The challenge: Asset pricing:bubbles fire sales liquidity spirals segmented markets Corporate/macro: financing/capital constraints.

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Presentation transcript:

The challenge: Asset pricing:bubbles fire sales liquidity spirals segmented markets Corporate/macro: financing/capital constraints

Investor Security class Investor Intermediary DebtEquity Intermediary ? ? Other assets Segmented markets Intermediated markets Security class Investor DebtEquity Other assets

Bubbles: Definitions and facts

Home Price-to-Rent: First American, Case-Shiller, FHFA

1. Consumption Habits are one model of time-varying risk premium Frictionless macro asset pricing: A useful benchmark or a hopeless anachronism? 2. Investment I/k=f(Q)

AA nonfinancial fine. dysfunctional market or credit risk premium

Arbitrage The cake, or the frosting?

Source: Fontana (2010)

Source: Fontana 2010

Source: Baba and Packer 2008

Banks, credit channel, financial frictions

Interest rate Supply (savings) Demand (investment, mortgages) A credit crunch: Banking system cannot make new loans. System Doesnt Work Loans Capital requirement

Interest rate Loans Supply Of risky debt Demand A fall in loans need not mean a credit crunch View 3: Investor Fear + Recession

r Loan r MortgageConsumerBusinessFederalFinancial 06/Q /Q /Q /Q /Q /Q Flow of new lending Broken intermediary system? Banks or securitized debt markets? Higher risk aversion, less demand? Banks or securitized debt markets? Borrowing Does Decline, a lot! Flow of funds ($billion)

Firm Writedown & Loss Capital Raised Citigroup Inc.* Wachovia Corporation* Merrill Lynch & Co Washington Mutual Inc UBS AG HSBC Holdings Plc Bank of America Corp JPMorgan Chase & Co Morgan Stanley* IKB Deutsche Industriebank AG Royal Bank of Scotland Group Plc Lehman Brothers Holdings Inc Credit Suisse Group AG10.43 Deutsche Bank AG Wells Fargo & Company105.8 Credit Agricole S.A Barclays Plc Canadian Imperial Bank of Commerce Fortis* Bayerische Landesbank6.90 HBOS Plc ING Groep N.V Societe Generale Mizuho Financial Group Inc.6.10 National City Corp Natixis Indymac Bancorp Inc4.90 Goldman Sachs Group Inc ………… TOTAL Banks Can And Do Raise Capital! (source: Bloomberg.com)

Banks Can and Do Raise Capital Source :Anil Kashyap Includes Treasury Purchase

Want to lend but cant? Vs. no good borrowers, higher r? Little decline in banking system lending. Banks can and do raise equity. Banks can and do fail / get taken over. Treasury purchase/debt guarantee did not stop it in tracks. Recapitalized banks pay dividends, buy other banks. High risk premiums in nonfinancial, non-intermediated assets. So…why is borrowing so much lower? Summary: Bank constraint vs. Credit market Or risk premium view r Loan r

US Non-Agency MBS Issuance

: 2008