南强讲座--James Mirrlees，The Crisis and Incentives.pptVIP

The Crisis and Incentives James Mirrlees Chinese University of Hong Kong Xiamen University November 2009 The Current Global Recession It began two years ago, when US house prices began falling sharply, bringing about loan default and fear of default. I suggest that was caused by the US administration (like other governments) raising interest rates in response to rising commodity prices. World effective demand fell too. Loss of wealth. US house price falls + interest rate rise increased mortgage default and fear of default. Assets based on subprime mortgages, and assets based on these assets, lost value. Pyramids of gambles crumbled. Chain reactions Banks, and many other investment funds, found the value of their assets had fallen greatly. Some were bankrupt. Other assets, including those conditional on bank solvency, fell too – some to zero. Bank lending fell sharply. Because banks decided they must make their portfolios less risky. Investment demand, demand for cars, etc. fell, with multiplied effect. Mortgage contracts. Mortgages are just part of the story, but a central part. Sub-prime (and some other) loans were a large part of house value had rising interest and repayment were carelessly checked for credit-worthiness Incompetent lenders? Not exactly. Lender behaviour looks rational. Mortgage-based securities Sub-prime mortgages (etc.) were bundled into securities (CDOs): the lender sold the risk to the market. So the lender was perfectly insured. Knowing he would be, he wanted to lend as much as possible, and ignored risk. Financial experts created CDOs because they believed risk markets are good (and they made money when they were sold). Moral hazard Moral hazard is when someone’s behaviour is not observed, and cannot be checked later. How he is rewarded for the outcome determines how he behaves. Full insurance seldom gives the right incentives. An optimal economy with moral hazard. Standard economic theory says you can achieve an optimum state of the econ