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Economic Crisis & Recovery

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Slide 1Slide 2The US RecessionSlide 4Slide 5Slide 6Slide 7Until the end of 2009, the US recovery depended on inventories and did not show up in employment.Most indicators began to improve in mid or late 2009Slide 10Slide 11Slide 12Slide 13Employment Lags Behind GDP Although U.S. job loss has been especially bad in this recession, the recovery lag behind GDP has not been unusual.Total hours worked in the US economy (an indicator that does not lag as far behind as unemployment) began to turn upward in October 2009Danger of a W-shaped recession?Four leading private forecasts of growth in 2010Slide 18Slide 19Slide 20Slide 21When will US adopt the tough measures to get back to fiscal sustainability?More on the crisis of 2007-2009Six root causes of the financial crisisSix root causes of financial crisis, cont.US real interest rate < 0, 2003-04Slide 27Origins of the financial/economic crisesThey did. Indices peaked in late 2006, and fell 1/3.Financial meltdown: bank spreads rose sharply when sub-prime mortgage crisis hit (Aug. 2007) and up again when Lehman crisis hit (Sept. 2008).My favorite monthly indicator: total hours worked in the economyNational income has been more reliable than GDP, even though they are supposed to measure the same thing.2: Policy Response -- How did we avoid another Great Depression?Slide 34U.S. Policy ResponsesThe Fed certainly did not repeated the mistake of 1930s: letting the money supply fall.Federal Reserve Assets ($ billions) have more-than-doubled, through new facilities, rather than conventional T bill purchasesSlide 38Slide 39Slide 40Policy Responses, continuedBottom line of macroeconomic policy response:3: Intellectual implications of the crisis for economicsThe return of KeynesMotivation for macroeconomic interventionSlide 46Who got pieces of it right, beforehand?Appendix: “Where should mainstream macro go, in light of the 2007-09 global financial crisis?”Financial crises: Not just for emerging markets anymore. An analogyImplications of the 2008 financial crisis for macroeconomics?What are some of these models?Jeffrey FrankelJeffrey FrankelHarpel Professor of Capital Formation & GrowthHarpel Professor of Capital Formation & GrowthEconomic Crisis & Economic Crisis & RecoveryRecoverySenior Executive FellowsSenior Executive FellowsMay 3, 2010May 3, 20102• The US recession• Forecasts• Origins of the financial crisis• Policy response: •How did we avoid a Great Depression?• Intellectual implications of the crisis •for the field of economics• Appendices• The global economy• The problem of global imbalances• The G-20 in 2010Topics3The US RecessionThe US RecessionThe US recession started in Dec. 2007 The US recession started in Dec. 2007 according according to the NBER Business Cycle Dating Committee.to the NBER Business Cycle Dating Committee.In May 2009, the recession’s length passed In May 2009, the recession’s length passed thethe postwar records postwar records -- 1973-75 & 1981-82-- 1973-75 & 1981-82 = 16 months= 16 monthsOne has to go back to 1929-33 for a longer One has to go back to 1929-33 for a longer downturn.downturn.Also the most severe, by most measures: Also the most severe, by most measures: rise in unemployment rate, job loss, output loss….rise in unemployment rate, job loss, output loss….4BUSINESS CYCLE REFERENCE DATESBUSINESS CYCLE REFERENCE DATESSource: NBERSource: NBERPeakPeakTroughTroughContractioContractionnQuarterly dates are in parenthesesQuarterly dates are in parenthesesPeak to TroughPeak to TroughAugust 1929 (III)August 1929 (III)May 1937 (II)May 1937 (II)February 1945 (I)February 1945 (I)November 1948 (IV)November 1948 (IV)July 1953 (II)July 1953 (II)August 1957 (III)August 1957 (III)April 1960 (II)April 1960 (II)December 1969 (IV)December 1969 (IV)November 1973 (IV)November 1973 (IV)January 1980 (I)January 1980 (I)July 1981 (III)July 1981 (III)July 1990 (III)July 1990 (III)March 2001 (I)March 2001 (I)December 2007 (IV) December 2007 (IV) March 1933 (I)March 1933 (I)June 1938 (II)June 1938 (II)October 1945 (IV)October 1945 (IV)October 1949 (IV)October 1949 (IV)May 1954 (II)May 1954 (II)April 1958 (II)April 1958 (II)February 1961 (I)February 1961 (I)November 1970 (IV)November 1970 (IV)March 1975 (I)March 1975 (I)July 1980 (III)July 1980 (III)November 1982 (IV)November 1982 (IV)March 1991 (I)March 1991 (I)November 20011 (IV)November 20011 (IV)43 months43 months13138811111010881010111116166616168888Average, all cycles:Average, all cycles: 1854-2001 (32 cycles) 1854-2001 (32 cycles) 1945-2001 (10 cycles)1945-2001 (10 cycles),,17171010June 2009 (II) or later > 18 months[not yet declared]5US employment peaked in Dec. 2007,which is one reason why the NBER BCDC dated the peak from that month. 8 million jobs were lost over the next two years. Payroll employment series Source: Bureau of Labor StatisticsPayroll employment series Source: Bureau of Labor Statistics, April 2010Jobs peakJobstroughUSemploymentfellfullyinproportiontoGDP,unlikethe“laborhoarding”patternofthepast.InGermany,bycontrast,therecessionhasshownuponlyinGDP,notatallinemployment.Until the end of 2009, the US recoverydepended on inventories and did not show up in employment.Source: IMF WEO, April 2010The 2007-09, recession was unusualin the size of job loss, and in financial markets’ liquidity crisis.9Most indicators began to Most indicators began to improve improve in mid or late 2009in mid or late 2009Interbank spreads Interbank spreads Output Output Stock marketStock marketConsumer confidence & spendingConsumer confidence & spendingEven housing measures have bottomed out.Even housing measures have bottomed out.The labor market has been terrible.The labor market has been terrible.But even it has responded with lags no worse than But even it has responded with lags no worse than usual.usual.10OECD Econ.Outlook, April 2010Evidence that the banking sector returned to normal by late 2009.Start of US sub-prime mortgage crisisLehmanfailure11OECD Economic Outlook, April 2010Evidence that the banking sector returned to normal in late 2009.%%Corporate bond rates have come back down too.OECD Economic Outlook, April 2010Now < interest rates in the (mild) 2001 recession.Source:Jeff Frankel’s blog, Nov.


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