7894bdb0_brary_of_Economics_and_Liberty__ast_Highlights_HIDE_HIGHLIGHTS
[Time] 27:42
Key factoid often forgotten: consumer indebtedness. Run-up in housing prices in the 1998-2002-2003 period. In advance of the subprime explosion, housing policy, incentives, change in credit standards making it easier for people to borrow. Book: consumer indebtedness growing and savings rate falling for a very long period in advance of that. Coincides with the current account story. Goes back into the 1980s. Abstract time line or flow chart of the sequencing of events. Very often the process of the big credit boom, the seat of it starts with financial liberalization or financial innovation. That can come in waves. Often what you have during those episodes is innovation getting ahead of regulation and supervision. In the early 1980s: Regulation Q lifted. Financial liberalization and innovation facilitate credit availability. In some countries, like Mexico, the years before the crisis reserve requirements had been reduced to zero. Lots of regulations enforced; Fannie and Freddie; Basel I and Basel II; hard to know how much is lax regulation versus hubris. Date of financial liberalization--periods in which interest rate ceilings removed, directed credit removed--common theme is that during that period, wild wild west, regulation and supervision get very low marks. Anecdote: long extended capital markets mission in Indonesia in 1995. Regulators there were saying you can create banks overnight but you can't create bankers. Aware that there were problems brewing; but had gone from very few banks to dozens of banks in a short period of time. Latest round was the securitization of mortgages which made everyone very comfortable. Take the good with the bad. Worrisome part is the innovation happens but regulation and supervision lags way behind. In Mexican crisis, banks were using derivatives, which were supposed to reduce risk; regulators caught unawares. Common theme.
Reinhart on Financial Crises | EconTalk | Library of Economics and Liberty