when's it all going to end? - roger farmer (ucla)
DESCRIPTION
Roundtable on Lessons from the financial crisis: how much longer until the end of the crisis? Barcelona GSE Summer Forum Barcelona Graduate School of Economics June 21, 2013 http://www.barcelonagse.eu/summer-forum.htmlTRANSCRIPT
When It’s All Going to End?
Barcelona, June 21st 2013
Roger E. A. Farmer, Distinguished Professor, UCLA and Senior Houblon Norman Fellow, Bank of England
Three Things to Think About
June 18th 2013 (c) Roger E A Farmer 2
Three Things to Think About
Policy Matters
June 18th 2013 (c) Roger E A Farmer 3
Three Things to Think About
Policy Matters
The Stock Market Matters
June 18th 2013 (c) Roger E A Farmer 4
Three Things to Think About
Policy Matters
The Stock Market Matters
The Central Bank Matters
June 18th 2013 (c) Roger E A Farmer 5
Policy Matters
0
5
10
15
20
25
30
1900 1925 1950 1975 2000
Unemployment Since 1890(Shaded areas are NBER recessions)
Before Keynes After Keynes
EmploymentAct of 1946
Une
mpl
oym
ent r
ate
(Per
cent
of l
abor
forc
e)
6
The Stock Market Matters
7
The Great Depression
4
8
12
16
20
24
28
32 0
5
10
15
20
25
30
351928 1930 1932 1934 1936 1938
S&P 500 (Left Scale)Unemployment Rate (Right Scale)
Black MondayOctober 28th 1929
The Stock Market Matters
8
The Great Depression The 2008 Financial Crisis
4
8
12
16
20
24
28
32 0
5
10
15
20
25
30
351928 1930 1932 1934 1936 1938
S&P 500 (Left Scale)Unemployment Rate (Right Scale)
Black MondayOctober 28th 1929
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
1,600 3
4
5
6
7
8
9
10
11
122005 2006 2007 2008 2009 2010
Unemployment Rate (Right Scale)S&P 500 (Left Scale)
Lehman BrothersCollapsesSeptember 15th 2008
The Central Bank Matters
n The Fed learned to fix recessions by lowering the interest rate
9
0
2
4
6
8
10
12
1985 1990 1995 2000 2005 2010
Treasury Bill RateUnemployment Rate
Per
cent
Interest Rate and Unemployment(Shaded areas are NBER recessions)
The Central Bank Matters
n The Fed learned to fix recessions by lowering the interest rate
n The Fed ran out of ammunition in 2008
10
0
2
4
6
8
10
12
1985 1990 1995 2000 2005 2010
Treasury Bill RateUnemployment Rate
Per
cent
Interest Rate and Unemployment(Shaded areas are NBER recessions)
How Bad is it?
11
93
94
95
96
97
98
99
100
101
5 10 15 20 25 30 35 40 45 50 55
October 1974March 1980July 1981June 1990February 2001January 2008
19741980 1981 1990
2001
2008
Employment Peak
Job Losses in the Last Six Recessions(Percent of payroll employment in peak month)
Per
cent
Months since employment peak
Can we Project this Forward?
12
93
94
95
96
97
98
99
100
101
5 10 15 20 25 30 35 40 45 50 55
October 1974March 1980July 1981June 1990February 2001January 2008
19741980 1981 1990
2001
2008
Employment Peak
Job Losses in the Last Six Recessions(Percent of payroll employment in peak month)
Per
cent
Months since employment peak 25 months
Feb 2012
Projected End Date
13
93
94
95
96
97
98
99
100
101
5 10 15 20 25 30 35 40 45 50 55
October 1974March 1980July 1981June 1990February 2001January 2008
19741980 1981 1990
2001
2008
Employment Peak
Job Losses in the Last Six Recessions(Percent of payroll employment in peak month)
Per
cent
Months since employment peak 25 months
Feb 2012
March 2015
But will employment per person recover?
June 18th 2013 (c) Roger E A Farmer 14
.40
.44
.48
.52
.56
.60
.64
50 55 60 65 70 75 80 85 90 95 00 05 10
Employment to Population Ratio This graph paints a much less rosy picture!
Policy Matters
This projection is based on the assumption that policy continues to be active
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Can we do Better Moving Forwards?
YES
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Can we do Better Moving Forwards? Monetary policy One instrument Two targets
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Can we do Better Moving Forwards? Monetary policy One instrument Two targets
The interest rate Price stability Growth and employment
June 18th 2013 (c) Roger E A Farmer 18
Can we do Better Moving Forwards? Monetary policy One instrument Two targets
The interest rate Price stability Growth and employment
Need a second instrument Target the stock market directly
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How?
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How? Set up an Exchange Traded Fund
June 18th 2013 (c) Roger E A Farmer 21
How? Set up an Exchange Traded Fund
Buy shares in the fund in exchange for debt
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How? Set up an Exchange Traded Fund
Buy shares in the fund in exchange for debt
Announce a price path for the fund
June 18th 2013 (c) Roger E A Farmer 23
How? Set up an Exchange Traded Fund
Buy shares in the fund in exchange for debt
Announce a price path for the fund
Increase the price if unemployment is too high
June 18th 2013 (c) Roger E A Farmer 24
How? Set up an Exchange Traded Fund
Buy shares in the fund in exchange for debt
Announce a price path for the fund
Increase the price if unemployment is too high
Lower the price if unemployment is too low
June 18th 2013 (c) Roger E A Farmer 25
Summary We learned how to operate monetary
policy to generate price stability
It took three hundred years
We need to learn how to operate a new policy to generate financial stability
June 18th 2013 (c) Roger E A Farmer 26