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The Story of the Recession

The Story of the Recession. Prof. Henry Chappell University of South Carolina. Introduction. Motivation! What happened? What caused the recession? Were government policies appropriate? Why is the recovery slow?. House Prices, 2000 - 2011. Housing Starts.

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The Story of the Recession

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  1. The Story of the Recession Prof. Henry Chappell University of South Carolina

  2. Introduction • Motivation! • What happened? • What caused the recession? • Were government policies appropriate? • Why is the recovery slow?

  3. House Prices, 2000 - 2011

  4. Housing Starts

  5. Real Residential Investment, 1994 - 2010

  6. Real GDP, 1970 - 2011

  7. Real Fixed Investment

  8. Real Consumer Durables

  9. Real Personal Consumption, 1994-2011

  10. Employment/Population

  11. Core CPI Inflation

  12. Productivity

  13. AD and AS

  14. What Causes Fluctuations? • Shocks to: • Spending and Taxes • Money • Wealth/Expectations/Animal spirits • Technology/Productivity

  15. Housing and Financial Markets • Institutions and History • “Old-fashioned mortgages” • Specialization • Securitization • Slicing and dicing: CDOs • Leverage and the Shadow Banking System • Boom and Bust

  16. Panic! • What Happened and When? • 2006 Home prices peak • 2007 Losses related to subprime mortgages • UBS, Bear-Stearns, BNP Paribas, Countrywide, Northern Rock • 2008 Premonitions: • Bear-Stearns bailout • Emergency loans to Fannie and Freddie • 2008 September Panic • Fannie, Freddie, Lehman, AIG, WaMu, Wachovia • Fed intervenes under Article 13.3, then TARP • Stock Market Collapse

  17. Market Failures • How housing and financial markets went wrong • Principle-agent problems • Moral hazard problems • Mortgage market actors • Banking panics/bank runs • Leverage as an amplifier • Asymmetric information • Bigger moral hazard problems • Financial institutions and government

  18. Why Now? • What was special about the period leading up to the panic? • Easy money • Global savings glut • Government support for housing • Lax regulation • Self-reinforcing expectations • Unfortunate coincidence?

  19. Policy Responses • Multiple governmental responses • Conventional monetary and fiscal policy responses • Special lending/purchase programs and bailouts • Quantitative easing • Regulatory reform • Have policies worked? • What about the government debt?

  20. Why is the Recovery so Slow? • Recovery is slow because: • Balance sheet repair • Overhang in housing and consumer durables • Damage to the functioning of intermediation • Zero lower bound on nominal interest rates

  21. The End

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