Jeffrey Frankel Harpel Professor of Capital Formation & Growth It May Be Slow, But at Least Its An Economic Recovery The trough of the 2007-09 recession Root causes of the crisis Policy response:
Wells, Ron, Contributing Editor has reference to this Academic Journal, PHwiki organized this Journal Jeffrey Frankel Harpel Professor of Capital Formation & Growth It May Be Slow, But at Least Its An Economic Recovery Senior Executive Fellows October 25, 2010 The trough of the 2007-09 recession Root causes of the crisis Policy response: How did we avoid a Great Depression Intellectual implications Appendix US budget deficits Topics June 2009 (II)
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Source: Jeff Frankels blog, Nov. 2009 But the usual cyclical pattern of recovery began in 2009, Q II: 1. Leading indicators come first. 2. Output indicators come next. 3. Labor market indicators come last. The economic roller coaster went into free-fall in the 3rd quarter of 2008. In September 2010, the NBER Business Cycle Committee announced that the trough of the recession came in June 2009 which marked the end of the longest & most severe recession since the 1930s. As usual, we were attacked both as long as not having declared the obvious trough earlier, based on the rule of 2 consecutive quarters of positive growth, in addition to also as long as not waiting until the economy was better which showed we were out of touch with reality. Much of the confusion can be easily explained by a few points: The definition of recession is declining economic activity, not a low level. The definition of recovery is rising economic recovery, not a high level. GDP & other economic statistics tend to point in different directions, have measurement error, in addition to be revised. We cant declare the end of a recession until we are reasonably sure that a hypothetical new downturn (double dip) would count as a separate new recession.
National output gives a pretty clear answer though GDP & Gross Domestic Income look slightly different. Peak Trough Some other indicators such as industrial production so similar dating Peak Trough Peak Trough The labor market lags behind, as usual
In the labor market, hours responds first. Firms delay hiring until they are confident of the need. Peak Trough OECD Econ.Outlook, April 2010 The banking sector normalized in Q3 2009. Start of US sub-prime mortgage crisis Lehman failure Interbank lending spreads are the best measure of the extraordinary financial crisis that led to global recession OECD Economic Outlook, April 2010 Danger of a double-dip Dem in addition to growth in the 1st year of recovery came in large part from: fiscal stimulus, & ending of firms inventory disinvestment. Both sources of dem in addition to have run down in 2010 The withdrawal of fiscal stimulus is now slowing growth. There could always be new shocks: Sovereign debt contagion, spreading from Greece Hard l in addition to ing as long as the $ Geopolitical/oil shock I put the odds of a double dip recession as rather small, but big enough to have persuaded the NBER to wait until September.
Soon we must return toward fiscal discipline. The only way to do this is both reduce spending & raise tax revenue, as we did in the 1990s. Tax revenue Let President Bushs tax cuts expire as long as the rich in 2011. Introduce a VAT or phase in auctioning of tradable emission permits Curtail expensive in addition to distorting tax expenditures E.g., Tax-deductibility of mortgage interest All politically very difficult, needless to say. Any solution requires: Honest budgeting (e.g., Iraq war on-budget, etc ) PAYGO Wise up to politicians who claim they want to do it entirely on the spending side & but who raise spending when they get the chance. Spending Cuts in farm subsidies as long as agribusiness & farmers, incl. ethanol Cut unwanted weapons systems (a rare success: the F22 fighter) Cut manned space program Social security Raise retirement age just a little Progressively index future benefit growth to inflation If necessary, raise the cap on social security taxes. Health care Encourage hospitals to st in addition to ardize around best-practice medicine to pursue the checklist that minimizes patient infections, avoid unnecessary medical tests & procedures, & st in addition to ardize around best-practice treatment. Lever: making Medicare payments conditional on these best practices . Curtail corporate tax-deductibility of health insurance, especially gold-plated. When will US adopt the tough measures to get back to fiscal sustainability Ideally, we would now adopt measures that would begin to go into effect in 2011-12 in addition to over the coming decades repeating the 1990s success. That is unlikely politically, due to partisan gridlock. Hopefully, then, after the 2012 presidential elections. Otherwise, in response to future crises, when it will be much more painful !
When will the day of reckoning come It didnt come in 2008: The financial crisis caused a flight to quality which evidently still means a flight to US $. Chinese warnings in 2009 may have augured a turning point: Premier Wen worried US T bills will lose value. He urged the US to keep its deficit at an appropriate size to ensure the basic stability of the $ . PBoC Gov. Zhou proposed replacing $ as international currency, with the SDR. More on the crisis of 2007-2009 Six root causes of the financial crisis Policy response: How did we avoid a Great Depression Intellectual implications 1. Six root causes of the financial crisis 1. US corporate governance falls short E.g., rating agencies; executive compensation options; golden parachutes 2. US households save too little, borrow too much. 3. Politicians slant excessively toward homeowner debt Tax-deductible mortgage interest; FannieMae & Freddie Mac; Allowing teasers, NINJA loans, liar loans MSN Money & Forbes
Six root causes of financial crisis, cont. 4. The federal budget has been on a reckless path since 2001, reminiscent of 1981-1990 5. Monetary policy was too loose during 2004-05, accommodating fiscal expansion, reminiscent of the Vietnam era. 6. Financial market participants grossly underpriced risk 2005-07. Ignoring possible shocks such as: housing crash, $ crash, oil prices, geopolitics . US real interest rate < 0, 2003-04 Real interest rates <0 Source: Benn Steil, CFR, March 2009 In 2003-07, market-perceived volatility, as measured by options (VIX), plummeted. So did spreads on US junk & emerging market bonds. In 2008, it all reversed. Source: The EMBI in the Global Village, Javier Gomez May 18, 2008 juanpablofern in addition to ez.wordpress.com/2008/05/ Recession 2008-09 Oil price spike 2007-08 Gulf insta-bility Foreign debt Origins of the financial/economic crises Excessive complexity CDSs MBSs CDOs Predatory lending Homeownership bias They did. Indices peaked in late 2006, in addition to fell 1/3. The black swan: investors thought housing prices could never go down. Financial meltdown: bank spreads rose sharply when sub-prime mortgage crisis hit (Aug. 2007) in addition to up again when Lehman crisis hit (Sept. 2008). Source: OECD Economic Outlook (Nov. 2008).
Monthly GDP Peak Trough National income has been more reliable than GDP, even though they are supposed to measure the same thing. Recession of July 1990 March 91 Recession of Mar. 2001 Nov. 2001 Recession of Dec. 2007 June 09 2. Policy Response – How did we avoid another Great Depression We learned important lessons from the 1930s in addition to , as long as the most part, didnt repeat the mistakes we made then.
We learnt from the mistakes of the 1930s. Monetary response: good this time Fiscal response: relatively good, but : constrained by inherited debt in addition to congressional politics. Trade policy: Some slippage, e.g., Chinese tires. But we did not repeat 1981 auto quotas or 2001 steel tariffs let alone Smoot-Hawley ! Financial regulation U.S. Policy Responses Monetary easing was unprecedented, appropriately avoiding the mistake of 1930s. (graph) Policy interest rates 0. The liquidity trip is not mythical after all. Then we had aggressive quantitative easing: the Fed purchased assets not previously dreamt of. The Fed certainly did not repeated the mistake of 1930s: letting the money supply fall. Source: IMF, WEO, April 2009 Box 3.1 1930s 2008-09
U.S. fiscal policy in 2010-2011, continued But spending boosts dem in addition to more than tax cuts do, because the latter are partly saved. Extend elements of the Obama stimulus such as infrastructure investment in addition to giving money to the states so that they dont have to lay off teachers, policemen, firemen, subway drivers & construction workers. U.S. fiscal policy in 2010-2011, continued How does one take steps today to lock in future fiscal consolidation Not by raising taxes or cutting spending today (see above); nor by promising to do so in a year or two (not credible). There are lots of economically sensible proposals as long as spending to eliminate, more efficient taxes to switch to, in addition to tax expenditures to cut. U.S. fiscal policy in 2010-2011, continued One big re as long as m might work best: pass legislation today to put Social Security on a sound financial footing in the long term. It would consist of a combination of raising the retirement age just a little (in proportion to lengthening life spans) in addition to slowing the growth of benefits as long as future retirees just a little (perhaps by progressive indexation). If Washington could fix Social Security, it would address the long-term fiscal outlook, yet would create no drag as long as the current fragile recovery.
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