Monday, April 06, 2009

Scope of Financial Crisis

One interesting puzzle of this crisis is that while it started with mortgages, it affected every financial sector pretty similarly. Below are the total returns from April 30 2008 through March 31 2009, for a variety of financial institutions with market cap greater than $30MM as of April 2008 (about 800 firms).

Stock Returns By Sub Industry From 4/30/08 - 3/31/09

One would think that size or industry would highlight those with the most direct mortgage ownership. It suggests that while mortgages may have started the crisis, the real problem was the amplification process that decimated everything. To this day only mortgage backed debt has had abnormally large loss rates. Speculative grade defaults for 2008 were 4.1%, which makes it the 12th worst year in the last 30, hardly consistent with the market debacle of the past 12 months. Auto loans, credit cards, etc. have reported an increase in losses, but are holding up pretty well. Everyone expects them to get much worse, but that's a forecast.

A similar issue is the performance across countries, where the US is actually doing better than most countries. This is all quite puzzling, as it appears the amplification mechanism is much more important than the initial cause. I don't really understand that mechanism.


J said...

I think the apmplification mechanism is panic.

Berend de Boer said...

With a theory of sound money you can make a lot more sense of this. We averted the dot com crash by printing money, but that simply doesn't work. Malinvestments will be liquidated. We might get out of this one by printing even more. But the one after this will be unlike anything we've ever seen. You can't become wealthier unless you produce.

Toronto Real Estate Agent said...

The amplification mechanism is always the problem. If your system failed in one sector and kept going in all the other ones, eventually it would level itself out and show very little change. But if a sector like mortgages is damages, it affects everything. The system would have to be perfectly built to not be affected by the mortgage crisis. But of course its not.

Take care, Julie