Saturday, March 29, 2008
Tweet[IWS] CRS: AVERTING FINANCIAL CRISIS [21 March 2008]
IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34412
Averting Financial Crisis
Updated March 21, 2008
Mark Jickling, Specialist in Financial Economics, Government and Finance Division
http://assets.opencrs.com/rpts/RL34412_20080321.pdf
[full-text, 18 pages]
Summary
There is no precise definition of "financial crisis," but a common view is that
disruptions in financial markets rise to the level of a crisis when the flow of credit to
households and businesses is constrained and the real economy of goods and services
is adversely affected. Since mid-2007, central bankers including the Federal
Reserve have labored to keep the downturn in U.S. subprime housing from
developing into such a crisis.
While subprime problems were widely anticipated, the subsequent spread of
turmoil into many seemingly unrelated parts of the global financial system was not.
Many losses occurring in diverse firms and markets often quite severe have
features in common: the use of complex, hard-to-value financial instruments; large
speculative positions underwritten by borrowed funds, or leverage; and the use of
off-the-books entities to remove risky trading activities from the balance sheets of
major financial institutions.
It is not yet clear whether financial market problems will significantly slow the
economy: many believe that the current episode is simply the downside of a normal
credit cycle, that is, a natural corrective to several years of unusually easy credit
conditions. On the other hand, some analysts identify market dynamics that may
amplify the effects of financial shocks and have the potential to generate
self-reinforcing, downward financial and economic spirals. The Federal Reserve has
used its traditional tools to avert such an outcome: it has lowered short-term interest
rates dramatically and injected billions of dollars into the banking system to support
market liquidity and keep credit flowing. In addition, the Fed has expanded its
sphere by making funds available to securities firms, which it does not regulate, and
has provided funding to underwrite the rescue-through-acquisition of Bear Stearns,
a leading investment bank. The duration of the current instability is in marked
contrast to financial shocks of recent decades stock market crashes, bond market
disruptions, the 9/11 attacks when the central bank was able to contain market
problems quickly with little or no interruption of U.S. economic growth.
Depending on how soon normal market conditions are restored, and at what
cost, policy makers may consider whether regulators have access to adequate
information about market conditions, and whether currently unregulated market
participants should be subjected to disclosure and reporting requirements. In
addition, the social costs of failed financial speculation may be judged great enough
to warrant new restrictions designed to lower the incidence of losses that have
system-wide impacts or to put the markets and the economy in a better position to
weather such shocks.
This report supplements CRS Report RL34182, Financial Crisis? The Liquidity
Crunch of August 2007, by Darryl Getter et al., which describes in greater detail the
channels through which subprime problems cascaded through the financial system.
This report focuses on the efforts of regulators to reduce stress to the markets and
will be updated as developments warrant.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Underlying Financial Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SIVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
What Makes a Financial Crisis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Government Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Open Market Operations and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . 8
The Discount Window . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Term Auction Facility (TAF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Treasury's "Super-SIV" Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Provision of New Capital to Financial Institutions . . . . . . . . . . . . . . . . . . . 11
Policy Issues: Are Regulators' Tools Adequate? . . . . . . . . . . . . . . . . . . . . . . . . . 13
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Speculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Commercial and Investment Bank Stock Indexes,
January 2007- March 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Structured Investment Vehicle Cash Flows . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. The Leverage Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor---------------------- Stuart Basefsky
New York, NY 10016 -------------------------------Director, IWS News Bureau
________________________________________________________________________
Congressional Research Service (CRS)
Order Code RL34412
Averting Financial Crisis
Updated March 21, 2008
Mark Jickling, Specialist in Financial Economics, Government and Finance Division
http://assets.opencrs.com/rpts/RL34412_20080321.pdf
[full-text, 18 pages]
Summary
There is no precise definition of "financial crisis," but a common view is that
disruptions in financial markets rise to the level of a crisis when the flow of credit to
households and businesses is constrained and the real economy of goods and services
is adversely affected. Since mid-2007, central bankers including the Federal
Reserve have labored to keep the downturn in U.S. subprime housing from
developing into such a crisis.
While subprime problems were widely anticipated, the subsequent spread of
turmoil into many seemingly unrelated parts of the global financial system was not.
Many losses occurring in diverse firms and markets often quite severe have
features in common: the use of complex, hard-to-value financial instruments; large
speculative positions underwritten by borrowed funds, or leverage; and the use of
off-the-books entities to remove risky trading activities from the balance sheets of
major financial institutions.
It is not yet clear whether financial market problems will significantly slow the
economy: many believe that the current episode is simply the downside of a normal
credit cycle, that is, a natural corrective to several years of unusually easy credit
conditions. On the other hand, some analysts identify market dynamics that may
amplify the effects of financial shocks and have the potential to generate
self-reinforcing, downward financial and economic spirals. The Federal Reserve has
used its traditional tools to avert such an outcome: it has lowered short-term interest
rates dramatically and injected billions of dollars into the banking system to support
market liquidity and keep credit flowing. In addition, the Fed has expanded its
sphere by making funds available to securities firms, which it does not regulate, and
has provided funding to underwrite the rescue-through-acquisition of Bear Stearns,
a leading investment bank. The duration of the current instability is in marked
contrast to financial shocks of recent decades stock market crashes, bond market
disruptions, the 9/11 attacks when the central bank was able to contain market
problems quickly with little or no interruption of U.S. economic growth.
Depending on how soon normal market conditions are restored, and at what
cost, policy makers may consider whether regulators have access to adequate
information about market conditions, and whether currently unregulated market
participants should be subjected to disclosure and reporting requirements. In
addition, the social costs of failed financial speculation may be judged great enough
to warrant new restrictions designed to lower the incidence of losses that have
system-wide impacts or to put the markets and the economy in a better position to
weather such shocks.
This report supplements CRS Report RL34182, Financial Crisis? The Liquidity
Crunch of August 2007, by Darryl Getter et al., which describes in greater detail the
channels through which subprime problems cascaded through the financial system.
This report focuses on the efforts of regulators to reduce stress to the markets and
will be updated as developments warrant.
Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Underlying Financial Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
SIVs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
What Makes a Financial Crisis? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Government Interventions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Open Market Operations and Monetary Policy . . . . . . . . . . . . . . . . . . . . . . . 8
The Discount Window . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Term Auction Facility (TAF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Treasury's "Super-SIV" Proposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Provision of New Capital to Financial Institutions . . . . . . . . . . . . . . . . . . . 11
Policy Issues: Are Regulators' Tools Adequate? . . . . . . . . . . . . . . . . . . . . . . . . . 13
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Speculation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
List of Figures
Figure 1. Commercial and Investment Bank Stock Indexes,
January 2007- March 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Figure 2. Structured Investment Vehicle Cash Flows . . . . . . . . . . . . . . . . . . . . . . 3
Figure 3. The Leverage Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.
Stuart Basefsky
Director, IWS News Bureau
Institute for Workplace Studies
Cornell/ILR School
16 E. 34th Street, 4th Floor
New York, NY 10016
Telephone: (607) 255-2703
Fax: (607) 255-9641
E-mail: smb6@cornell.edu
****************************************
# posted by SBasefsky : 1:15 PM
