Research Primer: The Story of the Credit Crisis
NERA Economic Consulting has a new working paper chronicling the history of the credit crisis. In typically clear-eyed fashion, NERA avoids any simple answers but identifies a confluence of contributory factors, illustrated with compelling charts.
A few highlights:
Opposing trends in housing prices and cost of credit led to a surge in subprime and other types of mortgage originations and securitizations until the deceleration occurred by the end of 2005 and beginning of 2006.
Starting in early 2000, housing prices adjusted for inflation began to increase to levels far exceeding the trends in rent and building costs, a key contributing factor to the current distress in the mortgage markets.
A $100 investment in the 07-01 BBB ABX (Credit Default Swaps) index in January 2007 was worth $5 in September 2008. This drop in value suggests significant losses on the underlying collateral that have not yet completely materialized.
NERA concludes by saying that “even after the credit crisis is over, it is not clear that the financial markets will ever be the same again.”
The free paper How Did We Get Here? The Story of the Credit Crisis is well worth a read.
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