Transcript Lecture 10. Chapter 11 - Henry W. Chappell Jr.

The Story of the
Recession
Prof. Henry Chappell
University of South Carolina
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Introduction
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Motivation!
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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
LRAS
SRAS
P0
AD
Y*
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What Causes Fluctuations?
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Shocks to:
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Spending and Taxes
Money
Wealth/Expectations/Animal spirits
Technology/Productivity
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Housing and Financial Markets
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Institutions and History
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“Old-fashioned mortgages”
Specialization
Securitization
Slicing and dicing: CDOs
Leverage and the Shadow Banking System
Boom and Bust
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Panic!
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What Happened and When?
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2006 Home prices peak
2007 Losses related to subprime mortgages
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2008 Premonitions:
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Bear-Stearns bailout
Emergency loans to Fannie and Freddie
2008 September Panic
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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
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Market Failures
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How housing and financial markets went
wrong
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Principle-agent problems
Moral hazard problems
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Banking panics/bank runs
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Mortgage market actors
Leverage as an amplifier
Asymmetric information
Bigger moral hazard problems
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Financial institutions and government
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Why Now?
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What was special about the period leading
up to the panic?
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Easy money
Global savings glut
Government support for housing
Lax regulation
Self-reinforcing expectations
Unfortunate coincidence?
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Policy Responses
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Multiple governmental responses
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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?
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Recovery is slow because:
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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
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