The G20's Blind Spot: President Obama must squarely face the bad asset problem

from PK Maibelo
http://www.voxeu.org/index.php?q=node/3385

From the article I have read, it came to my attention that the root cause of the previous financial crisis in the US has been that of too much leverage from financial institutions. The lack of proper oversight from authorities/regulators perpetuated to the crisis. This in turn turned in to a “bad debts arena” whereby assets were no longer performing and they had to be declared as Non-performing Loans (NPL). Also importantly is the fact that US consumers over the past 10 years had fallen into the habit of borrowing to spend and when the economy was faced with this epidemic it was all too late, as US households had little, if not negative, saving rates.

Very nice - this should be required reading for anybody thinking that the crisis will be short. The policies implemented now do not deal in any fundamental way with the problem of non-performing assets in the financial sector. To check a possible way out, look instead at the Swedish experience: nice discussion here

Fed’s Plosser: Bad Incentives Drove Much of Financial Crisis

From Nontando Frans

http://blogs.wsj.com/economics/2010/10/20/feds-plosser-bad-incentives-drove-much-of-financial-crisis/

I thought that this article was interesting as I’d never heard the “Bad Incentives” argument before. It was interesting reading about a Federal Reserve official taking some of the blame off of the financial institutions. But I don’t think he said anything new. From my view-point, financial institutions saw the ‘gaps’ in the system, and motivated by their desire to make more money (greed?), they decided to exploit the opportunities that they had identified. Greed still seems to be the starting point of everything.  But at the end of the day, I wonder whether wanting to make a little more money is such a bad thing? What can be defined as greed?

This relates well with Riane's contribution. Let's start from the assumption that "greed" is nothing more than the "profit maximization" of our economic models. when is greed a problem? When it generates behaviours that go against social welfare. Regulation is implemented in any market system to create good incentives that channel greed towards "good" behaviour. The regulation (or lack of) of financial markets was creating bad incentives - thus channeling the search for profit in activities which were increasing the risk of crisis. The problem is not greed itself but the context of rule and institutions that characterized a specific market or economy.  Thank you

Why Isn't Housing Recovering?

From Annika Eberle:
http://finance.yahoo.com/loans/article/110892/why-isnthousing-recovering?mod=loans-home

I think this article is interesting because, personally I haven't read anything about the real estate market since the crises hit in 2007/2008. It is interesting to see that investor sentiment turned from absolute optimism that housing prices will be ever increasing, to persistent pessimism and hesitation to get into the market, which is currently still the case according to the author and which makes perfect sense. The author also mentiones that although monetary policy easing took an aggressive approach, which was expected to have a positive influence on the housing  market, this still has not had a significant impact. This shows us just how much investor sentiment really does have an impact on pretty much any market!
Another fact I thought was interesting is that Fannie Mae and Freddie Mac are now seeking to maximise their profit because the crises depleted all their capital, and that this strategy is in fact making it more difficult for people such as small business owners or investors to get funding because underwriting rules have been drastically tightened or of penalties that have to be paid on mortgages that lie beneath a certain rating. To be noted is that these people are 1) a source of employment for the economy as well as a driving force behind housing sales. Quite a few aspects with relation to the housing market are addressed in this article, I just took two that i found specifically interesting. Please feel free to add some things on! :)


Very interesting contribution - the housing market in United States remains a very big indicators that things are not yet right and why. In the lectures we have talked about the importance of banking sector balance sheet in explaining the strength and duration of the crisis - the article shows another example of that.

Greenspan Concedes Error on Regulation

from Riané de Bruyn:

http://www.nytimes.com/2008/10/24/business/economy/24panel.html

There is a saying that everything that goes up must come down eventually and Alan Greenspan managed to postpone the fall of the economic boom for some time, but the fall became increasingly harder. It is ironic that people choose to believe that central banks have control over the whole economy and can control it like a puppet if they wish to do so. Yes monetary policy is a very strong instrument, like Friedman said, to use in the economy but nothing is fool proof and the crisis proved it. I agree with Alan Greenspan that there is too little regulation or no regulation in the debt market. In another article Greenspan said that the financial markets became too complex to fully understand and analyse which is true since the financial markets in the world are closely integrated and monetary policies are not independent of other countries anymore, which makes monetary policy models very complex and almost impossible to accurately estimate.

Although they blame Greenspan for the crisis and that he aggravated the situation by ignoring the signs, it is in my opinion that it would not have helped to curb the crisis but it would have only made it not as extensive as it is. It is clear that the stock markets cannot function independently and without regulation as Greenspan blames Wall Street for the crisis, which makes sense. There is no regulation or control over the selling of debt on the stock market. Thus I think that in the future the central bank should exercise more control over debt, thus the market of debt. It is obvious that debt and interest rates are closely linked and it makes logic sense that the central bank should be able to control the interest rate together with regulating the debt market, thus having control over the “missing link” in the market.

We have talked only a little about the role of regulation in providing financial stability. This article expand on the topic which is now the big issue in international policy making. Thank you.