the story of the recession
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The Story of the Recession. Prof. Henry Chappell University of South Carolina. Introduction. Motivation! What happened? What caused the recession? Were government policies appropriate? Why is the recovery slow?. House Prices, 2000 - 2011. Housing Starts. - PowerPoint PPT PresentationTRANSCRIPT
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The Story of the Recession
Prof. Henry ChappellUniversity of South Carolina
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Introduction Motivation!
What happened? What caused the recession? Were government policies appropriate? Why is the recovery slow?
House Prices, 2000 - 2011
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Housing Starts
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Real Residential Investment, 1994 - 2010
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Real GDP, 1970 - 2011
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Real Fixed Investment
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Real Consumer Durables
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Real Personal Consumption, 1994-2011
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Employment/Population
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Core CPI Inflation
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Productivity
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AD and AS
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AD
SRAS
*Y
0P
LRAS
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What Causes Fluctuations? Shocks to:
Spending and Taxes Money Wealth/Expectations/Animal spirits Technology/Productivity
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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
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Panic! What Happened and When?
2006 Home prices peak 2007 Losses related to subprime mortgages
UBS, Bear-Stearns, BNP Paribas, Countrywide, Northern Rock
2008 Premonitions: Bear-Stearns bailout Emergency loans to Fannie and Freddie
2008 September Panic Fannie, Freddie, Lehman, AIG, WaMu, Wachovia Fed intervenes under Article 13.3, then TARP
Stock Market Collapse
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Market Failures How housing and financial markets went
wrong Principle-agent problems Moral hazard problems
Mortgage market actors Banking panics/bank runs
Leverage as an amplifier Asymmetric information Bigger moral hazard problems
Financial institutions and government
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?
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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?
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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
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The End