Introduction to the Financial Crisis-cum-Great Recession

2 The Great Recession The Issues Housing Bubble –Contribution of bad policy / incentives Impulse vs. Propagation Mechanism –Role of “savings glut” –Role of monetary policy –Role of housing crisis –Role of financial crisis Weak Recovery –Role of policy mistakes / uncertainty –Role of financial crisis

3 Contributing Factors to Housing Bubble / Financial Crisis Greed (?????) Policies Promoting Home Ownership –1997 change in capital gains exclusion –Pressure on Fannie /Freddie Weak Capital Regulation –Basel risk weights –2002 change in weights for AAA/AA securities Savings Glut / Institutional Cash Pools Bad Monetary Policy Shadow Banking System –Financial innovation –Credit ratings –Loss of charter value Bad Regulation

4 Housing Bubble

5 Monetary Policy

6 Monetary Policy (II)

7 Economic Prospects The outlook is for continued slow growth. Economists are divided on the reason, but fairly united on the outlook. Reasons for Slow Growth  Recoveries from recessions accompanied by financial crises tend to be anemic.  President Obama’s economic policies have damaged growth prospects.  Bad policies have reduced growth.  Policy uncertainty has reduced growth.

8 Typical Recovery

9 Current Recovery

10 Banks not ready to lend, either… Particularly after a financial crisis!

11 Labor Market Still in Shambles

12 Investment has yet to recover!

13 Housing Market is Still a Wreck!