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Addressing the Credit Market Turmoil of 2007–08

In: The First Credit Market Turmoil Of The 21st Century Implications for Public Policy

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  • Sam Peltzman

    (University of Chicago, USA)

Abstract

At this writing in early October 2008, it appears that the first phase of the financial crisis is ending and the second is about to or has begun. The phase that is ending entails flushing the worst assets created during the subprime lending boom out of the financial system. It has been accomplished by massive writedowns and government actions of various kinds culminating in the creation of a taxpayer financed buyout fund for these assets. The phase that is beginning will be driven by the broader deterioration in bank balance sheets and income streams emanating from the ongoing decline in real estate values. This decline has already created negative equity for many prime mortgage holders. Were plain vanilla, held-to-maturity prime mortgages marked to market or to some realistic approximation thereof, it is likely that significant chunks of the banking system would be or will shortly be insolvent. We should expect this underlying economic reality to roll through the banking system in 2009 and 2010. It will create more demands on the Federal Deposit Insurance Corporation's (FDIC) insurance fund and, ultimately, the federal Treasury.

Suggested Citation

  • Sam Peltzman, 2009. "Addressing the Credit Market Turmoil of 2007–08," World Scientific Book Chapters, in: Douglas D Evanoff & Philipp Hartmann & George G Kaufman (ed.), The First Credit Market Turmoil Of The 21st Century Implications for Public Policy, chapter 24, pages 371-376, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789814280488_0024
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