Macroeconomic Impact of the Subprime Crisis

Approach Assuming a strictly macroeconomic point of view -Thinking in aggregates -Observing both sides of the market -Sector perspective and circular flows Theoretical and empirical aspects -Theory as driver for (more) empirical research -Numerical quantities for assessing potential impact (qualifying the numbers)  General view: Macroeconomic risks are overstated

Major aspects of analysis (1) Asset market prices and economic wealth (2) Response of institutional sectors to wealth fluctuations (3) Technical impact on financial system (4) News and expectation formation (5) Additional aspects

(1) Asset market prices and economic wealth Housing market Financial asset markets -Equity capital -Liabilities and derivatives (domestic and foreign) To what extent do asset price fluctuations imply variations in economic wealth (losses or gains)? Technical remark: Write-offs within the financial sector do not directly matter for GDP or GNI (revaluations within the financial accounts)

Residential housing as an economic asset Economic value stems from capacity to provide services (= provision of living space) This capacity was not affected by the subprime crisis (trivial, but true: the houses are still there) Stock effect of general housing price movements -Housing occupied by owner: No effective wealth effect -Rented housing : Wealth shift effect (between owners and tenants) Flow effect of general housing price movements -Positive linkage between relative housing prices and construction activity -Wealth shifting might have an expenditure effect, if propensities to consume of owners and tenants differ

Financial assets and wealth 1 Financial assets: Securitization of the real capital stock Capital stock numbers (2007, bill. Euro) Equity capital -Investors know about fluctuations -Expectation formation via smoothing rather than taking share prices at face values CAC-40 | DAX-30 10-year average: +7,0 % | +7,2% CAC-40 | DAX-30 4-year average: +16,7 % | +24,4% Germany Eurozone Fixed assets (total) 11.988 ca. 60.000 Fixed assets (housing) 5.723 Stock market capitalization DAX: 796 Total: 6.580,download.