Introduction to the Financial Crisis-cum-Great Recession.

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

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

36.4%34.6%

24.1%

33.1% 33.1%

8.2%

22.8%

-3.4%

16.4%

-5.7%-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

1948-49 1953-54 1957-58 1960-61 1969-70 1973-75 1980-82 1990-91 2001 2007-09

REAL LOAN GROWTH39 Months Since Recession End - Post - WWII Recessions

Total Loans in U.S. Commercial Banks; Deflated by Consumer Price Index (Urban-All Items)

11

Labor Market Still in Shambles

12

Investment has yet to recover!

13

Housing Market is Still a Wreck!