From a Housing Problem to a Financial Crisis

From a Housing Problem to a Financial CrisisU.S. Housing Prices since 2000

Easy MoneyPolicy

Capital Inflows

Eager Home Buyers

InnovativeBanks

Rating Agencies

AmbitiousMortgage Brokers

SecuritizationMBSs

EscalatingHouse Prices

Gov’t SponsoredEnterprises

Developer Clout

Bank Regulators

The best of times

The Ted Spread since 2007

The Use and Limits of Policy

Yields on 10-Year U.S. Government Treasury, AAA, and BBB Corporate Bonds since 2007

Easy MoneyPolicy

Capital Inflows

Eager Home Buyers

InnovativeBanks

Rating Agencies

AmbitiousMortgage Brokers

SecuritizationMBSs

EscalatingHouse Prices

Gov’t SponsoredEnterprises

Developer Clout

Bank Regulators

The best of times

U.S. Consumer and Business Confidence, since 2007

The T-Bill Rate, since 2007

Responses: No Bank Left BehindLender of Last Resort / Spender of Last Resort

• Tax Rebate $124 bil.• Fed Fund Rate Cuts• Fannie/Freddie $200 bil.• Bear-Stearns $29 bil.• AIG $174 bil.Fed “Facilities”• Primary Dealer Credit Facility (PDCF) $58 bil.• Treasury Security Loan Facility (TSLF) $133 bil.• Term Auction Facility (TAF) $416 bil.• Asset- Backed Commercial Paper Funding Facility (CPFF) $1,777 bil.• Money Market Investor Funding Facility (MMIFF) $540 bil.• More Fed Fund Rate Cuts … Hold At ~0%• Fed Purchases of Long-Term Securities: GSEs & MBSs $600 bil.• Term Asset-Backed Securities Loan Facility (TALF) $200 bil.• Emergency Economic Stabilization Act/TARP $700 bil.

Government LoansGovernment Equity

• Stimulus Package $787 bil. aka The American Recovery and Reinvestment Act

• TARP II

• Stress Tests

Money Demand, Money Supply, and the Liquidity Trap

LM Curve in the Presence of a Liquidity Trap

The IS–LM Model and the Liquidity Trap

The Interest Rate in Japan since 1990. Japan has been in a liquidity trap since the mid-1990s.

Government Spending and Revenues (as percent of GDP), Japan, since 1990.

• Increasing government spending and decreasing revenues have led to steadily larger deficits.

The Slow RecoveryThe Liquidity Trap and Adjustment Failure

Do Banking Crises Affect the Natural Level of Output?The Evolution of Output after Four Banking Crises