Tacage And that goes to the global economy itself. I gave you my money to invest it in whatever it is you zndi. Christopher Nevin rated it really liked it Apr 06, Adam Goldin rated it really liked it Mar 28, We need to have rules that increase transparency. We talked about transparency in the trading of securities. If the price of something —. You have successfully signed out and will be required to sign back in should you need to download more resources.

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With the book, Zandi aims to demystify the risky credit practices that preceded the string of front-page disasters in the still unfolding global financial meltdown. Welcome, Mr. Knowledge Wharton: The sub-prime crisis is one of those things that has unfolded piecemeal, and has taken over a year and a half.

And some elements of it started much earlier. Zandi: Right. Well, many things surprised me. But at the most fundamental level, it was just how egregious the lending had become at the peak of the housing boom.

It was making loans to people with low credit scores with no down payment, or down payment assistance. With no proof of income and just an enormous amount of risk layering that was going on. You know, I had a sense that obviously underwriting standards in the mortgage industry had fallen. I had no concept to what degree they had declined.

And I thought I had a pretty good understanding. I thought it was bad, but I had no understanding of how bad it really was. Zandi: Yeah, exactly. Bad credit scores.

But lenders would require a pretty sizable down payment, and certainly proof of income and a stable job. By the end of , and into , all of that had just evaporated. So it was really the wild, wild West, to a degree I did not know and could not have imagined. One of the things that happened in the build-up to all of this, that you mention in the book in some detail and that other people have talked about, is this period when risk seemed non-existent.

And that risky securities like junk bonds and emerging market debt and some of these mortgage-backed securities were trading at prices that offered yields that provided almost no risk premium at all. And apparently that was mispricing. That we now know that they were much riskier than people thought. What caused people to be so sanguine about risk?

And where do we stand now? Are we overestimating risk? Have we gotten too nervous? Or is it just impossible to tell what risks are? Zandi: Well, in part, there was a fundamental reason for this optimism.

And that goes to the global economy itself. The ups and downs in the economy seemed to be moderating. And there are some good reasons to believe that our economies are more stable than in the past. So there, I think, is a good sort of fundamental explanation for it.

But I think it got carried to an extreme, and people started, in a sense, forecasting with a ruler. And, you know, most forecasting is done that way. Zandi: Yeah. Ten percent. And so you start building that into your forecasting, and you tend to take more risk in response. The third thing is, there was just a lot of liquidity, a lot of cash. You can remember liquidity raining everywhere. Part of it was very aggressive monetary easing, back earlier in the decade.

It was also related to the fact that we have this very large current account trade deficit. And that provided a lot of liquidity.

And so money managers, investors, had lots of cash, lots of liquidity. And they have to put that to work. They could do that maybe for a year. I gave you my money to invest it in whatever it is you do. They actually felt uncomfortable. I had many money managers as clients. Zandi: They went from one asset class to the next, right? Zandi: Yes. Well, this asset has a higher risk premium. So let me go invest in that. You know, going back to the end of , early Right before the financial shock.

Risk premiums on everything. Junk corporate bonds, mortgage-backed securities. Commercial mortgage-backed securities. Direct investments in property. Everything — all the risk spreads were as narrow as they have ever been. Knowledge Wharton: It seems to me that a lot of people in this circumstance would kind of draw the line at what went wrong here as the innocent bystanders who were hurt. All of us who did not take out crazy mortgages and see our home prices fall, or see our stocks fall, and that sort of thing.

So, where, along that continuum, should the proper amount of regulation be? What should its goal be? Just to protect the innocent, or to guide the markets in a deliberate fashion, in a certain direction?

And these are the ways you measure capital. And these capital levels need to be equivalent across all financial institutions. That the entire credit risk in the financial system is at least being monitored, so that everyone can see it, and we have something palpable that we can measure and have an understanding of what was the level of risk rising, and the level of risk falling.

We need to have rules that increase transparency. We talked about transparency in the trading of securities. But also, in terms of the balance sheets of the institutions that are in our financial system. Zandi: And just having the information. No one knows. Zandi: I would appreciate it. Thanks for the opportunity. Knowledge Wharton: Thank you very much. And good luck with the book.

Zandi: Thank you.


Financial shock



‘Financial Shock’: Mark Zandi on the Risky Loans Behind the Meltdown



Mark Zandi





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