Upload
lydan
View
218
Download
0
Embed Size (px)
Citation preview
Credit, Housing, Commodities and the Economy
Financial Planning Association Financial Planning Association Annual NorCal Conference
May 27, 2008
Janet L. YellenPresident and CEO
Federal Reserve Bank of San Francisco
May 27, 2008 Federal Reserve Bank of San Francisco 2
Overview
Financial turmoil and the credit crunch
Downturn in housing markets
Surge in commodity prices
Implications for the outlook and policy
May 27, 2008 Federal Reserve Bank of San Francisco 3
The unwinding of a credit market bubble
A bubble-like situation had developed in the credit markets.
Very low long-term real interest rates
Investors accepted meager rewards for risk
Abundance of liquidity was reflected in:
Easy financing for leveraged buyouts
Carry trades
Rapid growth in subprime lending
Suggested a benign view of underlying risks.
May 27, 2008 Federal Reserve Bank of San Francisco 4
What caused the bubble?
Securitization and financial engineering appeared to improve risk-return tradeoff.
Up-front origination fees undermined strong underwriting incentives.
Institutions in the “shadow banking sector” sought to increase leverage and reach for yield.
Overreliance on credit ratings that proved unreliable.
Some lessons:
Inadequate risk management by many sophisticated institutions.
Shortcomings in financial supervision and regulation.
May 27, 2008 Federal Reserve Bank of San Francisco 5
Underwriting standards deteriorated
70
72
74
76
78
80
82
84
86
88
90
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
0
5
10
15
20
25
30
35
40
45
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Combined Loan-to-Value Ratios (2/28 Subprime Mortgages)
Percent without Full Documentation (2/28 Subprime Mortgages)
May 27, 2008 Federal Reserve Bank of San Francisco 6
What caused the bubble?
Securitization and financial engineering appeared to improve risk-return tradeoff.
Up-front origination fees undermined strong underwriting incentives.
Institutions in the “shadow banking sector” sought to increase leverage and reach for yield.
Overreliance on credit ratings that proved unreliable.
Some lessons:
Inadequate risk management by many sophisticated institutions.
Shortcomings in financial supervision and regulation.
May 27, 2008 Federal Reserve Bank of San Francisco 7
Subprime mortgage delinquencies are rising
1999 2001 2003 2005 20076
8
10
12
14
16
18
20
22
Subprime ARM
Subprime FRM
Mortgage Delinquency RatesReported quarterly; fraction of outstanding loans Percent
Delinquent mortgages are 30 days or more past due but not in foreclosure.
May 27, 2008 Federal Reserve Bank of San Francisco 8
Subprime delinquencies rose as house price appreciation slowed
Mortgage Delinquency Rates and OFHEO House Price Index Changes
0
5
10
15
20
25
30
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
percent
-1
1
3
5
7
9
11
13
15
percent
Delinquency rates*, subprime ARMs (left scale)
OFHEO Index, 4-quarter growth (right scale)
Sources: Office of Federal Housing Enterprise Oversight and Mortgage Bankers Association * 60 days or more past due or in foreclosure
May 27, 2008 Federal Reserve Bank of San Francisco 9
Subprime delinquencies and house price changes vary inversely across MSAs
May 27, 2008 Federal Reserve Bank of San Francisco 10
Prime mortgage delinquencies are rising too
1999 2001 2003 2005 20070
2
4
6
8
10
12
14
16
18
20
22
Subprime ARM
Subprime FRM
PrimeARM
PrimeFRM
Mortgage Delinquency RatesReported quarterly; fraction of outstanding loans Percent
Delinquent mortgages are 30 days or more past due but not in foreclosure.
May 27, 2008 Federal Reserve Bank of San Francisco 11
Subprime problems triggered financial market disruptions
Rising subprime delinquencies triggered disruptions in the markets for asset-backed securities (ABS).
Contagion to municipal bonds and other ABS markets
Prices fell, imposing losses on ABS holders.
Heavy ABS exposure of banks and “shadow banks”--highly leveraged institutions that “borrow short” to hold long-term assets including ABS.
Includes investment banks, hedge funds, SIVs/conduits.
May 27, 2008 Federal Reserve Bank of San Francisco 12
The emergence of a credit crunch
Financial institutions are deleveraging—scaling back their balance sheets.
Commercial banks experienced unanticipated buildup of loans on their balance sheets.
Many financial institutions are raising capital.
But banks are tightening credit terms and restricting availability.
May 27, 2008 Federal Reserve Bank of San Francisco 13
Banks are tightening credit standards
90 92 94 96 98 00 02 04 06 08-40
-20
0
20
40
60
80
100Net percent of respondents tightening credit standardsCredit Conditions, Domestic and Commercial Banks
Q2
C&I
ConsumerCommercialreal estate
Prime
Residential
Source: Federal Reserve Senior Loan Officer Opinion Survey
May 27, 2008 Federal Reserve Bank of San Francisco 14
1999 2000 2001 2002 2003 2004 2005 2006 20070
10
20
30
40
50
60
Billionsof $Private-Label RMBS and CMBS Issuance
3-month moving average
Apr.
RMBS
CMBS
Source: Asset-Backed Alert
New issuance of ABS has plummeted
May 27, 2008 Federal Reserve Bank of San Francisco 15
The interbank lending market is under stress
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May0
20
40
60
80
100
120
Spread between LIBOR and Expected Funds RateDaily closing; expected funds rate from Overnight Indexed Swap (OIS) contract
Basis points
5/22
Three-month
One-month
LIBOR: London InterBank Offered Rate
May 27, 2008 Federal Reserve Bank of San Francisco 16
Corporate bond spreads have risen
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun3
4
5
6
7
8
9
10
11
12
Corporate Long-Term Bond Yields Daily closing
Percent
High-yield-indexbonds
A-indexbonds
5/22
10-yeartreasury
May 27, 2008 Federal Reserve Bank of San Francisco 17
Fed initiatives to improve market liquidity
Enhanced discount window lendingReduced rate spread and lengthened term of lending
Established Term Auction Facility (TAF)Term discount window loans at auction rate; $150 billion
Initiated term repurchase (repo) transactionsAgency debt accepted as collateral for 28-day repos; $100 billion
Established Term Securities Lending Facility (TSLF)Lends Treasuries for highly rated ABS; up to $200 billion
Provided financing for acquisition of Bear Stearns Term financing to support purchase by JP Morgan; $29 billion
Established Primary Dealer Credit Facility (PDCF)Overnight borrowing from discount window by primary dealers
May 27, 2008 Federal Reserve Bank of San Francisco 18
Selected Federal Reserve Assets
0
100
200
300
400
500
600
700
800
900
1000
Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08
Billions of $
0
100
200
300
400
500
600
700
800
900
1000
Billions of $
Other $94.3 b
Primary Dealer CreditFacility $16.6 b
Primary Credit $14.4 b
Term Auction CreditFacility $125.0 b
Repurchase Agreements $95.8 b
Term Sec Lending Facility $138.1 b
Overnight Sec LendingFacility $12.5 b
US Treasuries held outrightless securities to dealers $369.5 b
week of May 14
New facilities change the composition of Fed’s balance sheet
May 27, 2008 Federal Reserve Bank of San Francisco 19
Spreads on MBS receded in wake of Fed initiatives
Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-080
50
100
150
200
250
300
350
400
Fannie Mae, 30 yr option adjusted spreadFreddie Mac, 30 yr option adjusted spreadCMBS, 10 yr AAA spread over swap
Basis pointsMBS Spreads
5/14
5/21
Sources: Asset-Backed Alert and Bloomberg
May 27, 2008 Federal Reserve Bank of San Francisco 20
The housing price-to-rent ratio soared
Price-rent ratio
15
17
19
21
23
25
27
29
1970 1974 1978 1982 1986 1990 1994 1998 2002 2006Source: BLS. Data are adjusted as in Gallin (forthcoming)
May 27, 2008 Federal Reserve Bank of San Francisco 21
150
200
250
300
350
400
450
500
550
600
78 82 86 90 94 98 02 06400
800
1200
1600
2000
2400
Housing Thousands, seasonally adjusted
Mar.
New housesfor sale(right scale)
Housing starts(left scale)
Vacant housesfor sale(left scale)
Apr.
Q1
Housing markets have hit the skids
May 27, 2008 Federal Reserve Bank of San Francisco 22
House prices are still heading down
1988 1993 1998 2003 200860
85
110
135
160
185
210
235
House PricesCase-Shiller national index with futures
Q4
Index
Futures
May 27, 2008 Federal Reserve Bank of San Francisco 23
The price of crude oil has jumped
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009152535455565758595105115125135
$/BarrelPrice of OilWest Texas Intermediate; weekly closing price
Futures 5/22
May 27, 2008 Federal Reserve Bank of San Francisco 24
Prices of other commodities are also up
2000 2001 2002 2003 2004 2005 2006 2007 20080
2
4
6
8
10
12
14
100
200
300
400
500
600
700
800
900
1000
Prices of Wheat, Corn and MetalsMonthly average $/Bushel
Hard Wheat
YellowCorn
CRB Metals Index(left scale)
Spot Price
May
May 27, 2008 Federal Reserve Bank of San Francisco 25
Consumer spending growth and sentiment are down
Consumer Sentiment and PCE Growth
55
65
75
85
95
105
115
1999 2001 2003 2005 2007-2.00
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
Consumer sentiment (left scale)*PCE growth (right scale)
*Source for consumer sentiment is Reuters/Michigan Survey.
Index 1966 = 100 4-quarter percent change
May 27, 2008 Federal Reserve Bank of San Francisco 26
3.5
4.0
4.5
5.0
5.5
6.0
6.5
2000 2001 2002 2003 2004 2005 2006 2007129
130
131
132
133
134
135
136
137
138
139
Employment SituationSeasonally adjusted
Nonfarm Payroll Employment(right scale)
Millions of EmployeesPercent
Unemployment Rate(left scale)
Empl. ChangeJan.Feb.Mar.Apr.
-76 K-83 K-81 K-20 K
Employment is shrinking and unemployment rising
May 27, 2008 Federal Reserve Bank of San Francisco 27
Capital spending has slowed
2000 2001 2002 2003 2004 2005 2006 2007 200845
50
55
60
65
70
Mar.
Billions of $
Shipments
Orders
Nondefense Capital Goods (Ex. Aircraft)Seasonally adjusted; 3-month moving average
May 27, 2008 Federal Reserve Bank of San Francisco 28
U.S. net exports are a source of strength
U.S. Net ExportsBillions of chained 2000 dollars
1995 1997 1999 2001 2003 2005 2007-700
-600
-500
-400
-300
-200
-100
0
May 27, 2008 Federal Reserve Bank of San Francisco 29
Economic growth has stalled
2000 2001 2002 2003 2004 2005 2006 2007
Q1
-2
0
2
4
6
8
Real Gross Domestic Product (GDP)Percent change at seasonally adjusted annual rate Percent
May 27, 2008 Federal Reserve Bank of San Francisco 30
Headline inflation has risen
1
2
3
4
PCE Price Inflation12 month percent change
Percent
Overall PCEPrice Index
Core PCEPrice Index
2000 2001 2002 2003 2004 2005 2006 2007 2008
May 27, 2008 Federal Reserve Bank of San Francisco 31
Stagflation involves high inflation and weak growth
Total CPI and Real GDP4-quarter percent change
1970 1975 1980 1985 1990 1995 2000 2005-4
-2
0
2
4
6
8
10
12
14
16
Total CPI
2008Q1
Core CPIReal GDP
May 27, 2008 Federal Reserve Bank of San Francisco 32
Stagflation involves a wage-price spiral
Total CPI and Unit Labor Cost4-quarter percent change
1970 1975 1980 1985 1990 1995 2000 2005-4
-2
0
2
4
6
8
10
12
14
16
Unit Labor Cost
Total CPI
2008Q1
May 27, 2008 Federal Reserve Bank of San Francisco 33
University of Michigan Inflation Expectations
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Rate of inflation
Michigan 12 months out
Michigan 5-10 years out
Inflation expectations drive the wage-price spiral