Housing and Financial Crisis

The September conference of the Brookings Papers on Economic Activity focuses on the current housing and credit crisis and on international finance and development. New research findings by leading academic, business, and government economists include:

• 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 “stickiness” of home prices does not arise when banks sell foreclosed properties—suggesting a steeper drop in prices during this cycle.
  
  
• Bank Capital Losses and Future Lending: (Jan Hatzius) Losses on mortgage assets have crimped financial institutions’ 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.
  
  
• The Unofficial Economy and Economic Development: (Rafael La Porta and Andrei Shleifer) Firms that do not pay taxes represent a third or more of economic activity in many developing countries, but evidence suggests that their productivity is low.
  
  
• Real Exchange Rate and Economic Growth: (Dani Rodrik) International evidence shows that undervaluing a nation’s currency stimulates its economic growth, especially for developing countries.
  

The Brookings Papers is the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Doug Elmendorf, Senior Fellow at Brookings, Greg Mankiw, Harvard University professor and former chairman of the Council of Economic Advisers, and Lawrence Summers, Harvard University professor and former secretary of the Treasury. More information on the Brookings Papers and this conference is available here.