Progress and Confusion: The State of Macroeconomic Policy by Olivier Blanchard

Author:Olivier Blanchard [Blanchard, Olivier]
Language: eng
Format: epub
Published: 0101-01-01T00:00:00+00:00

The Current Environment

Several commentators have remarked that in the United States, and especially in Europe, we have seen several years of low growth and extraordinarily low interest rates. Some have concluded that we must be entering a period of secular stagnation in which there are very few projects with high expected returns. An alternative view, one that can only be understood in terms of the credit surface, is that even though the riskless rate may have declined, the full credit surface may have become steeper, and thus for many or most potential borrowers the credit environment might be tighter than before.

In the United States the credit surface for corporate loans is quite different from the credit surface for consumer (or small business) loans. We are witnessing a tale of two different leverage cycles. Corporate borrowers with mediocre credit ratings and high debt-to-equity ratios are able to issue bonds at extraordinarily low interest rates. But homeowners with average credit scores cannot easily get loans. One reason is that banks holding AAA-rated mortgage securities now incur capital charges they did not bear before. This lowers the price of the AAA-rated piece and lowers the profitability of nonagency securitizations. Without a vehicle into which to sell their loans, banks offer far fewer loans. Second, the banks are terrified of putbacks, which oblige them to buy back loans at par that were not properly vetted. To temper that fear, regulators created a safe harbor of qualified mortgages that could not be put back, but this has only served to convince banks that non-QM loans are in graver danger of putbacks. Figure 15.4 shows that there were vastly more loans made to borrowers with below 725 FICO scores securitized by Fannie Mae and Freddie Mac in 2006 than in 2013. The only category of loans that was more prevalent in 2013 consisted of very high FICO score loans.

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