Transcript The Economy: View from February 2009

The Economy: View from
February 2009
RECAP OF WHERE WE ARE,
HOW WE GOT HERE,
AND WHERE WE’RE LIKELY TO
GO
Predicting the Future is Hard!
 "But a destabilizing contraction in nationwide house
prices does not seem the most probable outcome.
Indeed, nominal house prices in the aggregate have
rarely fallen and certainly not by very much."
 Alan Greenspan, May 6, 2004
 http://www.federalreserve.gov/boarddocs/speeches
/2004/200405062
Leading Economic Indicators—Selected
Countries
November
December
YOY% Change
USA
-8.7
-9.5
Japan
-5.5
-7.3
France
-5.7
-5.9
-10.7
-11.8
Italy
-5.0
-5.6
UK
-6.7
-6.8
Korea
-4.4
-4.4
Czech Republic
-10.4
-12.5
Poland
-7.2
-7.7
Spain
-7.4
-7.7
Turkey
-10.5
-13.4
Brazil
-2.9
-5.4
-12.9
-14.0
-7.7
-7.5
-13.8
-17.7
Country
Germany
China
India
Russia
Where We’re At—Newest Data
Imports & Exports Follow Production
More Data
How Does this Compare Historically?
Employment—Historical Comparison
States Feeling the Pinch
Effect on Budgets?
Consumers are Saving
Does Detroit Need a Bailout?
Estimated Impact of Spending a Dollar
by Sector of the Economy
Economic multipliers—by economic sector
Highest:
Motor vehicle manufacturing
2.87
Food and tobacco manufacturing
2.61
Farms
2.33
Residential construction
2.27
Local government enterprises
2.22
Lowest:
Legal services and real estate
1.49
Warehousing and storage
1.43
Fed banks, credit intermediation, etc.
1.39
Rankings estimated based on 2006 data
Deflation?
The Banks
Evolution of a Crisis—Financial “Innovation”
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The S&L collapse of the 1980s
Diversification of risk
Consolidation of institutions (Glass Steagall)
Mortgage backed securities
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Selling an interest in a pool of mortgages rather than selling the mortgages
themselves
If profitable, where do you get more mortgages?
Diversification vs. multiplication of risk—did the bankers understand this
tradeoff?
Credit default swaps (CDSs)
Who regulated this market?
What are the incentives to “work out” problem loans?
What assets can the government buy?
The goal of helping borrowers
Fear factor—it appears to be much worse in Europe
Taxes and Deficits
Predicting the Future
 Deflation or inflation?
 Where will growth come from?
 Social Security—can we afford it?
 Medicare and the health care system
 Taxes
 The role of government
 International relations
 Trade
 Conflict