2012.05.02 - crisis_Cochrane
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2012.05.02 - crisis_Cochrane


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buy now? 
7.\u202f Government running the banks / credit system for a long time. 
8.\u202f Fiscal \u201cstimulus.\u201d 
9.\u202f \u201cDo something.\u201d It\u2019s ok to be negative. 
10.\u202fThe major danger is political, not economic. 
Supply	
  
Price	
  
Demand	
  
Treasury	
  Hope:	
  	
  
Small	
  purchase	
  raises	
  price	
  a	
  lot	
  
Finance	
  experience:	
  	
  
Huge	
  purchase	
  to	
  move	
  	
  
prices	
  a	
  lirle	
  
Mortgage-­\u2010backed	
  securiFes	
  
Policy. Will the Treasury Plan work? 
100	
  
90	
  
10	
   Equity	
  
Debt	
  =	
  
1.	
  Before	
  
95	
   90	
  
5	
   Equity	
  
Debt	
  =	
  
2.	
  Ater	
  
95	
   90	
  
5	
  
=	
  
3.	
  No	
  new	
  loans!	
  
5	
  
5	
  
New	
  debt	
  
New	
  
loan	
  
Loan	
  
(Assets)	
  
45	
   45	
  
5	
  
=	
  
3.	
  \u201cDeleverage?\u201d	
  
50	
  
Sell. 
! 
50	
  
Credit Crunch \u2013 \u201cundercapitalized\u201d mechanics 
Risk 
95	
   90	
  
5	
  
1.	
  New	
  
Equity	
  
=	
  
55	
  
10	
  
45	
  
2.	
  New	
  
debt	
  
New	
  
loan	
  
4. \u201cRecapitalize\u201d 
70	
  
90	
  
=?	
  
4. \u201cFailure\u201d = recapitalization 
70	
  
	
  Fail,	
  =	
  
50	
  
20	
  
	
  =	
  
Solutions? 
WaMu JPMorgan 
$100	
  
$1.10	
  
$1.10	
  
$1.10	
  
$100	
  
Joe	
  
Joe	
  $100	
  
$99	
   Sue	
  
$98	
  
Sue	
  $99	
  
Bob	
  
What went wrong / needs to be fixed? 
1.\u202f Amazing amount of overnight / short financing 
Yes Not 
$1	
   Joe	
  
$1	
   Joe	
  
$100	
  
$1	
  
$1	
  
$1	
  
$100	
  
Joe	
  $100	
  
$99	
   Sue	
  
$98	
  
Sue	
  $99	
  
Bob	
  
2.	
  Value	
  =	
  80	
   3.	
  Value	
  =	
  80	
  
1.	
  Will	
  this	
  last?	
  
Who	
  stops	
  ?	
  
2. Abandon Mark to Market? 
3. Dynamic capital standards! 
Swaps, brokerage, etc. 
Supply	
  (saving)	
  Financial	
  system	
  
(intermediary)	
  
Demand	
  (investment)	
  
Deposits, 
CDs, Stock 
Mortgage 
Interest	
  
rate	
  
Supply	
  
Demand	
  
A	
  credit	
  crunch:	
  banking	
  system	
  cannot	
  make	
  new	
  loans.	
  
Banking	
  
System	
  	
  
Loans	
  
The financial system can slice, dice and transfer risk, but cannot bear risk. 
People must bear risk.