Milton Marquis March 11,2004

Technology’s Impact on the Financial Systems and the Stock Markets Milton H. Marquis Florida State University

Financial System • • • • •

Role: Process Information Driven by Innovations in IT 24/7 Trading Global Markets Interconnected Financial Transactions on the Internet – Payments – Investments – Credit Histories/Availability of Credit

Equities Markets • Open Outcry/Specialist Auction Market: Is It Becoming Anachronistic?

• Volume of trading on NASDAQ vs NYSE • Multiple Listings • Attempted Mergers in Exchanges

Household Wealth • Contribution of Equities -- Mutual Funds -- Pension Funds • Contribution of Housing -- Refinancing -- Home Equity Lending

Economy-wide Household Balance Sheet Today • Asset Portfolio -- Financial vs Tangible Real Assets • Liability Structure -- Mortgages vs Consumer Debt • Net Worth • Source: Federal Reserve’s Flow of Funds Accounts

Asset Allocation 35

$34.3T

30 25

$19.8T

Trillions of 20 Dollars 15 10 5 0

FINANCIAL ASSETS

TANGIBLE REAL ASSETS

Total Assets (2003Q4) = $54.2T

Financial Asset Allocation Money Market $8.3T (24.1%)

$5.3T (15.3%) $2.5T (7.3%)

$5.7T (16.6%) $9.3T (27.1%)

Instruments Credit Market Instruments Corporate Equities Stock & Bond Mutual Funds Pension Funds Other

$3.3T (9.6%)

Direct Holdings of Corporate Equities as Percent of Financial Assets = 16.6% Direct & Indirect Holdings of Corporate Equities as Percent of Financial Assets = 31.1%

Tangible Real Assets $1.5T (7.5%) $3.2T (15.9%)

Housing Consumer Durables Other

$15.2T (76.6%)

Housing as Percent of Tangible Real Assets = 76.6%

Structure of Liabilites 7

$6.8T

6 5 Trillions of 4 Dollars 3 $2.0T

2

$0.9T

1 0

Home Mortgages

Consumer Credit

Other

Total Liabilities (2003Q4) = $9.8T

Contributions of Equities & Housing to Household Net Worth $T

% Net Worth

5.7

12.9

Equities (direct & indirect)

10.7

24.0

Housing (assets)

15.2

34.2

Equities (direct)

Home Mortgages (liabilities)

6.8

Net Equity in Housing

8.4

Net Worth

$44.4 T

18.8

20

19

19

19

19

19

19

19

19

19

19

02

97

92

87

82

77

72

67

62

57

52

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Q 1

Percent

Financial Assets as a Percent of Total Assets 75

70

65

60

55

Features of Equities’ Share of Households’ Asset Portfolios • Relative stability over the longer term • Nature of short-run shifts in equities’ share of household assets in response to economic and financial conditions • Passive vs active reallocations • Trends in equity ownership

19 52 Q 19 1 55 Q 19 1 58 Q 19 1 61 Q 19 1 64 Q 19 1 67 Q 19 1 70 Q 19 1 73 Q 19 1 76 Q 19 1 79 Q 19 1 82 Q 19 1 85 Q 19 1 88 Q 19 1 91 Q 19 1 94 Q 19 1 97 Q 20 1 00 Q 20 1 03 Q 1

Percent

Direct & Indirect Holdings of Equities as Percent of Net Worth 40

35

30

25

20

15

10

5

0

Indirect Holdings of Corporate Equities as Percent of Total 50 40

Indirect Holdings

20 10

Pension Funds

0 19 52 Q 1 19 57 Q 1 19 62 Q 1 19 67 Q 1 19 72 Q 1 19 77 Q 1 19 82 Q 1 19 87 Q 1 19 92 Q 1 19 97 Q 1 20 02 Q 1

Percent

30

Features of Home Equity’s Contribution to Household Wealth • Relative stability over the longer-term • Home Equity Lending • Refinancing

Home Equity as a Percent of Households’ Net Worth 24

Percent

20

16

12

1952Q1: 19.0% 2003Q4: 18.6% AVE: 18.6%

1952Q1 1957Q1 1962Q1 1967Q1 1972Q1 1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1

Homeowners’ Equity as Percent of Real Estate Value 85 80

Percent

75 70 65 60 55 50

1952Q1 1957Q1 1962Q1 1967Q1 1972Q1 1977Q1 1982Q1 1987Q1 1992Q1 1997Q1 2002Q1

Mortgage Refinancing and Interest Rates 12,000

Refi Index

Mortgage Rate (30-yr fixed)

10,000 8,000

10 9 8 7 6

6,000 4,000 2,000

01 /0 7/ 00 05 /2 6/ 00 10 /1 3/ 00 03 /0 2/ 01 07 /2 0/ 01 12 /0 7/ 01 04 /2 6/ 02 09 /1 3/ 02 01 /3 1/ 03 06 /2 0/ 03 11 /0 7/ 03

0

5 4 3 2 1 0

Mortgage Refinancing and House Price Appreciation 140

Refi Index

Real House Price Index

10,000 9,000

130

8,000 7,000

120

6,000

House Price

110

5,000 4,000

100

3,000 2,000

Refi Index

90

1,000 80 3/31/1990

0 9/30/1992

3/31/1995

9/30/1997

3/31/2000

Source: MBAA and OFHEO

9/30/2002

Conclusions • Long-run Stability in Household Balance Sheets -- Financial Assets = 2/3 of Total Assets -- Home Equity = 19% of Net Worth • Equities as Share of Financial Assets may Continue to Grow • Current Balance Sheet near Long-run Ave • Housing & Equity Markets in Balance