Year: 2010
Type: report
Abstract: All bond prices plummeted (spreads rose) during the financial crisis, not just the prices of subprimerelated bonds.These price declines were due to a banking panic in which institutional investors and firms refused to renew sale and repurchase agreements (repo) -short-term, collateralized, agreements that the Fed rightly used to count as money.Collateral for repo was, to a large extent, securitized bonds.Firms were forced to sell assets as a result of the banking panic, reducing bond prices and creating losses.There is nothing mysterious or irrational about the panic.There were genuine fears about the locations of subprime risk concentrations among counterparties.This banking system (the "shadow" or "parallel" banking system) -repo based on securitization -is a genuine banking system, as large as the traditional, regulated and banking system.It is of critical importance to the economy because it is the funding basis for the traditional banking system.Without it, traditional banks will not lend and credit, which is essential for job creation, will not be created.
DOI: 10.3386/w15787
Author: Gary Gorton
Institutions: National Bureau of Economic Research, Yale University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W1496511217