Tuesday, June 30, 2009

Great Charts from the BIS

The BIS has released its always-excellent Annual Report, and it doesn't disappoint. I highly recommend the Report's account of the financial panic last September and October (pp. 23-31). It's easy to forget how truly terrifying it was, and the unimaginable pressure that policymakers—especially the Federal Reserve—were under to solve new systemic threats pretty much every day. In particular, I recommend the box describing the crucial role of the money market funds in the financial contagion, and their role in spreading the funding crisis to the European banks (pp. 25-26). BIS publications always have great charts, and I've extracted some of my favorite charts from this year's Report below. One interesting thing the Report does is it provides charts of all the important market indicators with a verticle line marking the date of the Lehman bankruptcy (Sept. 15). That way, you can really appreciate how important that day was. To say that it marked the beginning of a new stage in the financial crisis is a gross understatement. Other interesting charts in the Report: Great stuff, as always.


Economic Darwinism said...

Good morning!

It's easy to forget how truly terrifying it was, and the unimaginable pressure that policymakers—especially the Federal Reserve—were under to solve new systemic threats pretty much every day.

We'll see what the history books have to say about this. My inclination is that history will not come down on your side of this argument. I think fears of the impending doom of society as we know it were greatly exaggerated by the banks in order for them to push through emergency policies that would have been inconceivable during any other time.

Note that in all the charts you provide, none of them look back prior to 2007. It is that short sightedness that got us into this mess. Sitting in 2006 and looking back at default rates going back to 2003 (which many large structured products companies were doing) you would have come to the conclusion that HPA could never be negative and a CDO is safer than Treasuries.

If you take each of those charts and attempt to backfill them 100 years, you will likely see that in most of them, the period of the "crisis" was not so unusual after all.

We just became complacent during an extended period of declining volatility known as the "Great Moderation", which everyone should now see as a farce.

Donald Pretari said...

"In summary, as officials look forward they need to balance stability with efficiency. Reducing moral hazard, keeping institutions simple and small, and
reducing their international reach will all come at the expense of economies of scale and scope. In the end, a safer and more stable financial system may very well be a less efficient one. Hence it is critical that policymakers work to
build a system that is as efficient as possible for the maximum tolerable level of risk they choose"

The solution is called Narrow Banking.

It's a good report. But, when you read the solutions, you also read the inherent problems that they all have. I'm sure that such a system as they're advising would be a major improvement over the current one, but I don't think that it will prove to be sound enough.

As for Sept. 2008, we were battling a possible Debt-Deflationary Spiral. We've had a slow motion one instead. I'm very grateful though, that enough people were aware of this possibility and its grave consequences, that they realized how precarious our situation was. Again, a Debt-Deflationary Spiral has no natural stopping point. If that's not scary, I don't know what is.

Don the libertarian Democrat

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