G30 Publishes Credit Crunch: Where Do We Stand? by Thomas A. Russo
The Group of Thirty (G30) has released Occasional Paper 76: Credit Crunch: Where Do We Stand? by Thomas A. Russo, which provides data on a logical series of issues that led to the current U.S. credit crunch, explains the consequences in liquidity markets, and offers policy proposal to ameliorate the current situation.
Washington, DC (PRWEB) April 8, 2008 -- The Group of Thirty (G30) has released Occasional Paper 76: Credit Crunch: Where Do We Stand? by Thomas A. Russo, which provides data on a logical series of issues that led to the current U.S. credit crunch, explains the consequences in liquidity markets, and offers policy proposal to ameliorate the current situation.
In the paper, Mr. Russo weaves together a narrative of the interrelated forces that are unfolding in the current economic environment. To begin, he focuses on the U.S. consumer, who has been crucial to economic growth and yet now finds himself increasingly levered and under duress. Mr. Russo explains how the declining housing market, exacerbated by stress in the mortgage market, has left consumers unable to borrow from their homes to finance consumption. He then details the increasing signs of contagion from mortgage-backed securitizations to other markets such as credit cards and auto loans, as general uneasiness grows and as challenged consumers begin to struggle to pay other debts.
As nervousness spreads across markets, Mr. Russo describes a flight to quality and to hard assets, leading to rising prices for gold, fine art, oil, etc. The paper goes on to tackle the role of liquidity, questioning whether we are in the midst of a global liquidity bubble contributing to excess valuations of certain assets. Finally, Mr. Russo comes full circle to the U.S. financial "crisis" where bank balance sheets are backing up with assets, potentially further reducing credit creation, further pinching the consumer.
Against this backdrop, the paper concludes with policy proposals aimed at ameliorating the current situation. Mr. Russo calls for broad-brush approaches to addressing subprime mortgages; an extension of the U.S. Department of Housing and Urban Development and Federal Housing Administration programs to keep borrowers in their homes; targeted tax incentives; discount window action; an expansion of volume caps of state housing authorities; and a lowering of the federal funds rates.
This paper was first presented by Mr. Russo on November 30, 2007, during the G30's 58th plenary. The paper was updated as of January 17, 2008, in preparation for the World Economic Forum Annual Meeting 2008 in Davos, Switzerland. It is available from the G30 at their website, www.group30.org.
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