How debt markets have malfunctioned in the crisis
By: Arvind Krishnamurthy.
Contributors: National Bureau of Economic Research.
Series: NBER working paper series -- working paper 15542; Working paper series (National Bureau of Economic Research : Online) -- working paper no.  15542.
Publisher: National Bureau of Economic Research
Published: 2009
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Description: "This article explains how debt markets have malfunctioned in the crisis, with deleterious consequences for the real economy.  I begin with a quick overview of debt markets.  I then discuss three areas that are crucial in all debt markets decisions: risk capital and risk aversion, repo financing and haircuts, and counterparty risk.  In each of these areas, feedback effects can arise, so that less liquidity and a higher cost for finance can reinforce each other in a contagious spiral.  I document the remarkable rise in the premium that investors placed on liquidity during the crisis.  Next, I show how these issues caused debt markets to break down: fundamental values and market values seemed to diverge across several markets and products that were far removed from the "toxic" subprime mortgage assets at the root of the crisis.  Finally, I discuss briefly four steps that the Federal Reserve took to ease the crisis, and how each was geared to a specific systemic fault that arose during the crisis"--National Bureau of Economic Research web site.
Notes: Title from PDF file as viewed on 12/1/2009.

Includes bibliographical references.

Also available in print.

System requirements: Adobe Acrobat Reader.

Mode of access: World Wide Web.