1. The Financial and Economic Crisis Lecture Two: How the crisis affected the US and world economies Mike Kennedy

2. The epicentre of the storm, the US economy

3. What happened in some individual OECD economies…

4. … and in the euro area

5. Risk aversion spiked during the crisis

6. Credit conditions were affected by the spike in risk…

7. … as was the outlook for activity

8. A driving factor were house prices (nominal) which fell (almost) everywhere

9. One offshoot of the housing boom: the US economy (and others) became unbalanced, with the share of construction rising in importance

10. But this wasn’t just a US phenomenon – Spain, Greece and Ireland stand out as seeing a rise in the importance of housing in their economies

11. Another look at housing investment in the OECD

12. Based on past experience, a decline in house prices would have negative effects A house price downturn, when it occurs, or even just a stabilization of prices, could: – affect consumption through reduced housing equity withdrawal and effects on perceived wealth, – be exacerbated by ratios of household debt to income which are at historical highs in several countries. The historical record suggests that in the case of a major housing downturn, spill-over effects may be large, with consumption and GDP growth on average falling from around 4% prior to a housing peak to practically nil after it. As well, with low inflation, a correction in “real” house prices would be long and slow.

13. A look at housing investment

14. Business confidence plunged …

15. … and non-residential investment also declined but nowhere to the extent of residential structures

16. Real consumption also fell but not like housing

17. The outlook for family incomes played a role in the US

18. Household balance sheets were weakened…

19. … in part by a fall in housing wealth

20. World trade collapsed…

21. … with both exports and imports hit hard

24. Intentions to hire driven by the outlook for sales

27. Unemployment rates rose virtually everywhere…

28. … but especially in the euro area

29. Not much of the problem was structural …

30. … except in certain parts of the euro area and only later

31. Cyclical unemployment rose during the recession in non-euro area economies

32. Cyclical unemployment also rose in the euro area but after the recession!

33. Did unusually high house prices foreshadow sharp drops in those prices? Not that well this time

34. Did the high real house prices foreshadow the depth of the recessions? Not really. We need to look elsewhere for that – to a banking system that was being transformed

35. Mortgages became an increasing share of total bank loans in the US …

36. … with subprime mortgages growing in importance…

37. … but mortgage delinquency rates were low up until 2007

39. Euro debt markets were affected

40. Credit restraint also affected euro area government bond rates but uncertainty was likely more important

41. Euro area is still in crisis

42. Was being a member of the euro a problem: Swedish (red line) and Finnish (blue) long-term interest rates

43. Emerging markets get hit through the financial channel

44. Key emerging market GDPs were affected, with some seeing large negative growth

45. A typical economic time series

46. Some scary stuff: An error correction mechanism