Lecture: Safe Asset Supply

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From the course by Yale University

The Global Financial Crisis

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Yale University

The Global Financial Crisis

1203 ratings

Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.

From the lesson

Safe Assets and the Global Savings Glut

Lecture: Safe Asset Supply4:07

Meet the Instructors

Andrew Metrick
Michael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy Geithner
Lecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management

[MUSIC]

So we've been talking about the demand for safe assets.

What about the supply?

Is there a way that all these large institutional cash pools, for example,

could have satisfied their demands with supplies that were currently outstanding?

One very important fact about the demand that these institutional cash pools had

for safe assets is that, unlike the foreign demand, large investors,

large institutional investors, very very focused on short-term assets.

So it's not just long-term government bonds that they want.

In fact, it's very specifically short-term government securities and

short-term agency securities that they demand.

So how much of this is out there and could those demands be satisfied?

Okay. Typically,

we're going to look to a few places.

We're gonna look to precious metals.

Historically, that would have been the only place that you could have gone,

if you go before we had any stable governments.

You look to the debt and the currency of stable countries.

And as we've talked about already, by 2007, we're running out of U.S.

securities for this purpose.

Let's see in this table, also coming from Pozsar's work,

just where things stood as we led up to the financial crisis.

Along the top we see the years represented.

We're going to go from before the crisis until after,

from 2005 to after the worst was over in 2010.

The outstanding amounts, first, of short-term treasury

securities in the United States and short-term agency securities.

Again, the agencies are Fannie Mae and Freddie Mac,

the large government-sponsored enterprises in the United States.

The total amount of short-term debt that was available, and

these are treasury bills, or treasury securities,

treasury bonds that have a remaining maturity of one year or less.

So everything here that is going to, in the next year,

mature, we're going to define those as short-term.

We see that the total amount outstanding in 2005 and

2006 was just 1.7 trillion and 1.6 trillion.

And I say just relative to the sizes that we've seen

in the previous lessons of just how much demand was out there.

The foreign official holdings, so

these are government holdings of short-term treasury securities and

short-term agency securities, are relatively low compared to this total.

So if we focus just on the short-term securities, that's not really,

the problem is not coming just from the global savings glut countries.

They were predominantly demanding longer-term government assets.

Instead, it's the demand from institutional cash pools.

Institutional cash pools, based on available data, just to get a sense of

their size, an institutional cash pool's estimate of their total volume,

that was the two different lines in the graph that we saw in the previous lesson.

If we add together the foreign official holdings and then the estimated demand

from institutional cash pools, we see that already by 2005,

at the very bottom of the table, there was a deficit of over $1 trillion.

This deficit would grow even more severe in

2006 and in 2007 before falling during the crisis.

It fell during the crisis predominantly because the U.S. government started to

issue much more in the way of treasury securities and agency securities.

So the U.S. government made up the gap once the crisis hit.

Prior to the crisis, however, this gap was being filled almost exclusively

with AAA securities that have been manufactured by the financial system.

These are the things that people often hear about that got us into trouble.

And we'll be talking about those in the lessons to come.

[MUSIC]

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