1 The Story of the Recession Prof. Henry Chappell University of South Carolina.
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Transcript of 1 The Story of the Recession Prof. Henry Chappell University of South Carolina.
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The Story of the Recession
Prof. Henry Chappell
University of South Carolina
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Introduction
Motivation! What happened? What caused the recession? Were government policies appropriate? Why is the recovery slow?
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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
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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