Seattle Presentation西雅图学习课件

“Liquidity,LiquidityEverywhere

ButNotaDroptoDrink

Liquidity,LiquidityEverywhere

andalltheBanksdidShrink”

WithsincereapologiesSamuelColeridgeandtheRimeoftheAncientMarinerProfessorMichaelPalmerPresentationtoSchnitzerWest,LLCSeattle,WashingtonSeptember24,2008QuickBioMichaelPalmer,ProfessorofFinance,LeedsSchoolofBusiness,UniversityofColorado.Education:Ph.D.UniversityofWashington,1967(FinanceandMacro-economics)VisitingProfessorStatus:KansaiGaidaiUniversity,Osaka,Japan;JiaoTongUniversity,Shanghai,China;SemesteratSeaAcademicDirector:LondonSeminarinInternationalFinancePunchLineWehaveexperiencedanunprecedentedfreezingofglobalfinancialmarketswhichisnowaffectingrealeconomicactivity.Financialmarketsareshowingsomesignofthawing,butisittoolittleandtoolatetoavoidamajorglobalslowdown?Theme#1Currentfinancialcrisisisnotaliquiditycrisis!LiquidityisNottheIssueThere’splentyofliquidityFed’sDiscountWindowFacilityand28and84-dayTAFprogram;2008data:DiscountWindow(Primary)borrowing:$180bnPrimaryDealerCreditBorrowing:$117bnTermAuctionFacility:$1.7trFedbuying3monthcommercialpaperfromissuers.Specificcompanies:AIG:$85billion(USTreasury)+$38bn(FederalReserve)Fedassetshaveballoonedto$1.8tr,or12%ofGDP–doublefromlastyear.BorrowingfromtheFed,$bnForeignCentralBanksandGovernmentshavealsoExpandedLiquidityUnitedKingdomSeptember19,2007:TheBankofEnglandannouncedthatitwouldconductauctionstoprovidefundstobanksat3monthmaturity.Expectedinjectionwiththisprogram:$350bnOctober8,2008:GovernmentannounceditwouldbuysharesinUKbanks-Estimatedinjection:$90bnto135bnEuro-ZoneECBpermitsapproximately1,900membercountry(15)bankstoraise3-and6-monthfundsthroughweeklyauctions.FundsinjectedthroughOctober8:$590bn.October6,2008:GermanGovernmentannouncedastate-leadrescuepackageforcommercialpropertylenderHypoRealEstate.Estimatedinjection:$68bn.U.S.FinancialSystemhasPlentyofReserves(DepositoryInstitutions)ExcessReserves=TotalReserves*-Required**AverageMonthlyData($Bn)2005through2007:$1.72008(Jan–Sep):$8.5****DepositsatFed+VaultCash**LegalReservesagainstDeposits***$6.0BninSeptemberNon-BorrowedReservesTotal–BorrowingfromFedAverageMonthlyData($Bn)2005through2007:$43.52008(Jan–Aug):-$92.0ButReservesAreNot(Yet)ShowingupinMoneySupplyGrowthM2Growth*3Months,May2008toAug2008: 1.5%6Months,Feb2008toAug2008: 3.3%12Months,Aug2007toAug2008: 5.3%*Percentchangeanseasonallyadjustedannualrates.CommercialLoans*Aug4-8,2008: $42.4BnAug6-10,2007: $39.7BnAug7-11,2006: $44.0BnAug1-5,2005: $48.0Bn*Commercialandindustrialloansmadebylargedomesticcommercialbanks.Dataarecollectedduringthemiddlemonthofeachquarter.WhathaveFinancialInstitutionsDoneWithTheirNewLiquidity?Strategy#1InvestinginSafe-HavenFinancialAssetsIncreaseinRiskAversionRepresentedbyTEDSpreadThreemonthU.S.dollarLibor–ThreemonthU.S.T-Billrate.Early2007spread20basispoints.Oct14,2008spreadreached445basispoints(thelargestsincedatacollectionbeganin1984)3-monthTEDSpreadImpactofSafeHavenonYieldsStrategyInvestinginSafe-HavenFinancialAssetsIncreaseinRiskAversionMovingintoTreasuryBillsBiggestimpactonshortsegmentofU.S.yieldcurvePushingdowntheshortendofthecurve.Fedpolicyalsoaffectingthissegment.YieldCurve:Oct2007toOct2008FinancialInstitutionsHesitatetoLendtoOneAnotherortoEnd-UserMarketStrategy#2HoardingReservesRepresentedbyspreadofLIBORoverCentralBankpolicyinterestratesEarly2008U.S.spreadwasaroundzero.Currentlyspreadisaround200basispoints.Increasingdepositswithcentralbanks.BanksdepositedarecordamountofcashwiththeECB(182.6bneuros)onOct13thU.S.,U.K.andEuro-ZoneFinancialInstitutionsAreIncreasingtheirDepositswithCentralBanksInadditiontoinvestinginsafehavenassets,commercialbanksarealsoincreasingtheirdepositholdingsattheirrespectivecentralbanks.ECBdata:Friday,Oct10,2008:BankdepositswithECBtotaled154.7Bneuros.Monday,Oct14,2008:BankdepositswithECBtotaledarecord182.8Bneuros.Theme#2Currentfinancialcrisishaslittletodowithinterestrates!CentralBankInterestRatesontheWayDownCentralBankTargetRatesKeyshorttermcentralbankratesarecomingdown.U.S.responseearlieranddeeper.Fromcyclepeak:U.S.5.25%(6/06)–1.5%Easingbegan:Sept2007U.K.5.75%(7/07)–4.5%Easingbegan:Dec2007Euro-zone4.25%(7/08)–3.75%Easingbegan:Oct2008 Othercentralbanksareloweringratesaswell(Australia,India)ThroughOct8,2008AreEuropeanCentralBanksAbandoningtheirInflationTargets?BankofEnglandInflationtargetingadoptedinMay1997andsetbyGovernment.CurrentCPIInflationtarget:2.0%Currentinflation(Oct):4.7%BankofEngland“seekstomeettheinflationtargetbysettinganinterestrate.”EuropeanCentralBankInflationtargetingadoptedin1997throughanamendmenttooriginaltreatyofRome.Inflationtarget:“Below,butcloseto,2%overthemediumterm.”CurrentCPIinflation(June–Aug):3.9%ECBmeetstheirinflationtargetthroughsettingan“appropriatelevelofthekeyinterestrates.”WhyMightLoweringInterestRatesNotWork?KeynesianLiquidityTrapAreweapproaching,orperhapsalreadyin,someformoftheKeynesianliquiditytrap?“Liquidity-preferencemaybecomevirtuallyabsoluteinthesensethatalmosteveryonepreferscashtoholdingadebtwhichyieldssolowarateofinterest.Inthiseventthemonetaryauthoritywouldhavelosteffectivecontrol...”GeneralTheory(1936)Monetarypolicywillnotworkatthispointbecauselendersarenotwillingtomakeloans.ElasticDemandforReservesBankLendingRatesHaveComeDown,butLoanshaveNotGoneUpCommercialLoans*Aug4-8,2008: $42.4BnAug6-10,2007: $39.7BnAug7-11,2006: $44.0BnAug1-5,2005: $48.0Bn*Commercialandindustrialloansmadebylargedomesticcommercialbanks.Dataarecollectedduringthemiddlemonthofeachquarter.InterestRateonLoans*Aug4-8,2008 4.36%Aug6-10,2007 7.00%Aug7-11,2006 7.14%Aug1-5,2005 5.32%*Weightedaverageeffectiveloanrate,calculatedfromthestatedrateandothertermsoftheloans. LessonsfromJapan?PaulKrugman(1998)hasarguedthatJapanfellintoaliquiditytrapinthe1990s.Japanwasveryslowtoreact.Monetarypolicybecameuselessbecausebanksstoppedlending.Creditfreeze!FiscalpolicyintheformoflargepublicprojectsfinallymovedJapanoutofrecession.ButGovernmentdebtnow180%ofGDP(US:80%)Theme#3Authoritiesseemtobetreatingthecurrentcrisis(invaryingdegrees)asanliquidityproblem.FedofNewYork(Oct8),announcinganadditional$37.8bnforAIGstated:ThisnewactionwillhelpAIG“replenishliquidity…”But,thecurrentcrisisisabout(1)insolvencyconcernsandaresulting(2)creditfreeze!It’sreallyaboutalossofconfidence.InterbankLendingistheProblemDomesticandinterbanklendingmarketsarefrozen.Liquidityisthere,butbankshavebeenreluctanttolendtooneanother.Federalfundsmarket.LIBORmarket.WhatisLIBORandwhyisitImportant?LIBOR:TheLondonInterbankOfferRateistheinterestratethatlargebankschargeoneanotherfor10foreigncurrencydenominatedloans(deposits)rangingfromovernightoutto12months.SeteachdayinLondonaroundnoonthroughtheBBAbyarepresentativepanelofcommercialbanks.USdollarLIBORthemostimportant.Itisestimatedthat$360troffinancialproductsworldwide,frommortgagestocompanyloansandderivates,istiedtoaLIBORrate.Otherregionalmarketshavesimilarinterbankrates(HIBOR,inHongKong).RetailLendingistheProblemCommercialPaperMarketsKeysourceofshorttermfundingisdryingup.Especiallyforlongerterm(3-month)paper.Lastyearoutstandingcommercialpaper:$2.2trRecently:$1.6tr(3yearlow)Mostofit1to4daysmaturity.MarketsdoNOTwanttolendPrimemoneymarketfundspulled$200bnfromthismarketfromSept16toOctober8thShifttoShortTermBondSpreadsareIncreasingPre-FinancialCrisisSeptember20,2007Corporate:Aaa: 5.88%Baa: 6.73%Spread:Baa-Aaa +85basispoints*

Government

10year 4.69%Spreads(over10yearGovernmentrate)Aaa: +119basispointsBaa: +204basispoints*1934–2003spread=103basispointsNowOctober14,2008Corporate:Aaa: 6.55%Baa: 8.86% Spread:Baa–Aaa +231basispointsGovernment

10year 4.08%Spreads(over10yearGovernmentrate)Aaa: +247basispointsBaa: +478basispointsU.S.BondMarketsU.S.corporatebondsaleswereattheirlowestSeptemberlevelsince2000.September2008:$11.7bnSeptember2007:$32.7bn“Corporateborrowingoptionshavedwindlesastheinvestmentgradebondmarket(Baaandabove)remainedallbutclosedforafifthweek.”(Bloomberg,Oct8)CompanieslikeGannett(thelargestnewspapercompanyintheU.S.)andSouthernhavehadtoforegoissuingdebt.Thenewissuemarketisespeciallytroublingforfinancialfirms,whichhaveabout$145billioninfixed-andfloatingratedebtmaturingintherestof2008,accordingtoJPMorgandata.Overallcorporatebondspreadshavehitrecordhighs,closingonOctober2at339basispoints,upfrom317atthestartofthemonth.Theme#4Untilweunderstandthecurrentsituation,wecannotofferappropriateandlastingsolutions.FinancialMarketsFinancialmarketsworkbestwhenparticipantshaveconfidenceindealingwithoneanotherandwiththe“value”oftheassetstheyareinvolvedin.Today,confidencehasbrokendown.Confidenceregardingthesolvencyofborrowers.Confidenceregardingthesolvencyoflenders.Confidenceregardingthe“market-values”offinancialassets.Confidenceregardingthe“tradability”offinancialassets.Confidenceregardingtheregulationofmarkets.Confidenceregardingpolicymakers.Etc.LackofConfidenceWhenconfidencebreaksdown,financialmarketsceasetofunction(efficiently).Examples:Interbankmarket–whichhasbeenregardedasclosetoriskfree-suddenlyfreezesup.Highinvestmentgradecompaniesareforcedoutofthelongtermbondmarkets.Highinvestmentgradecompaniesstruggletoraiseshorttermfunds.Will$700BnBailoutRestoreConfidence?OnOct3,Congresspasseda$700Bnbailoutpackage.Inandofitselfwillthisrestoreconfidence?Idon’tthinkso.Issue:Whatif“toxic”loansareremovedfromthebalancesheetsoffinancialinstitutions?Willthecreditmarkets“unfreeze?”Willtheinterbankmarket“unlock?”Willfinancialinstitutionscontinuetoseek“safehaveninvestments?”WillTheInjectionofGovernmentMoneyintotheEquityPositionofBanksRestoreConfidence?U.S.announcedthattheywillinject$250Bnintobanksthroughthepurchaseofpreferredstock.Whatwillbanksdowiththesefunds?Withthisaction,combinedwiththe$700bnbailout,thereistheissueof“moralhazard.”Essentiallyrewardingbadbehaviorandsettingaprecedentforfuturebailouts.Frenchmodel:(Oct20)Announcedthattheywouldinvest$13.99billion(insubordinateddebt)inthecountry'ssixbiggestbanksbyyear-endonconditionthattheyincreaselendingtocompanies,householdsandlocalgovernments.WillaMoreGloballyCoordinatedPolicyResponseRestoreConfidence?Overthelasttwoweeks,centralbankshaveengagedincoordinatedpolicyactions:Centralbanksaretakingequitypositionsintheirbigbanks.FED,BOE,andECBallloweredtheirkeyshorttermtargetinterestrateby50basispoints.CentralbankshaveagreedtoprovideunlimiteddollarfundstofinancialinstitutionsinEuropeandAsia.Tryingtobringdowntheoverseasdollarrate.Centralbanksarelendingtocorporateborrowersintheirmoneymarkets.Key:RestoringConfidenceHowmightfinancialmarketconfidenceberestored?Greatertransparencybyallparticipants,butespecially:Originatorsofnewfinancialproducts.Riskevaluationservices.Majorfinancialinstitutions,includegovernmentorganizations.Policymakers.Actingaslendersoflastresorttoendusers.ThroughgloballycoordinatedactionTheme#5:LookingattheBigPictureWhatAbouttheEconomy?HowDidweGetWhereweAreToday?WhereAreweToday?WhereAreweGoing?HowDidWeGetHere?RecentHistoryEasymonetarypolicyfueledeconomicgrowthGenerallyaperiodoflowandfallinginflationChinaEffectResultedinlowinterestrates(fallingcostofdebt)LongEquityBullMarketBullIncreasingwealtheffectLeadtoIncreasingdomesticdebtExplosionofhouseholddebt.DeterioratingcurrentaccountbalanceIncreasingforeignownershipofU.S.debtEasingspreadingtothehousingmarketFedPolicyandEconomicGrowthMonetaryPolicyEconomicGrowthInflationandInterestRatesInflationLongtermInterestRatesRelationshipofInflationtoLongTermInterestRatesConsumerCreditandHouseholdDebtConsumerCreditHouseholdDebtServiceRatioEquityMarkets:WealthEffect1990’s2000–Oct2007ImpactonHousingSectorMortgageandHousingMarketsMortgageMarketsHousingPricesWhereareweToday?FinancialcrisisspillingovertorealeconomyRecentannouncedjobcuts(downsizing)SurveysofconsumerholidaybuyingintentionsHousingleadslowdown(recession?)BloombergGDPsurvey:3Q:-0.2%;4Q:-0.8%FallingassetpricesEquitiesandrealestateStockmarketgenerallyaleadingindicatorofarecessionFrozencreditmarketsWeakenedfinancialinstitutionsWeakhouseholdbalancesheetsGlobalcontagion(economicslowdownscoupledwithrisingcostofdevelopingnationdebt)Lossofconfidence(inmarkets,infinancialinstitutions,inregulatorsandpolicymakers)LeadingIndicatorsofEconomicActivityUsefulLeadingIndicatorsConferenceBoard’sLeadingIndicatorSeriesIndicatesdirectionofeconomyovernext3to6months.Oct:Sept+0.3%Aug–0.9%StockpricesStockPricesShadedareaisaNBERdatedrecession.SoWhereistheEconomyHeaded?Consumerspendingisthekey.Representsabout68%ofGDP(2006)*Services:38%;Durables:10%;Non-durables:20%PrivateInvestmentabout17%**Housing:3.5%;Producersdurables:11%GovernmentExpendituresabout17%FederalGovernment:5%;State/Local:12%*Consumersectorrepresented66.5%ofGDPfrom1996-2006**PrivateInvestmentrepresented25.2%andhousing1.6%ofGDPfrom1996to2006SoWhatAbouttheConsumer?Consumespendingwillbeaffectedby:Confidence(contagioneffectoffinancialcrisis)Incomelevels(incomeandunemploymenteffects)Wealtheffects(stockmarketandhousingpriceseffect)SignalsfromToday:HowistheConsumerLikelytoReactintheFuture?ConsumerConfidenceUnemploymentRate(Sept6.1%)SignalsfromToday:HowistheConsumerLikelytoReactintheFuture?EarningsGrowthWealthEffect:DJADown38%fromhighWealthEffect:HousingPricesHousingPriceDataDuringthe25-yearperiodfrom1975through1999,realhousepricesstayedwithintherangeof$132,000to$171,000.Onlysincetheyear2000haverealhousepricesrisenabovethisrange.TheUnitedStatesmedianpricewasatapproximately$206,500asofthesecondquarterof2008.Thisis21%higherthantheprevioushousingboompeakofaninflation-adjusted$170,900in1989.Nominalpricespeakedin2Q2006at$252,514.Currentlyat$206,500(-18%)1975–2Q2008RegionalImpactsofHousingLosAngeles:Sept06:-26%Seattle:July07:-7%WhereareFinancialMarketsHeaded?AreweattheBottom?IndicationsofsomefinancialmarketthawingoutLIBOR(dollar)rateseasing(Oct22,overnightUSDat1.12%hasfallentolowestlevelsince2004).TEDspreadeasing(from434aweekagoto250now).Interbankrateseasing(globally,inAsiaandEurope).Commercialpaperrateseasing(Oct22,30-daypaperat1.93%atlowestlevelin4years).Moneymarketfundrateseasing.Recentmoneysupplygrowth.Perhapssomeconfidenceiscomingback,BUTspreadsarestillhistoricallyhighsuggestingthethawstillhasawaytogo.Futureshorttermandlongertermproblems?MountingcreditcarddelinquenciesBofAlost$373millioninthe3rdquarteroncardservicesunit.FallingU.S.savingsratemightdiscouragehouseholdconsumption(ifrebuildingsavingstakesplace).RisingFederalgovernmentdeficit.IstheFederalReserveRunningoutofTraditionalOptions?TraditionalPolicyToolsFedfundsratenowat1.5%Runningoutofdownsideroom?Discountwindowborrowingfacilityhasbeenexpandedtonon-commercialbankborrowers.Reserveratioremainsunchanged.ContemporaryApproachLenderoflastresorttoimportantfinancialmarkets.Oct21:Providing$540bntomoneymarketmutualfundssotheycanmeetredemptions.UnfreezefrozenmarketsExpanddirectlendingbeyondthecommercialpapermarketwhereneeded.But,Fedassetsareballooning,$1.8tr,or12%ofGDP–doublefromlastyear.WhatelseNeedstobeDone?RestoreConfidence“Temporary”increaseinFDICinsuranceandguaranteeofmoneymarketmutualfunds.Globalcoordinationmustcontinue.Europehasincreaseddepositinsuranceaswell.But,continuationofstrongdollarsuggestsongoingglobalflighttosafetyisstillanissue(nextslide).Balanceallactionsagainstmoralhazardissue.OngoingIssuesCleaningupthesecuritizationsandderivativesmarkets.Includingeducatingenduserstotherisksinvolved.Revisingregulationdecisions.Glass-SteagallMark-to-marketaccountingrulesEuropeeasingrulesallowingbankstoreclassifysomeassetsaslongterm.Examiningtheresponseofcreditratingagencies.U.S.DollarRemainsStrongTurnaroundinJulyConsequencesofstrong$KeepU.S.inflationincheck.ProvidegreaterflexibilitytoFederalReserve.DiscourageforeigncentralbankwithdrawalsfromU.S.financialmarkets.ForeignownershipofU.S.marketabledebtnowaround60%DoWeNeedAnotherStimulusPackage?Bernanke(Oct20):indicatedthathewouldendorseadditionalfiscalstimulustohelpconsumers.“Thepaceofeconomicactivityislikelytobebelowthatofitslonger-runpotentialforseveralquarters.Theslowinginspendingandactivityspansmostmajorsectors.''BushAdministrationindicatedtheywere