Embed Size (px)
Citation preview
TheGreatRecession
LawrenceJ.ChristianoTransportationCenter, BusinessAdvisoryCouncil,May3-4,2017
Objective
• DiscusstheGreatRecession,2007-?
• Whatcausedit,whatmadeitlastsolong?• Whydidsofewpeopleseeitcoming?
• ImplicationsforWorldTradeandPolicy.
GreatRecession• Big,bypostWorldWarIIstandards.
The 2007-2009 Recession in PerspectiveOutput Consumption Investment Employment Hours
Percentage change, peak to trough2007-2009 Recession (2007 Q4-2009 Q3) -7.2 -5.4 -33.5 -6.7 -8.7Average Post WWII Recessions -4.4 -2.1 -17.8 -3.8 -3.2US Great Depression (1929 to 1933) -36 -23 -69 -27Christiano-Motto-Rostagno (2003)
GreatRecession• Big,bypostWorldWarIIstandards.
The 2007-2009 Recession in PerspectiveOutput Consumption Investment Employment Hours
Percentage change, peak to trough2007-2009 Recession (2007 Q4-2009 Q3) -7.2 -5.4 -33.5 -6.7 -8.7Average Post WWII Recessions -4.4 -2.1 -17.8 -3.8 -3.2US Great Depression (1929 to 1933) -36 -23 -69 -27Christiano-Motto-Rostagno (2003)
GreatRecession• Big,bypostWorldWarIIstandards.
The 2007-2009 Recession in PerspectiveOutput Consumption Investment Employment Hours
Percentage change, peak to trough2007-2009 Recession (2007 Q4-2009 Q3) -7.2 -5.4 -33.5 -6.7 -8.7Average Post WWII Recessions -4.4 -2.1 -17.8 -3.8 -3.2US Great Depression (1929 to 1933) -36 -23 -69 -27Christiano-Motto-Rostagno (2003)
SmallerthanGreatDepression.
Potentialoutput?
TotalProductionOverPopulation
GreatRecession:WhydiditHappen?• Initially,verypuzzling….scaryeven.
• Overbuildinginrealestateledtoimbalances:
• Unemployedconstructionworkerslookingforjobs.
• ‘plentyofjobs(e.g.,nursing),butunemployed(e.g.,constructionworkers)didn’thavetherightskills’
• Problem:unemploymentwashighacrossall sectors.
• Obamacare:
• FearthatACAwouldraisecostsofbusinessled`waitandsee’attitudeaboutfirminvestmentandnewhires.
• Problem:Surveysoffirmssuggestedthattheirmainproblemswere`lackofsales’.
So,WhatCausedit…whatwasthetrigger?
• CorrectioninHousingPricesinMid-2006.
• But,likeMrs.O’Leary’scowandChicagofire,didnothave tobringdownthehousingmarketandwholeeconomy.
• Whatturnedthehousingpricecorrectionintoadisaster:
• Housingpricecorrectionledtobankrun.
Trigger:housepricesstoppedrisinginMay2006
Trigger:housepricesstoppedrisinginMay2006
HousingPriceCorrectionNeedNotHaveLedtoHousePriceCollapseandCollapseinEconomy.
Whatturnedthehousingpricecorrectionintoadisaster?
• Housingpricecorrectionledtobankrun.
Thisiswhatabankrunlookedlikehistorically.
Thistime,bankrunswereinvisibletomostpeople(Gorton).
RunwasonShadowBankingSystemnot commercialbankingsystem.
ItwasnotgenerallyknownhowhugetheShadowBankingsystemwasandhowVulnerabletheShadowBankswere.
TheDramaoftheBankRunsBroughttoLifeinSomeGreatMovies!
Whydiditlastsolong?
• Ascredittohousingsectordriedup,housingpricesfellsharply.
• Fallinhousingpricesmadehomeownersfeelpoor,andcutbackspending.
• Firmsseeingfewersales,cutbackinvestment.
• Economyinatailspin.
• Perfectstorm:standardsolutiontorecessioncouldnotbeimplementedwheninterestrateshitzero.
• Abiginfrastructureprogrammighthavehelped.
Whatabouttrade?
EconomicactivityinUSandothercountriesremainsweak.
Investmentespeciallyweak,reducingTrade.
TradehassloweddownwithrelativeweaknessinUS,ChineseandotherEconomies.Also,WorldTradeOrganizationReportsthattraderestrictionsareontherise.
ImplicationsforPolicy
• Abankrunturnedwhatcouldhavebeenarelativelysmallhousingcorrectionintoamajordisaster.
• Theproblemwasnotsomuchinthecommercialbankingsystem.• Indeed,thecommercialbanksactedas`shockabsorbers’forthesystem.• ‘Toobigtofail’and’laxlendingstandards’inbanksnotthefirstorderofbusiness.
• Theproblemwastheshadowbankingsystem.• Itwasvulnerabletorunsbecauseithadnoprotectionfromacentralbank.• Mustbecarefultospotbank-likeinstitutionsandmakesuretheyarenotvulnerabletoruns.
BankingCrisis,the‘ThePanicof2007’(Gorton)
• Example ofaBank:• banktakesa$1depositandpromisestorepay$1inoneperiod.• Itlendsthemoneytoafirm,whichpromisestopaythe$1backintwoperiods(zerointerest!)• Maturitymismacth.
• Ifdepositorsatone bankwantmoneyback….• Bankcanrolloverliabilities• Bankcansellassetstoanotherbank.
• Ifdepositorsatallbankswantmoneyback…• Rollovercrisis.• Banksmustsellassetsoutsideindustrywhereassetsarenotwellunderstood.• Mustsellataloss(firesale).
RolloverCrisis:RoleofHousingMarket• Whatmattersistheactualvalueofassetsandtheirfiresale value.
• Ifbankissolventunder(firesale value),thenprobabilityofruniszero.
• RolloverCrisisHypothesis:• pre-2005,nocrisispossible,• post-2005crisispossible.
Pre-housing market correction Post-housing market correction
Assets Liabilities120 (105) Deposits: 100
Banker net worth 20 (5)
Assets Liabilities110 (95) Deposits: 100
Banker net worth 10 (-5)
RolloverCrisis:RoleofHousingMarket• Whatmattersistheactualvalueofassetsandtheirfiresale value.
• Ifbankissolventunder(firesale value),thenprobabilityofruniszero.
• RolloverCrisisHypothesis:• pre-2005,nocrisispossible,• post-2005crisispossible.
Pre-housing market correction Post-housing market correction
Assets Liabilities120 (105) Deposits: 100
Banker net worth 20 (5)
Assets Liabilities110 (95) Deposits: 100
Banker net worth 10 (-5)
