easy money policy
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Easy MoneyPolicy
Capital Inflows
Eager Home Buyers
InnovativeBanks
Rating Agencies
AmbitiousMortgage Brokers
SecuritizationMBSs
EscalatingHouse Prices
Gov’t SponsoredEnterprises
Developer Clout
Bank Regulators
The best of times
A “Global Saving Glut”
The Boom Years: High Real GDP Growth Declining Unemployment1997 – 2000
2003/4 - 2006
Growth > ~ 2.5 % Unemployment
Easy MoneyPolicy
Capital Inflows
Eager Home Buyers
InnovativeBanks
Rating Agencies
AmbitiousMortgage Brokers
SecuritizationMBSs
EscalatingHouse Prices
Gov’t SponsoredEnterprises
Developer Clout
Bank Regulators
The best of times
The Downturn: Slowing GDP Growth Rising Unemployment
Growth < ~ 2.5% Unemployment
Financial System MeltdownAt 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
Bankruptcies
•New Century Financial•Lehman Brothers•Washington Mutual Inc.
Abroad
•HBOS Lloyds Bank•Fortis PNB Paribus
•Northern Rock•Royal Bank of Scotland•Dexia•Glitnir/Kaupthing/
Landsbanki
Flight to SafetyFlight from Risk
Torschlusspanik!
Baa-AAA Interest Differential The Good News: 1932 was worse
The Bad News: This downturn isn’t over yet
0.00
1.00
2.00
3.00
4.00
5.00
6.00May 325.64%
Apr 383.17%
Sep 822.69%
Dec 083.38
House Price – Foreclo
sureSpiral
Demand –Jobs –
Wages – Income –
SpiralDeleveraging – Debt DeflationSpiral
GovernmentRevenue – CutbackSpiral
Global Repercussion Spiral Macroecono
mic Linkages
and Feedbacks
Vicious Spirals Unleashed
ResponsesLender 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
House Price – Foreclo
sureSpiral
Demand –Jobs –
Wages – Income –
SpiralDeleveraging – Debt Deflation
SpiralGovernmentRevenue – CutbackSpiral
Global Repercussion Spiral Macroecono
mic Linkages
and Feedbacks
Vicious Spirals Reversed? Tackle them all together!
StimulusProgram•Infrastructure Spending•Tax Cuts
Federal AidTo States
RefinanceMortgages
Revive dual banking systemCash for Trash•Recapitalize banks•Revive securitization
G – 20•Coordinated Stimulus
Macroeconomic Linkages and
Feedbacks
Vicious Spirals Unleashed
The Stimulus Plan: How to Spend $787 bil.• Tax cuts for individuals $232 bil.• Tax cuts for businesses $ 33 bil.• Aid to States $ 181 bil.– Total funds to Nevada $ 1,460 mil.• Education 480 mil
• Infrastructure $ 32 bil.• Transportation $ 48 bil.• Science and Research $ 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.
Franklin Delano RooseveltPresident, 1933 – 1945
Workers: Fear of job loss.
Business: Fear of deflation.
1/1/1929
4/1/1929
7/1/1929
10/1/1929
1/1/1930
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1/1/1931
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djia, left scale $/pound, right scale producer price index, right scale mfg employment, right scale
Producer Price Index
Onset of the Depression: Persistent Deflation…Persistent Job Loss
$/pound
DJIA
Manufacturing Employment
1/1/1929
4/1/1929
7/1/1929
10/1/1929
1/1/1930
4/1/1930
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0.60
0.80
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1.20
1.40
1.60
1.80
real m1 balances (ppi deflator) demand deposit to currency ratio real m2 balances (ppi deflator)
Ratio of Demand Deposits To Currency
Real Money Holdings
Onset of the Depression:Bank Runs
Deflationary Expectations
“…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.”
Rembrandt, The Turk Titian, Venus With The Mirror
Andrew Mellon Secretary of the Treasury, 1921 – 1932
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.
Franklin Delano RooseveltPresident, 1933 – 1945
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
1/1/1929
4/1/1929
7/1/1929
10/1/1929
1/1/1930
4/1/1930
7/1/1930
10/1/1930
1/1/1931
4/1/1931
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1/1/1932
4/1/1932
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10/1/1932
1/1/1933
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djia, left scale $/pound, right scale producer price index, right scale mfg employment, right scale
New Deal Reflation
DJIA
Manufacturing Employment
$/pound
Producer Price Index
1/1/1929
4/1/1929
7/1/1929
10/1/1929
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4/1/1930
7/1/1930
10/1/1930
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0.00
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0.80
1.00
1.20
1.40
1.60
1.80
real m1 balances (ppi deflator) demand deposit to currency ratio real m2 balances (ppi deflator)
Ratio of Demand Deposits To Currency
Real Money Holdings
New Deal Reflation
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
0
1
2
3
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6
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1.00%
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3.00%
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6.00%
7.00%
8.00%
Full Employment Demand Shift Federal Expend as % of Real GDP
Federal Budget Stimulus
Full Employment Demand Shift
(Brown)
Federal Spending(% of GDP)
1929
1930
1931
1932
1933
1934
1935
1936
1937
1938
1939
0
1
2
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6
0.00%
1.00%
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7.00%
8.00%
Full Employment Demand Shift Federal Expend as % of Real GDP
Federal Budget Stimulus: “Mistake of 1937”
Full Employment Demand Shift(Brown)
Federal Spending(% of GDP)
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 1939
-15
-10
-5
0
5
10
15
20
full employment demand shift july-to-july m1 growth (%)
Fiscal and Monetary Stimulus…And Retrenchment
1/1/1929
4/1/1929
7/1/1929
10/1/1929
1/1/1930
4/1/1930
7/1/1930
10/1/1930
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80.00
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100.00
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120.00
djia, left scale $/pound, right scale producer price index, right scale mfg employment, right scale
DJIA
Manufacturing Employment
Producer Price Index
$/pound
Stimulus and Retrenchment: Recession in Depression
1929 1930 1931 1932 1933 1934 1935 1936 1937 1938 19390.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
18.00%
20.00%
40.00%
45.00%
50.00%
55.00%
60.00%
65.00%
70.00%
75.00%
80.00%
85.00%
investment federal govt state & local exports imports consumption, rt axis
The Great Depression: An Overview(Percents to Real GDP)
• The Four Freedoms:
– Freedom of belief
– Freedom of speech
– Freedom from want
– Freedom from fear
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