WED 2:00 PM Discussant-type Session - Housing and Banking Crisis

Full Report:
On modeling some essential dynamics of the subprime mortgage crisis, presented by Lianjun An with coauthors
The presentation proceeded to describe the “elements of the model,” including three systems: the Bank System, the House Market, and Economics. These were followed by the introduction of stock and flow charts in each subsystem. Complex models of the above were presented with twenty-nine equations. All flows in the banking system were assumed to be driven by the housing market and the economic system. Initially, parameters were set at arbitrary levels and initial conditions assumed no subprime loan availability. The Simulation results revealed the interaction between these three systems. The change in the behavior of the model following the addition of subprime mortgages was presented in the form of simulation results. The causal relationships in each system and across systems were captured and quantified in the model. Three scenarios were proposed and simulations results were shown.

The presentation was reasonably contained within the twenty minutes allocated followed by a ten-minute Q&A session. Comments were received both from the session discussant and the audience. The following comments were noteworthy: there was an absence of feedback loops in the model; the model did not consider Federal policy, i.e., monetary policy being considered exogenous to the model; and the need for understanding the actual processes involved in the recent financial crisis was suggested. For example, it was suggested that the three models be further validated by investigating the actual processes of subprime lending leading to the recent credit crisis from those people involved.

Korean real estate market mechanisms and deregulation of mortgage loans: qualitative analysis, by Sungjoo Hwang, Moonseo Park, and Hyun-Soo Lee
The focus of this presentation was to develop a system dynamics model of Korean housing market structure. The presenter explained the recent slowdown in the Korean real estate market and the subsequent reaction of the Korean government of removing restrictions and enforcing various policies in order to stimulate housing market activities. The Loan to Value and Debt to Income ratios have increased in the Korean real estate market since 2008. The objective of the study was to “develop a universal real estate and financing model.”

The first stage of the modeling showed a simple model of supply and demand with no government interference or transaction costs where prices are affected only by changes in supply and demand. The structure of the real estate financial market was captured in the second model. The effects of policy intervention were later explored by showing the changes in the behavior of the model. It was concluded that some of the current policies may even lead to undesired outcomes.

This session proved to be very popular with the audience and majority of participants were in favor of their continuation in the conference program. The presentation overran slightly, and, hence, the time to discuss the paper and the Q&A session were somewhat reduced. David Wheat, the discussant, proposed some questions which were followed by more questions from the audience. The discussion concluded that the system developed had some potential, but it had not fully achieved its goals. The validity of the model was also questioned, as it was not clear if all variables had followed the same unit of analysis (e.g., money per year for borrower). Further problems were noted in the model, and it was suggested that stock and flow diagrams should be first developed and feedback loops to be introduced later.

Finally, it was suggested that the problem statement had to be reconsidered: Is there a dynamic historical problem in the Korean real estate that this study aims to address, or is the aim of the study to develop a forecasting tool to avoid future crisis?
It was also suggested that these models are validated using historical time series data.

Mahtab Akhavan Farshchi