1. 1 The Story of the Recession Prof. Henry Chappell University of South Carolina

2. 2 Introduction Motivation! What happened? What caused the recession? Were government policies appropriate? Why is the recovery slow?

3. House Prices, 2000 - 2011 3

4. Housing Starts 4

5. Real Residential Investment, 1994 - 2010 5

6. Real GDP, 1970 - 2011 6

7. Real Fixed Investment 7

8. Real Consumer Durables 8

9. Real Personal Consumption, 1994-2011 9

10. Employment/Population 10

11. Core CPI Inflation 11

12. Productivity 12

13. AD and AS 13

14. 14 What Causes Fluctuations? Shocks to: Spending and Taxes Money Wealth/Expectations/Animal spirits Technology/Productivity

15. 15 Housing and Financial Markets Institutions and History “Old-fashioned mortgages” Specialization Securitization Slicing and dicing: CDOs Leverage and the Shadow Banking System Boom and Bust

16. 16 Panic! What Happened and When? 2006 Home prices peak 2007 Losses related to subprime mortgages UBS, Bear-Stearns, BNP Paribas, Countrywide, Northern Rock 2008 Premonitions: Bear-Stearns bailout Emergency loans to Fannie and Freddie 2008 September Panic Fannie, Freddie, Lehman, AIG, WaMu, Wachovia Fed intervenes under Article 13.3, then TARP Stock Market Collapse

17. 17 Market Failures How housing and financial markets went wrong Principle-agent problems Moral hazard problems Mortgage market actors Banking panics/bank runs Leverage as an amplifier Asymmetric information Bigger moral hazard problems Financial institutions and government

18. Why Now? What was special about the period leading up to the panic? Easy money Global savings glut Government support for housing Lax regulation Self-reinforcing expectations Unfortunate coincidence? 18

19. Policy Responses Multiple governmental responses Conventional monetary and fiscal policy responses Special lending/purchase programs and bailouts Quantitative easing Regulatory reform Have policies worked? What about the government debt? 19

20. Why is the Recovery so Slow? Recovery is slow because: Balance sheet repair Overhang in housing and consumer durables Damage to the functioning of intermediation Zero lower bound on nominal interest rates 20

21. 21 The End