Transcript Keynes and Recession

Dr Maurice Mullard
Lecture 4





Global Economy experience 122 financial
crisis since 1945
UK Experienced 8 recessions USA 7 since
1950
Definition of recession fall in GDP for two
quarters
Most recessions start in financial sector
banking crisis or housing bubble
Recovery takes about 10 years see work
Reinhart (2010) Reinhart and Rogoff (2009)
also IMF website(imf.org)



Thesis of a Savings Glut too much global
savings not enough investment opportunities
imbalance savings and investment
Debt and house prices low interest rates
(Stiglitz 2010
Repairing lost savings (Haldane Bank of
England)






A Problem of Government intervention
Interest rates kept too low after Dot comm
bubble and after 9/11 because of worry
about deflation
Government subsidy to housing
Moral hazard after bank bail outs Bear
Stearns Northern Rock Llyods Banks AIG
Bail out costs 16 trillion dollars
Created problem of too big to fail






Savings and Investment
Savings higher than investment
Saving as individual issue and the collective
decision
Declining aggregate demand
Stimulus packages
Infrastructure expenditure as improving
capital





Recession is this a
V sharp decline only temporary and soon
return to normal
L Sharp decline and economy stays at
stagnant level for a long period
W this is the double dip recession we already
had one recession in 2007 forecast of new
recession in 2011
U economy decline stays at low and slowly
receovers







Temporary blip soon return to normal path
of growth
Structure of Economy is sound
Unemployment is voluntary
Prick the bubble of housing
Problem is now recession is in third year
UK forecast growth 0.5 per cent
Destruction of GDP equivalent to 5 per cent







UK GDP has shrunk by 6 per cent that means
GDP is now smaller than in 2007 difficult to
recover lost production
Problem of structure
Too much reliance on financial sector
Need to find new growth sectors
Exports to china and India
Global imbalances
EU in recession as well as USA







Coalition decision to reduce spending by 80
billion in next five years Forecast that we had
recession in 2007 and we shall have a new
recession in 2011 increases in unemployment
dependence private and public sectors
Hurricane still to come
Falling house Prices
Decline in manufacturing
Reducing public expenditure
Interest rates already at zero
Where is growth going to come from