During the current so-called financial crisis, central banks around the world have injected vast amounts of liquidity into the system in an attempt to keep banks afloat and the economy ticking over. Nevertheless, many financial institutions have declared bankruptcy while others have received governmental bail-outs and been nationalized. At the same time, lending to businesses is down, bankruptcies are on the rise, large and important manufacturers like General Motors are on the brink of bankruptcy and hav e asked for governmental assistance, unemployment is rising, property prices are falling, and the worlds major economies are contracting. The current state of affairs is arguably the biggest negative shock to hit the economy since the Great Depression.
The crisis is reflected in the performance of stock markets around the world, which are at their lowest levels in a decade. For example, from the beginning of August 2007 to the end of March 2009, the S&P 500 is down 45.7%, the DAX is down 46.4%, the FT SE 100 is down 40.8%, the Nikkei is down 52.2%. In Norway, the OBX is down 52.5%.
The apparent propagation of the crisis from the financial to the real sector emphasizes a need for a better understanding of the workings of financial markets and the imp act of financial decisions on growth and stability. In this project we propose first to report on the state of knowledge in three key areas, namely: (i) The market for liquidity and the liquidity of financial markets, (ii) Securitization, and (iii) Levera ge, incentives, and growth. In the second phase we will use this information to learn about the courses of the crisis and how we can avoid similar crises in the future.