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Introduction to the Financial Crisis-cum-Great Recession

Introduction to the Financial Crisis-cum-Great Recession. The Great Recession The Issues. Housing Bubble Contribution of bad policy / incentives Impulse vs. Propagation M echanism Role of “savings glut” Role of monetary policy Role of housing crisis Role of financial crisis

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Introduction to the Financial Crisis-cum-Great Recession

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  1. Introduction to the Financial Crisis-cum-Great Recession

  2. The Great RecessionThe Issues • Housing Bubble • Contribution of bad policy / incentives • Impulse vs. Propagation Mechanism • Role of “savings glut” • Role of monetary policy • Role of housing crisis • Role of financial crisis • Weak Recovery • Role of policy mistakes / uncertainty • Role of financial crisis

  3. Contributing Factors to Housing Bubble / Financial Crisis • Greed (?????) • Policies Promoting Home Ownership • 1997 change in capital gains exclusion • Pressure on Fannie /Freddie • Weak Capital Regulation • Basel risk weights • 2002 change in weights for AAA/AA securities • Savings Glut / Institutional Cash Pools • Bad Monetary Policy • Shadow Banking System • Financial innovation • Credit ratings • Loss of charter value • Bad Regulation

  4. Housing Bubble

  5. Monetary Policy

  6. Monetary Policy (II)

  7. Economic Prospects The outlook is for continued slow growth. Economists are divided on the reason, but fairly united on the outlook. Reasons for Slow Growth • Recoveries from recessions accompanied by financial crises tend to be anemic. • President Obama’s economic policies have damaged growth prospects. • Bad policies have reduced growth. • Policy uncertainty has reduced growth.

  8. Typical Recovery

  9. Current Recovery

  10. Banks not ready to lend, either…Particularly after a financial crisis!

  11. Labor Market Still in Shambles

  12. Investment has yet to recover!

  13. Housing Market is Still a Wreck!

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