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Transcript
The Story of the
Recession
Prof. Henry Chappell
University of South Carolina
1
Introduction

Motivation!




What happened?
What caused the recession?
Were government policies appropriate?
Why is the recovery slow?
2
House Prices, 2000 - 2011
3
Housing Starts
4
Real Residential Investment,
1994 - 2010
5
Real GDP, 1970 - 2011
6
Real Fixed Investment
7
Real Consumer Durables
8
Real Personal Consumption,
1994-2011
9
Employment/Population
10
Core CPI Inflation
11
Productivity
12
AD and AS
LRAS
SRAS
P0
AD
Y*
13
What Causes Fluctuations?

Shocks to:




Spending and Taxes
Money
Wealth/Expectations/Animal spirits
Technology/Productivity
14
Housing and Financial Markets

Institutions and History






“Old-fashioned mortgages”
Specialization
Securitization
Slicing and dicing: CDOs
Leverage and the Shadow Banking System
Boom and Bust
15
Panic!

What Happened and When?


2006 Home prices peak
2007 Losses related to subprime mortgages


2008 Premonitions:



Bear-Stearns bailout
Emergency loans to Fannie and Freddie
2008 September Panic



UBS, Bear-Stearns, BNP Paribas, Countrywide,
Northern Rock
Fannie, Freddie, Lehman, AIG, WaMu, Wachovia
Fed intervenes under Article 13.3, then TARP
Stock Market Collapse
16
Market Failures

How housing and financial markets went
wrong


Principle-agent problems
Moral hazard problems


Banking panics/bank runs



Mortgage market actors
Leverage as an amplifier
Asymmetric information
Bigger moral hazard problems

Financial institutions and government
17
Why Now?

What was special about the period leading
up to the panic?






Easy money
Global savings glut
Government support for housing
Lax regulation
Self-reinforcing expectations
Unfortunate coincidence?
18
Policy Responses

Multiple governmental responses






Conventional monetary and fiscal policy
responses
Special lending/purchase programs and bailouts
Quantitative easing
Regulatory reform
Have policies worked?
What about the government debt?
19
Why is the Recovery so Slow?

Recovery is slow because:




Balance sheet repair
Overhang in housing and consumer durables
Damage to the functioning of intermediation
Zero lower bound on nominal interest rates
20
The End
21