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Explaining Recession

Explaining Recession. Dr Maurice Mullard Lecture 4. Financial Crisis . 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

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Explaining Recession

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  1. Explaining Recession Dr Maurice Mullard Lecture 4

  2. Financial Crisis • 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)

  3. Explaining Present Recession A Keynesian Perspective • 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)

  4. Liberal Market Perspective • 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

  5. Keynes on the paradox of thrift • 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

  6. Shape of the Recession • 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

  7. Optimist View • 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

  8. The UK experience • 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

  9. Austerity UK Style • 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

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