Some interesting papers on housing and capital markets were presented at a Brookings seminar last week. The Hatzius, Case, and Caballero et al., papers are all particularly good.
Goldman Sachs’ Hatzius argues we could lose 1.80 percentage points of GDP growth this year and next. Case says we will see bigger real estate price declines than many are forecasting given the high number of foreclosed properties. Finally, Caballero et al., make an intriguing case for unexplored linkages between oil markets, subprime, and global capital imbalances.
- Making Sense of the Subprime Crisis: (Kristopher Gerardi, Andreas Lehnert, Shane Sherlund, and Paul Willen) Financial-market analysts understood that a fall in house prices would have disastrous consequences for foreclosures, but they assigned a low probability to such a fall.
- Financial Regulation in a System Context: (Stephen Morris and Hyun Song Shin) Basel-style capital rules fail to distinguish between the inherent risk of an asset and its systemic importance. Liquidity requirements may be a necessary complement.
- How Will the Housing Market Clear?: (Karl Case) The typical downward â€œstickinessâ€ of home prices does not arise when banks sell foreclosed propertiesâ€”suggesting a steeper drop in prices during this cycle.
- Bank Capital Losses and Future Lending: (Jan Hatzius) Losses on mortgage assets have crimped financial institutionsâ€™ balance sheets. Resulting cuts in their lending is likely to depress GDP growth significantly this year and next.
- Financial Whac-a-Mole: (Ricardo Caballero, Emmanuel Farhi, and Pierre-Olivier Gourinchas) The subprime crisis, volatile oil prices, and persistent imbalances in international capital flows all stem from a global scarcity of sound and liquid financial assets.