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 It is known that a liquidity excess was in

the world from 2000 to 2006

 USA wanted to close the budget and
foreign trade deficit.
 Then liquidity of China became a part of an
activity to finance USA economy.
 Housing credits boom in USA.
 These situations prepare the basic of
Minsky Moment.
 According to Minsky’s theory if there is long
term stability, it brings unstability to
 If economy is stable, interest rates are low.
 People can contract debts easily and they
can make more risky investments.
 Asset prices start to increase.
 However system is blocked when the good
atmosphere is removed in the economy
 Therefore asset prices go down rapidly.
 Debt rates start to increase and no one
wants to give a debt to anyone.
 We can see from the graphic that house
prices appreciated.
 The main basic of appreciation was
 Securitisation means that cash flows
centralize as a pool system and these
cash flows are sold to another
investment banks or mortgage
companies with risk.
 Securitisation products include
mortgage-backed securities, asset-
backed securities and asset-backed
commercial paper.
 The graphic shows us amount of
commercial paper outstanding.
 Many of securitised mortgage products
are sold to another companies or
investment banks with more risk
 Subprime mortgage originations rose
from $160 billion in 2001 to $600 billion
in 2006.
 Then banks or companies which took
these papers re-securitised these
derivative products again.(CDO)
 In 2006 Moody which is a investment bank
had 39.5 % of CDO pools which 70% were
subprime mortgages.
 Reason of this boom foreclosure rates for
subprime mortgages are believed low
between 2002-2003.
 Ratings agencies supported their thought
but they were wrong.
 However this was an unusual environment,
and there was substantial risk implied by
high foreclosure rates.
 Another problem was credit notes which
were given to poor quality CDOs by ratings
 For example, one CDO product which had
to be B note, but ratings agencies gave it A
note. That’s why investors were mistaken
in the market.
 Then investors who realized this situation
did not trust the market, and they did not
purchase these products.
 Thus liquidity declined in the market
 Securitisation had produced great
progress in the sharing of risk.
 Risks are transfered to banks’ and
companies’ balance sheets to the
 That progress was real and these
technological innovations will continue
although it causes problems.
 Securitisations have had a bumpy ride
for two decades.
 The financial system present for mortgage
securitisation market to intermediating risk.
 There is likely to be a long term reduction
in the credit which may be supplied per unit
of equity capital in the financial system.
 When in the market shock occurred,
investors do not want to share risks.
 According to Calomiris these things do not
a financial crisis make in 23 November
 Calomiris said that housing prices may
not be falling by as much as some
economists say they are.
 Calomiris believed that Case-Schiller
index which measure US house prices
could not measure the prices well. He
trust OFHEO’s index much more.
 The reduced supply of new housing
should be a positive effect on housing
prices going forward.
 Residential investment by household
sector relative to GDP is shown in the
 Nonfinancial firms are highly liquid and
not overleveraged. That’s why many
companies must use their own
resources to invest.
 Gross Corporate Leverage:
 Net Corporate Leverage: Liabilities, less
cash, / Assets
 All in all Calomiris was so well
intentioned before the crisis happen.
 Calomiris was well intentioned but he
noticed also new financial shocks.
 These shocks can be housing price
declines, or substantial increases in
defaults on other consumer loans.
 He said that substantial decline in credit
supply will magnify the shocks turn them
into a recession.
 Calomiris said ‘We have not (yet) arrived
at a Minsky moment, but now?