Financial Stability: Looking Back and Looking Forward

Lewis Alexander, U.S. Chief Economist and Head of Fixed Income Research in the Americas, Nomura Securities International served as the second speaker in the 2018-2019 MBA Executive Speaker Series. 

Beginning his discussion on financial stability, Alexander asked students, “Why should you care?” Taking a pause, he ultimately answered his questions stating, “If we’re about to have a recession, given where we are you need to be thinking about that. It is important to ask yourself the question, what is that recession going to be like? Understanding the financial crisis is part of understanding what’s coming.”

Shifting to a focus on the financial crisis, Alexander briefly touched upon the prelude of the event. “We had a period starting after the last recession in 2001 where the economy was doing reasonably well and for a variety of reasons there was pretty strong risk appetite.” High risk appetite translated into households having access to an increased amount of mortgage credit. He continued, “the expansion of mortgage credit to individuals went too far.”

According to Alexander the crisis played on in three major phases. The first phase (Mid- 2006 to August 2007) “was when prices actually started to fall.” The second phase (August 2007 to March 2008) started “where the losses had reached a point, where a whole bunch of investment vehicles had held this investment risk were coming under pressure.” The final phase took place between March 2008 and May 2009 ‘when the first major financial institution came under pressure.”

Concluding his discussion Alexander recapped the actions taken since the 2008 financial crisis and answered the arching question, is the next recession going to be as big as in the past. The response to the crisis has been a collaboration of tactics including higher capital requirements, implementing liquidity requirements, more intensive supervision, flexible regulatory boundaries and restricting bailouts. “My bottom line is no, I think in part because we’ve done all these things, the system is a lot safer now, said Alexander.”

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