Transcript Financial Crisis Great Depression

A “Global Saving Glut”
The best
of times
Capital Inflows
Escalating
House Prices
Easy Money
Policy
Ambitious
Mortgage Brokers
Eager Home
Buyers
Developer Clout
Innovative
Banks
Bank Regulators
Gov’t Sponsored
Securitization
MBSs
Rating
Agencies
The Boom Years: High Real GDP Growth  Declining Unemployment
1997 – 2000
2003/4 - 2006
Growth > ~ 2.5 %  Unemployment
The best
of times
Capital Inflows
Escalating
House Prices
Easy Money
Policy
Ambitious
Mortgage Brokers
Eager Home
Buyers
Developer Clout
Innovative
Banks
Bank Regulators
Gov’t Sponsored
Securitization
MBSs
Rating
Agencies
The Downturn: Slowing GDP Growth  Rising Unemployment
Growth < ~ 2.5%  Unemployment
Financial System Meltdown
At home
Gov’t Supported Takeovers
•Countrywide  BofA
•Bear Stearns  JPMorgan Chase
•Silver State Bank Nevada State
•Merrill Lynch  BofA
•Washington Mutual  JPM Chase
•Wachovia  Wells Fargo
•Security Saving  Bank of Nevada
Interventions/
Nationalizations/
Pre-privatizations
•IndyMac
•Fannie Mae/
Freddie Mac
•AIG
Abroad
•HBOS  Lloyds Bank
•Fortis  PNB Paribus
•Northern Rock
•Royal Bank of Scotland
•Dexia
•Glitnir/Kaupthing/
Landsbanki
Bankruptcies
•New Century Financial
•Lehman Brothers
•Washington Mutual Inc.
Flight to Safety
Flight from Risk
Torschlusspanik!
Baa-AAA Interest Differential
The Good News: 1932 was worse
The Bad News: This downturn isn’t over yet
6.00
May 32
5.64%
5.00
4.00
3.00
2.00
1.00
0.00
Apr 38
3.17%
Sep 82
2.69%
Dec 08
3.38
Vicious Spirals Unleashed
House Price –
Foreclosure
Spiral
Deleveraging – Debt Deflation
Spiral
Demand –
Jobs –
Wages –
Income –
Spiral
Government
Revenue –
Cutback
Spiral
Global Repercussion
Spiral
Macroeconomic Linkages
and
Feedbacks
•
Responses
Lender of Last Resort / Spender of Last Resort
Tax Rebate $124 bil.
• Fed Fund Rate Cuts
• Fannie/Freddie $200 bil.
•
Bear-Stearns $29 bil.
• AIG $174 bil.
Fed “Facilities”
• Primary Dealer Credit Facility (PDCF) $58 bil.
• Treasury Security Loan Facility (TSLF) $133 bil.
• Term Auction Facility (TAF) $416 bil.
• Asset- Backed Commercial Paper Funding Facility (CPFF) $1,777 bil.
• Money Market Investor Funding Facility (MMIFF) $540 bil.
• More Fed Fund Rate Cuts … Hold At ~0%
• Fed Purchases of Long-Term Securities: GSEs & MBSs $600 bil.
• Term Asset-Backed Securities Loan Facility (TALF) $200 bil.
• Emergency Economic Stabilization Act/TARP $700 bil.
Government Loans
Government Equity…Capital Injections
• Stimulus Package $787 bil.
aka The American Recovery and Reinvestment Act
• TARP II
• Stress Tests
Vicious Spirals Unleashed
Vicious Spirals Reversed? Tackle them all together!
Refinance
House
Price –
Mortgages
Stimulus
Demand –
Program
Jobs –
•Infrastructure
Spending
Wages –
•Tax Cuts
Foreclosure
Spiral
Deleveraging
Debt Deflation
Revive dual–banking
system
Cash for Trash
Spiral
Income –
Spiral
•Recapitalize banks
•Revive securitization
Federal Aid
Government
To States
Revenue
–
Cutback
Spiral
GGlobal
– 20 Repercussion
•Coordinated
Spiral Stimulus
Macroeconomic
Linkages
Macroeconomic Linkages
and
and
Feedbacks
Feedbacks
The Stimulus Plan: How to Spend $787 bil.
• Tax cuts for individuals
• Tax cuts for businesses
• Aid to States
– Total funds to Nevada
• Education
• Infrastructure
• Transportation
• Science and Research
$232 bil.
$ 33 bil.
$ 181 bil.
$ 1,460 mil.
480 mil
$ 32 bil.
$ 48 bil.
$ 21 bil.
This Time Is Different
•
•
•
•
•
•
•
Average Outcomes of a “Typical” Financial Crisis
Economic Statistic Average Outcome
Housing prices
-35%
Equity price
-56%
Unemployment
+7 percentage points
Duration of rising unemployment
4.8 years
Real GDP
-9.3%
Duration of falling GDP
1.9 years
Increase in real government debt
+86%
Note: Financial crises are typically quite long and very costly.
The Great Depression (1930s), Japan’s Bubble Economy (1990s), Asia Financial Crisis (1997-8)
• Source: Carmen Reinhart and Kenneth Rogoff, “The Aftermath of Financial
Crises”HarvardUniversity working paper, December 2008
FDR:
… the only thing we have to fear is
fear itself —nameless, unreasoning,
unjustified terror which paralyzes
needed efforts to convert retreat into
advance.
Workers: Fear of job loss.
Business: Fear of deflation.
Franklin Delano Roosevelt
President, 1933 – 1945
140.00
120.00
120.00
Onset of the Depression:
Persistent Deflation…Persistent Job Loss
110.00
Manufacturing Employment
100.00
100.00
$/pound
80.00
90.00
60.00
80.00
DJIA
40.00
70.00
Producer Price Index
20.00
0.00
1/2/1929
60.00
50.00
1/2/1930
1/2/1931
djia, left scale
1/2/1932
1/2/1933
$/pound, right scale
1/2/1934
1/2/1935
1/2/1936
producer price index, right scale
1/2/1937
1/2/1938
1/2/1939
mfg employment, right scale
1.80
1.60
1.40
Onset of the Depression:
Bank Runs
Deflationary Expectations
1.20
Real Money Holdings
1.00
0.80
0.60
0.40
Ratio of Demand Deposits
To Currency
0.20
0.00
1/2/1929
1/2/1930
1/2/1931
1/2/1932
real m1 balances (ppi deflator)
1/2/1933
1/2/1934
1/2/1935
demand deposit to currency ratio
1/2/1936
1/2/1937
1/2/1938
real m2 balances (ppi deflator)
1/2/1939
Rembrandt, The Turk
Titian, Venus With
The Mirror
Andrew Mellon
Secretary of the Treasury, 1921 – 1932
“…liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate.
It will purge the rottenness out of the system…People will work harder,
lead a more moral life.”
The Circular Flow: Consequences of Financial System Meltdown
FDR Inaugural Address
… the only thing we have to fear is fear itself
—nameless, unreasoning, unjustified terror
which paralyzes needed efforts to convert retreat
into advance…This Nation is asking for action,
and action now.
A “New Deal”—A New Regime
•1932
•Reconstruction Finance Corp, Glass-Steagall (T-bonds back cash)
•March/April 1933
•Loosened Fetters
•Emergency Banking Act/Gold to Treasury
•CCC and Reforestation Relief Act
•May 1933
•AAA/Thomas Amendment (President & gold price/
BoG & reserve requirement), TVA, Federal Securities Act
•June 1933
•NIRA, Glass-Steagall  FDIC
•October-November 1933
•Commodity Credit Corp, Civil Works Administration
•January 1934
•Gold Reserve Act : $ Devaluation: $20.67  $35/oz.
•June 1934
•SEC, FSLIC
•1935
•WPA, REA, Wagner Act  NLRB
•Schechter Poultry – NRA
Franklin Delano Roosevelt
President, 1933 – 1945
140.00
120.00
New Deal
Reflation
120.00
110.00
$/pound
100.00
100.00
Manufacturing Employment
80.00
90.00
Producer Price Index
60.00
80.00
40.00
70.00
DJIA
20.00
0.00
1/2/1929
60.00
50.00
1/2/1930
1/2/1931
djia, left scale
1/2/1932
1/2/1933
$/pound, right scale
1/2/1934
1/2/1935
1/2/1936
producer price index, right scale
1/2/1937
1/2/1938
1/2/1939
mfg employment, right scale
1.80
New Deal
Reflation
1.60
1.40
Real Money
Holdings
1.20
1.00
0.80
0.60
Ratio of Demand Deposits
To Currency
0.40
0.20
0.00
1/2/1929
1/2/1930
1/2/1931
1/2/1932
real m1 balances (ppi deflator)
1/2/1933
1/2/1934
1/2/1935
demand deposit to currency ratio
1/2/1936
1/2/1937
1/2/1938
real m2 balances (ppi deflator)
1/2/1939
6
8.00%
Federal Budget Stimulus
7.00%
5
Federal Spending
(% of GDP)
4
6.00%
5.00%
3
4.00%
3.00%
2
Full Employment
Demand Shift
(Brown)
1
2.00%
1.00%
Full Employment Demand Shift
Federal Expend as % of Real GDP
1939
1938
1937
1936
1935
1934
1933
1932
1931
1930
0.00%
1929
0
6
8.00%
Federal Budget Stimulus:
“Mistake of 1937”
7.00%
5
Federal Spending
(% of GDP)
4
6.00%
5.00%
3
4.00%
3.00%
2
Full Employment
Demand Shift
(Brown)
1
2.00%
1.00%
Full Employment Demand Shift
Federal Expend as % of Real GDP
1939
1938
1937
1936
1935
1934
1933
1932
1931
1930
0.00%
1929
0
20
Fiscal and Monetary Stimulus…And Retrenchment
15
10
5
0
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
-5
-10
-15
full employment demand shift
july-to-july m1 growth (%)
1939
Stimulus and Retrenchment:
Recession in Depression
140.00
Manufacturing Employment
120.00
120.00
110.00
$/pound
100.00
100.00
80.00
90.00
Producer
Price Index
60.00
80.00
40.00
70.00
DJIA
20.00
0.00
1/2/1929
60.00
50.00
1/2/1930
1/2/1931
djia, left scale
1/2/1932
1/2/1933
$/pound, right scale
1/2/1934
1/2/1935
1/2/1936
producer price index, right scale
1/2/1937
1/2/1938
1/2/1939
mfg employment, right scale
20.00%
85.00%
The Great Depression: An Overview
(Percents to Real GDP)
18.00%
80.00%
16.00%
75.00%
14.00%
70.00%
12.00%
65.00%
10.00%
60.00%
8.00%
55.00%
6.00%
50.00%
4.00%
2.00%
45.00%
0.00%
40.00%
1929
1930
investment
1931
1932
federal govt
1933
1934
state & local
1935
exports
1936
imports
1937
1938
consumption, rt axis
1939
• The Four Freedoms:
– Freedom of belief
– Freedom of speech
– Freedom from want
– Freedom from fear