TAILIEUCHUNG - Paper based on transcript of speech presented at the Global Economic Prospects meeting, Peterson Institute for International Economics

My topic today is the ongoing subprime and credit crisis. Since our meeting today will also cover, for the first time, prospects for the Indian economy, I thought I should motivate my presentation with the following proverb from Mahatma Gandhi, “Whatever you do will be insignificant, but it is very important that you do it.” I plan to divide my remarks into three parts. First, I want to recap briefly what has happened in the crisis since it erupted in August 2007. Second, I want to comment briefly on the strategy for managing the crisis. And third, I want to offer. | The Subprime and Credit Crisis Morris Goldstein Peterson Institute Paper based on transcript of speech presented at the Global Economic Prospects meeting Peterson Institute for International Economics April 3 2008 Peterson Institute for International Economics I. Introduction My topic today is the ongoing subprime and credit crisis. Since our meeting today will also cover for the first time prospects for the Indian economy I thought I should motivate my presentation with the following proverb from Mahatma Gandhi Whatever you do will be insignificant but it is very important that you do it. I plan to divide my remarks into three parts. First I want to recap briefly what has happened in the crisis since it erupted in August 2007. Second I want to comment briefly on the strategy for managing the crisis. And third I want to offer a 10-part reform program for preventing and managing future crises. Needless to say this will require that I talk fast. II. Some Key Features of the Crisis With subprime mortgages representing only about 14 percent of the stock of US mortgages most observers expected rising delinquencies in this segment to be contained at moderate cost. Testifying in July 2007 Federal Reserve Bank Chairman Bernanke estimated that credit losses associated with subprime mortgages would probably total 50 billion to 100 billion. As we now know what began as a subprime crisis has proved to be wider deeper and more damaging than originally thought. Consider the following snapshot of actual and perspective credit losses liquidity and credit spreads recapitalization of financial firms liquidity injections by central banks and US home foreclosures. By now we are up to over 200 billion in reported credit losses worldwide just due to subprime exposure. A ballpark estimate is that US banks brokers dealers hedge funds and government-sponsored enterprises will wind up with at least 300 billion of credit losses on mortgage securities of all kinds. If you go beyond mortgages

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