המעבר מהמשבר הפיננסי בארה"ב למשבר בכלכלה העולמית

1. המעבר מהמשבר הפיננסי בארה"ב למשבר בכלכלה העולמית אינטגרציהכלכליתופיננסיתוהמשבריםמאז 2007 - פרופ' ערןישיב - סמסטרב' תשע"ט

2. Economic development does not result in the elimination of financial crises. • The recent financial crisis of 2007-2009 in the United States and Europe shows that market economies, however much they grow and change, are still susceptible to collapse or near-collapse from financial crisis. • This is a staggering thought. And it came as a surprise, as financial crises were thought to be things of the past for developed economies, now only occurring in emerging markets. רקע – מהו משבר פיננסי? Source: Gorton, G. (2014). Some reflections on the recent financial crisis. In Trade, Globalization and Development. ‏ אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

3. A “financial crisis” occurs when bank debt holders run on all or many banks demanding that banks convert their (short-term) debt claims into cash to such an extent that this demand for cash cannot be met. • The banking system must then be saved by the central bank or the government. • Or, if there is no run on banks—or no observed run-- then a financial crisis is a situation where there is significant impairment to the banking system, resulting in closures, bailouts, nationalization, blanket insurance guarantees, or other government assistance. רקע – מהו משבר פיננסי? Source: Gorton, G. (2014). Some reflections on the recent financial crisis. In Trade, Globalization and Development. ‏ אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

4. המעבר ממשבר הסאב-פריים למשבר במשק האמריקאי – אירועים מרכזיים אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

5. ניתן לחלק את המשבר הפיננסי של 2007-2009 לשני חלקים נפרדים: החלק הראשון, והמוגבל יחסית – מאוגוסט 2007 ועד אוגוסט 2008 נגרם מההפסדים שנגרמו בשוק משכנתאות הסאב-פריים בארה"ב, שהיווה חלק קטן יחסית של מהערכת הפיננסית האמריקאית . בשלב הזה, על אף ההפסדים, התמ"ג בארה"ב המשיך לצמוח והתחזיות צפו מיתון קטן יחסית. Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. המעבר ממשבר הסאב-פריים למיתון עולמי – אירועים מרכזיים אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

6. לקראת סוף 2008, המשבר הפיננסי נכנס לשלב אקוטי. ארבעת האירועים המרכזיים שיצרו את השלב הזה היו: פשיטת הרגל של בנק ההשקעות Lehman Brothers ב- 15 בספטמבר 2008 בעקבות החלטת הפד לא להצילו. קריסת חברת הביטוח AIG ב- 16 בספטמבר 2008. ריצה על הקרן הכספית הגדולה Reserve Primary Fund שנחשבה לאחד מאפיקי ההשקעה הבטוחים ביותר בארצות הברית. קשיים בהעברת תכנית החירום לייצוב כלכלת ארה"ב - The Troubled Asset Relief Program(TARP). המעבר ממשבר הסאב-פריים למיתון עולמי – אירועים מרכזיים Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

7. The Lehman Bankruptcy On Monday, September 15, 2008, after suffering losses in the subprime market, Lehman Brothers, the fourth-largest investment bank by asset size with over $600 billion in assets and 25,000 employees, filed for bankruptcy—the largest bankruptcy filing in U.S. history. Many commentators have argued that the Treasury and the Fed’s decision to allow Lehmann to go bankrupt was a colossal mistake that turned a mild financial disruption into a global financial crisis. But it’s useful to remember that at the time, there was a plausible case for letting Lehman go into bankruptcy. המעבר ממשבר הסאב-פריים למיתון עולמי – קריסת LB Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

8. In practical terms, the U.S. government or its regulatory authorities had no authority to put Lehman into government conservatorship so it could keep functioning, as the Treasury was able to do with Fannie Mae and Freddie Mac. • The bailout of Bear Stearns had extended the government safety net outside the banking system to investment banks, and the U.S. Treasury and the Federal Reserve were concerned about increasing the moral hazard incentives for a wider set of financial institutions to take on excessive risk. • Lehman was among the most leveraged of the major investment banks. With Lehman’s vulnerability already well-known, Lehman seemed like a natural test case to provide an object lesson that market participants should take measures to protect themselves. המעבר ממשבר הסאב-פריים למיתון עולמי – קריסת LB Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

9. The Broader Context • If the Federal Reserve had cut a deal with Barclays to rescue Lehman before bankruptcy, would the crisis have been defused? • NO - The underlying stresses in the financial system were all too real. • Two major changes that occurred by late September 2008. • First, even though markets had been digesting bad news about mortgage-backed securities since mid-2007, the events of September 2008 showed that risk taking was far more extensive than markets had realized and the fragility of the financial system was far greater than most market participants could have imagined. ההקשר הרחב של קריסת LB Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

10. The Broader Context • The AIG blowup and the run on the Reserve Primary Fund revealed that the financial system was engaged in what could be described as one huge “carry trade.” Technically, carry trades are ones in which a trader borrows at a low interest rate to fund the purchase of assets that yield a high interest rate. Carry trades generate immediate profits, but may be very risky because the higher interest rate on the purchased assets may just reflect greater tail risk for that asset. • AIG’s issuing of credit default swaps is a classic example of a type of carry trade, because the firm was earning large profits on the premiums paid on these contracts until the tail risk became a realization ההקשר הרחב של קריסת LB Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

11. Second, although markets had been watching government agencies scramble to deal with the financial crisis since late 2007, the events of September 2008 raised serious doubts that the U.S. government had the capability to manage the crisis. • TARP was originally proposed as a flimsy, three-page proposal, which raised concerns that the Treasury was unprepared, and the initial TARP proposal failed on a bipartisan vote. Even though the TARP legislation was eventually passed, the reputational damage was done. • After September 2008, the pattern of runs on the shadow banking system intensified and worsened. Banks began to horde cash and were unwilling to lend to each other, despite huge injections of liquidity into the financial system by the European Central Bank, the Bank of England, and the Federal Reserve. • The subprime crisis had become a fulfil edged, global financial crisis. ההקשר הרחב של קריסת LB אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

12. The patterns of credit spreads tell the story: • The TED spread rose from around 100 basis points during the week before the Lehman bankruptcy to over 300 basis points on September 17, the day after the liquidity squeeze on AIG and the Reserve Primary Fund materialized. • The TED spread then dropped by 100 basis points, but as confidence in the ability and competence of the government to react quickly to contain the crisis weakened over the next couple of weeks, it climbed to over 450 basis points by October 10. • The spread between interest rates on Baa corporate and Treasury bonds, also rose by over 200 basis points and now rose well above the levels seen in 2001 during the prior recession period. • The stock market crash also accelerated, with the week of October 6, 2008, showing the worst weekly decline in U.S. history. ההקשר הרחב של קריסת LB – סיכון מערכתי Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

13. ההקשר הרחב של קריסת LB – סיכון מערכתי Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

14. Conditions in the financial markets continued to deteriorate. The public anger that resulted from the TARP “bailouts”—which involved injections of capital into financial institutions, with little restrictions on their use—became so intense that it became increasingly clear that the new Obama administration, taking office in January 2009, would not be able to get additional funds beyond those already allocated to TARP, if needed. • Although the TED spread fell from it peak in October 2008 with the help of government support to the financial sector, the spread between Baa and Treasury bonds continued to rise, peaking at over 500 basis points in December 2009. By the end of 2008, the stock market had fallen by over half from its peak in fall 2007. ההקשר הרחב של קריסת LB - סיכון מערכתי Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

15. In considering these events, it’s also important to remember that the financial system had been greatly weakened before September 2008. • It may be that given the amount of systemic risk embedded in the financial system, some other stress or failure of a financial institution would also have revealed the fragility of the financial system—and then led to a chain reaction that could also have tipped the financial system over the cliff. • The financial system in mid-September 2008 was far more vulnerable than almost all policymakers and market participants realized at that time. There is a distinct possibility that the financial system would have imploded even if Lehman had been bailed out. ההקשר הרחב של קריסת LB – סיכון מערכתי Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

16. The ripple effects of Lehman’s demise were difficult to predict, because Lehman had counterparties across the globe: • First, and most importantly, many money market funds suffered losses. To avoid the broad repercussions of a run on money market funds, the U.S. Treasury set aside $80 billion to guarantee brokers’ money market funds. • Second, the prices paid for credit default swaps that offer protection against defaults of the remaining banks soared, as each bank tried to protect itself against counterparty credit risk—that is, the risk that other banks would default. • Third, financial non-asset backed commercial paper experienced a sharp fall, which led to the introduction of the Commercial Paper Funding Facility by the Fed. ההקשר הרחב של קריסת LB – סיכון מערכתי Source: Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007-2008. Journal of Economic perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

17. ההקשר הרחב של קריסת LB – סיכון מערכתי Source: Brunnermeier, M. K. (2009). Deciphering the liquidity and credit crunch 2007-2008. Journal of Economic perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

18. המעבר ממשבר פיננסי למיתון אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

19. The Links from Financial Crisis to Recession: • GDP growth in the U.S. economy had turned down in the third quarter of 2008, falling at a –1.3 percent annual rate. • But it was in the fourth quarter of 2008 that the recession that started in December 2007 became the worst economic contraction in the United States since World War II. המעבר ממשבר פיננסי למיתון Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

20. Real U.S. GDP contracted sharply in the fourth quarter of 2008 and the first quarter of 2009, declining at annual rates of –5.4 and –6.4 percent, respectively. The unemployment rate skyrocketed, exceeding 10 percent by October 2009. המעבר ממשבר פיננסי למיתון Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

21. A worldwide recession ensued as well. World economic growth fell at an annual rate of –6.4 percent in the fourth quarter of 2008 and –7.3 percent in the first quarter of 2009. המעבר ממשבר פיננסי למיתון Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

22. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

23. How financial crises lead to sharp economic downturns? • The basic explanation has three interrelated parts: • First, a financial crisis widens credit spreads, like the difference between interest rates on Baa corporate and Treasury bonds. • The result is that conventional monetary policy is defanged: even if interest rates on Treasury bonds fall because of a weakening economy and easing of monetary policy, the interest rates relevant to household and business purchase decisions go up, causing a drop in aggregate demand. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

24. Baa corporate bond rates barely budged at the beginning of the financial crisis in 2007 or during the Bear Stearns episode in March 2008, but climbed substantially in September 2008. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

25. Second, the decline in asset prices during a financial crisis causes a decline in the value of collateral, which makes it harder for nonfinancial firms to borrow. • In addition, the deterioration of balance sheets at financial firms, which have the expertise to mitigate adverse selection and moral hazard problems, causes their lending to fall (a process known as “deleveraging”), which causes spending to decline. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

26. This figure shows how total bank lending continued to rise early in the financial crisis in 2007, and even remained stable through March 2008 and the Bear Stearns rescue. Right after September 2008, bank lending rises largely because lenders were drawing heavily on already-established lines of credit, but by mid-2009 bank lending is on a downward trend. This decline should not only be attributed to the decline in the supply of loans, but also to the decline in the demand for loans as a result of weakening economic conditions. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

27. Third, the general rise in uncertainty that occurs during a financial crisis also leads to an increase in asymmetric information, further hindering the ability of financial markets to allocate funds to households and businesses with productive investment opportunities. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? Source: Mishkin, F. S. (2011). Over the cliff: From the subprime to the global financial crisis. Journal of Economic Perspectives. אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

28. This figure shows how the market for asset-backed commercial paper, which had seemed to be recovering in mid- 2008, dwindled from daily average issuance of $64 billion at the beginning of September 2008 to $16.6 billion by the end of 2009. כיצד משבר פיננסי הופך למשבר ריאלי בכלכלה? אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

29. Source: IMF , October 2010 “Systemic liquidity risk: improving the resilience of financial institutions and markets”, Global Financial Stability Report (GFSR) התפשטות המשבר – ניתוח קרן המטבע הבינלאומית אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

30. The inability of multiple financial institutions to roll over or obtain new short-term funding was one of the defining characteristics of the crisis. • Systemic liquidity risks were unrecognized by both the private and public sectors and required unprecedented intervention by governments and central banks during the crisis. סיכון מערכתי – ניתוח ה IMF אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

31. This crisis also exposed the systemic importance of nonbank funding sources. • Decisions taken by key money market investors proved to be highly disruptive, not only for the United States, but also, in terms of the availability of U.S. dollar funding, for non-U.S.- based financial institutions. • As these investors were not covered under the formal financial safety net, when systemic vulnerabilities materialized, governments and central banks had to provide guarantees and liquidity support to funding markets and also nonbank money market participants סיכון מערכתי – ניתוח ה IMF אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

32. The freezing up of the interbank, foreign currency swap, and secured money markets necessitated massive crisis intervention, cross-border coordination, and adjustments to central bank liquidity operations to stabilize the financial system and restore orderly market conditions. • Central banks had to step in and take over the role of money markets in distributing liquidity in the system as banks and other lenders shunned transacting, particularly beyond very short-term maturities, due to rising counterparty risk concerns. • Central banks also have become buyers of last resort of distressed assets, and governments have needed to guarantee bank debt סיכון מערכתי – ניתוח ה IMF אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

33. A key aspect of the crisis was the increased use by banks of short-term wholesale funding and the risks that it posed when these short-term markets dried up. • Perhaps insufficiently recognized was that the wholesale providers of funds had also changed—instead of interbank markets acting to move unsecured funds where needed, other intermediaries, such as money market mutual funds, were growing suppliers of funds while traditional, more stable depositors were not. Secured lending through repurchase operations also grew immensely, greasing the funding markets. סיכון מערכתי – ניתוח ה IMF אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט

34. The crisis exposed a bank-centric rather than a systemic approach to liquidity risk management by Supervisors. • Supervisors were not aware of the systemic implications of institutional funding and liquidity management, and how idiosyncratic risk (e.g., subprime credit risk) could quickly morph into a systemic liquidity risk for the financial system as a whole. • Nor did they fully appreciate the adverse implications of cross-border and currency funding and flows, and of different infrastructures for trading, clearing, and settlement in important secured funding markets. סיכון מערכתי – ניתוח ה IMF אינטגרציה כלכלית ופיננסית והמשברים מאז 2007 - פרופ' ערן ישיב - סמסטר ב' תשע"ט