robert holzmann governor oesterreichische nationalbank introduction vienna, november 26, 2020 globalization and pandemics – pol antras global economy lecture 2020 ladies and gentlemen, on behalf of the vienna institute for international economic studies ( wiiw ) and the oesterreichische nationalbank, i welcome to this year ’ s global economy lecture, which is the 25th of its kind. we have a very distinguished speaker today, professor pol antras from harvard university, who is joining us from cambridge, massachusetts. a very warm welcome to you, professor antras, we are very honored that you are taking your time today, on thanksgiving day, to present your views on “ globalization and pandemics. ” the global economy lecture series has existed since 1999, but this is the very first time that it takes place online. while we would certainly have preferred meeting you all in person at the oenb premises in the usual setting, with a reception and informal networking after the lecture, i have to admit that the new format also has its merits. pol antras would probably not have agreed to fly over to europe for a lecture on thanksgiving day. and, besides, a physical meeting would probably not have attracted as many participants as we can welcome today. over the twenty years of its existence, the global economy lecture has hosted a number of very distinguished speakers, and it has featured all the major trends in international economics, and in particular in international trade and global value chains : from the transition process in central and eastern europe or in asia to the effects of major trade agreements, the emergence of multinational enterprises, and the digital revolution of production processes. today ’ s lecture is going to cover another new phenomenon in global trade : the covid - 19 pandemic has led to a temporary collapse of world trade links. supply disruptions occurred mainly at the beginning of the crisis. demand increased markedly for a number of specific items, e. g. health products and it equipment. these goods are produced in highly organized global value chains, which were subject to severe disruptions due to restrictions in transport and labor mobility. industries with shorter safety stocks were hit hardest. more recently, the largest problems have resulted primarily from weak global demand for final goods. publisher : oesterreichische nationalbank communications division otto - wagner - platz 3, 1090 vienna the pandemic itself is a tail event, with enormous short - to medium - term implications for global growth and trade. but we would

##os. the conversion of mortgages into mortgage - backed securities ( mbs ) and collateralized debt obligations ( cdos ) may seem complicated but in reality these are fairly straightforward transactions. to provide the committee a rough schematic, we start with those who take out amortizing housing loans from banks. for the bank, this is a long - term asset which ties up resources and is prone to market and credit risks. to mitigate these risks, the bank may pool the amortizations expected from the mortgage and create a security which can be sold to investors. the coupon payment of the new security is funded by the amortizations of the housing loan. this security is referred to as the mbs and the transaction is oftentimes is handled through a special purpose vehicle. to the bank, the effect is an improvement in the asset quality of its balance sheet because the traditional mortgage risks are mitigated. investors welcome this because it affords them another instrument that they can consider for their portfolio. the spv earns from being a conduit while the mortgagor is unaffected because he / she has already received the proceeds from the original loan. taking this a step further, collateralized debt obligations may also be created and likewise offered to investors. there are technical differences between cdos and mbs but for purposes of situating the current market conditions, it is perhaps sufficient to suggest that the two instruments are similar in that they pool underlying assets and sell an instrument that represents these underlying assets. the effective fed funds rate subsequently reversed course. housing prices also began to fall significantly and mortgage defaults began to rise. since the home was typically the collateral of the mortgage, falling housing prices also eroded the value of the collateral supporting the loan. in the past, a loan default would have simply meant foreclosing on the home. however, since the mortgage was already “ converted ” into a security ( mbs and cdos ) held by investors worldwide, the combination of rising mortgage defaults and falling collateral values translated into losses for the mbss and the cdos ( either through outright defaults, missed coupon payments and loss in market value of the security ). these factors sparked the widespread dilemma that we now find ourselves in. if memory serves us right, it was in february 2007 that the term “ subprime mortgage ” was publicly alluded to in a disclosure by an international financial institution. the subprime difficulties began to take explicit shape as