-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
1/17
The Macroeconomic Situation:
June 2008The Last Financial Crisis of the
Nineteenth Century
J. Bradford DeLong
U.C. Berkeley and NBER
[email protected]
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
2/17
Fridays Macroeconomic News
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
3/17
Sundays Macroeconomic News Tim Geithner, President of
New York Fed
A new regulatoryframework
Covering commercial and
investment banks, home
and foreign
Federal Reserve to play
central role
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
4/17
Mondays Macroeconomic News Ben Bernanke, Chair of Fed
Said the central bank willstrongly resist any waning of
public confidence in stableprices.
CBOT futures: a 55 percentchance the Fed will raise theFed Funds
rate from 2 on Aug.5 meeting (compared with 9
percent Monday morning); a 95percent chance the Fed willraise by
December (comparedto 67 percent a week ago)
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
5/17
Inflation since 1964 In the 1970s, jumps in
inflation were followed
within months by jumps incore inflation.
Since 1982 not.
The breaking of
inflationary psychology?
The breaking of unions
with multi-year contracts
and escalators?
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
6/17
1844: The Renewal of the Bank
of England Charter Prime Minister Robert
Peel
It should be illegal for theBank of England to makeemergency
loans
If they make them in a
crisis, we wont
prosecute
Suspension letters
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
7/17
Karl Marxs Critique Karl Marx
You cant solve a real-sideproblem--overinvestment,etc.--with
financialmanipulation
Peel himself has beenapotheosized in the mostexaggerated
fashion... amassive accumulation ofcommonplaces,
skillfullyinterspersed with a largeamount of statisticaldata
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
8/17
Andrew Mellon Agreed with
Karl Marx Andrew Mellon
Hoovers Treasury
Secretary Hoover followed
Mellons advice
Great Depression
No Fed since hasdared let key financialinstitutions fail
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
9/17
After the Depression, Hoover Did
Not Like Mellon Much Hoover: The leave it alone
liquidationists headed by Mellonfelt that government must keep
itshands off and let the slump liquidate
itself. Liquidate labor, liquidatestocks, liquidate the farmers,
liquidatereal estate. [Mellon] insisted that,when the people get an
inflationbrainstorm, the only way to get it out oftheir blood is to
let it collapse even apanic was not altogether a bad thing.[Mellon]
said: It will purge the
rottenness out of the system. High costsof living and high
living will comedown. People will work harder, live amore moral
life. Values will be adjusted,and enterprising people will pick up
thewrecks from less competent people
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
10/17
Implications: What the Fed and
Treasury Are Doing Before the onset of the crisis,
the Fed had direct holdings ofaround $790bn of Treasuries.
As of Wednesday 28th May,the Feds liquidity operationshad used
over half of theseavailable securities
Unleashing FNMA to the tuneof perhaps $500 billion
Guaranteeing the unsecureddebt of every investment bankin the
U.S.
Liquidity tsunami
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
11/17
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
12/17
Additional Headwinds: Oil Dealing with the new oil
shock
Unlikely to be aspeculative movement
Asian industrialization and
demand simply proceeding
too fast
A curb in U.S. demand thatproduces a fall in global oil
prices will see U.S. demand
rise again
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
13/17
Additional Headwinds: Oil and
the Trade Balance The non-oil deficit is not
that large
Adjustment of the dollaragainst the Europeans hashad a
significant role
But the oil deficit is large
Hard to see how the dollar
can avoid a bigdepreciation against Asian
currencies
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
14/17
We Are Not Through with This
Dollar Cycle The dollar has fallen
against the Europeans
The dollar has not yetfallen against the Asians
It may fall against the
Asians in nominal terms
We may see a burst of
wage inflation in Asia...
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
15/17
We Are Not Through with This
Housing-Price Decline Housing prices dont
behave much likefinancial assets
It takes a long time forsupply-and-demandinformation to
beincorporated into housingprice declines
Hard to see how we canavoid another 15%-20%decline in
nationwideaverage housing prices
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
16/17
Macroeconomic Outlook for
Equities Long-run historical
average of 20 With normal productivity
growth corresponds toaverage real return of 5.5%per year
And to an equity premiumof 4% per year
Question of why it is solarge Todays P/E suggest a
percentage point lower foraverage real equity return
-
8/14/2019 The Macroeconomic Situation: The Last Financial Crisis
of the Nineteenth Century: 20080611
17/17
What Does This Mean for Asset
Prices and Returns? J.P. Morgan: They will
fluctuate
Global (and local)rebalancing Asian appreciation
Implies domestic exportand import-competingboom
U.S. housing sectordeclines
With consequences forfinancial institutions
Equities as a whole seemnot unfairly valued
