounts of government resources, they may simply not able to keep up.
The Subprime Solution The Response Today
Concluding Remarks
None of these proposals represents a true institutional innovation The US congress has been slow to react the crisis As the crisis worsens and begins to consume significant amounts of government resources, they may simply not able to keep up. The new government may perform much better to deal with the crisis.
The Subprime Solution The Response Today
Never too old to learn, never too late to turn.
