Jeffrey Frankel Harpel Professor of Capital Formation Growth

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2. The US retreat Forecasts Origins of the monetary emergency Policy reaction: How could we have been able to we stay away from a Great Depression? Scholarly ramifications of the emergency for the field of financial matters Appendices The worldwide economy The issue of worldwide awkward nature The G-20 in 2010. Subjects. 3. The US Recession.

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Monetary Crisis & Recovery Jeffrey Frankel Harpel Professor of Capital Formation & Growth Senior Executive Fellows May 3, 2010

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Topics The US subsidence Forecasts Origins of the money related emergency Policy reaction: How did we keep away from a Great Depression? Scholarly ramifications of the emergency for the field of financial aspects Appendices The worldwide economy The issue of worldwide lopsided characteristics The G-20 in 2010

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The US Recession The US subsidence began in Dec. 2007 as indicated by the NBER Business Cycle Dating Committee. In May 2009, the subsidence's length passed the after war records - 1973-75 & 1981-82 = 16 months One needs to backpedal to 1929-33 for a more extended downturn. Likewise the most serious, by most measures: ascend in unemployment rate, work misfortune, yield misfortune… .

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June 2009 (II) or later > year and a half [not yet declared]

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US business crested in Dec. 2007, which is one motivation behind why the NBER BCDC dated the top from that month. 8 million occupations were lost throughout the following two years. Occupations trough Jobs top Payroll work arrangement Source: Bureau of Labor Statistics, April 2010 Payroll business arrangement Source: Bureau of Labor Statistics

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US work fell completely in extent to GDP, dissimilar to the "work accumulating" example of the past.

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In Germany, by complexity, the retreat has appeared just in GDP, not under any condition in work.

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Source: IMF WEO , April 2010 Until the finish of 2009, the US recuperation relied on upon inventories and did not appear in work. The 2007-09, subsidence was uncommon in the extent of occupation misfortune, and in money related markets' liquidity emergency.

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Most pointers started to enhance in mid or late 2009 Interbank spreads Output Stock market Consumer certainty & spending Even lodging allots have bottomed. The work showcase has been horrendous. Yet, even it has reacted with slacks no more terrible than common.

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OECD Econ.Outlook , April 2010 Evidence that the keeping money part came back to typical by late 2009. Lehman disappointment Start of US sub-prime home loan emergency

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OECD Economic Outlook , April 2010 Evidence that the saving money part came back to ordinary in late 2009.

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Corporate security rates have returned excessively . % Now < loan fees in the (gentle) 2001 subsidence . OECD Economic Outlook , April 2010

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The monetary crazy ride went into free-fall in the 3 rd quarter of 2008. In any case, the standard repetitive example of recuperation started in 2009, Q II: 1. Driving pointers start things out. 2. Yield markers come next . 3. Work showcase pointers come last . Source: Jeff Frankel's blog, Nov. 2009

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Employment Lags Behind GDP Although U.S. work misfortune has been particularly terrible in this retreat, the recuperation fall behind GDP has not been surprising. Retreat of Mar. 2001 – Nov. 2001 Recession of Dec. 2007 – ?

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Total hours worked in the US economy (a marker that does not linger as a long ways behind as unemployment) rotated toward the sky in October 2009 Source: New arrangement from BLS covering the whole private economy. 4/8/2010

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Danger of a W-formed subsidence? Request development in the 2 nd half of 2009 came in extensive part from: monetary boost, & closure of firms' stock disinvestment. Both wellsprings of jolt are running down in 2010. Luckily it would appear that utilization & speculation might burst into flames: Friday's GDP report from BEA (4/30/10). QIII-QI: 2.2% 5.6% 3.2 .% , now drove by utilization. There could simply be new stuns: An Iceland or Dubai or Greece Hard arriving for the $ Geopolitical/oil stun… I now put the chances of a twofold plunge subsidence as rather little, however sufficiently enormous to have induced the NBER BCDC in our April 8 meeting to hold up longer before announcing the 2009 trough.

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Four driving private estimates of development in 2010 Source: Michael Mussa, Global Economic Prospects for 2010 and 2011 , PIIE, April 8, 2010.

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International Monetary Fund | April 14, 2010 Table 1.1. World Economic Outlook (%) Year over Year Q4 over Q4 (2010-2011 are projections) 2008 2009 2010 2011 2009 2010 2011 World Output 3.0 –0.6 4.2 4.3 1.7 3.9 4.5 Advanced Economies 0.5 –3.2 2.3 2.4 –0.5 2.2 2.5 Japan –1.2 –5.2 1.9 2.0 –1.4 1.6 2.3 United States 0.4 –2.4 3.1 2.6 0.1 2.8 2.4 Euro Area 0.6 –4.1 1.0 1.5 –2.2 1.2 1.8 Newly Industrialized Asian Economies 1.8 –0.9 5.2 4.9 6.1 3.4 5.9

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Year over Year Q4 over Q4 (2010-2011 are projections) 2008 2009 2010 2011 2009 2010 2011 Emerging & Devel- 6.1 2.4 6.3 6.5 5.2 6.3 7.3 oping Economies Central & E.Europe 3.0 –3.7 2.8 3.4 1.9 1.3 4.1 Russia 5.6 –7.9 4.0 3.3 –3.8 1.7 4.2 Developing Asia 7.9 6.6 8.7 8.6 8.9 9.1 China 9.6 8.7 10.0 9.9 10.7 9.4 10.1 India 7.3 5.7 8.8 8.4 6.0 10.9 8.2 ASEAN-5 4.7 1.7 5.4 5.6 5.0 4.2 6.2 Middle East & N.Africa 5.1 2.4 4.5 4.8 . . . . . . . . . Sub-Saharan Africa 5.5 2.1 4.7 5.9 . . . . . . . . . Western Hemisphere 4.3 –1.8 4.0 . . . . . . . . . Brazil 5.1 –0.2 5.5 4.1 4.3 4.2 Mexico 1.5 –6.5 4.2 4.5 �??�2.4 2.3 5.5

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Soon we should return toward monetary teach. The best way to do this is both diminish spending & raise impose income, as we did in the 1990s. Assess income Let President Bush's tax breaks for the rich terminate in 2011. Stage in carbon assess or unloading tradable emanation allows Or present a Value Added Tax Curtail costly and misshaping charge consumptions E.g., Tax-deductibility of home loan intrigue All politically extremely troublesome, obviously. Any arrangement requires: Honest planning (i.e., war in Iraq goes on-spending plan) PAYGO Wise up to government officials who guarantee they need to do it completely on the spending side & yet who raise spending when they find the opportunity.

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Spending Cuts in ranch appropriations for agribusiness & agriculturists Cut undesirable weapons frameworks (an uncommon achievement: the F22 warrior) Cut kept an eye on space program… Social security Raise retirement age – only a little Progressively file future advantage development to expansion If vital, raise the top on government disability charges. Human services Encourage healing centers to institutionalize around best-rehearse prescription to seek after the agenda that limits quiet diseases and to keep away from superfluous restorative tests & strategies. Lever: making Medicare installments contingent on these prescribed procedures . Abridge corporate assessment deductibility of medical coverage, particularly gold-plated.

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When will US receive the intense measures to return to monetary supportability? In a perfect world, we would now receive measures that would start to become effective in 2011-12 and over the coming decades – rehashing the 1990s achievement. That is far-fetched politically, divided gridlock. Ideally, then, after the 2012 presidential races. Something else, in light of future emergencies, when it will be substantially more excruciating !

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More on the emergency of 2007-2009 Six underlying drivers of the money related emergency Policy reaction: How did we stay away from a Great Depression? Suggestions for the field of financial aspects

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Six main drivers of the money related emergency 1. US corporate administration misses the mark E.g., rating offices; official remuneration … alternatives; brilliant parachutes… 2. US families spare close to nothing, get excessively. 3. Government officials incline exorbitantly toward property holder obligation: Tax-deductible home loan premium; F annie M ae & Freddie Mac ; Allowing secrets, no-value, NINJA credits, liar advances… MSN Money & Forbes 24

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Six underlying drivers of monetary emergency, cont. 4. The government spending plan has been on a foolhardy way since 2001, reminiscent of 1981-1990 5. Money related strategy was too free amid 2004-05, obliging financial extension, reminiscent of the Vietnam time. 6. Money related market members terribly underpriced hazard 2005-07. Disregarding conceivable stuns, for example, lodging crash, $ crash, oil costs, geopolitics… . 25

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US genuine financing cost < 0, 2003-04 Source: Benn Steil, CFR, March 2009 Real loan costs <0 26

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Source: "The EMBI in the Global Village," Javier Gomez May 18, 2008 2003-07, advertise saw unpredictability, as measured by alternatives (VIX), plunged. So did spreads on US garbage & developing business sector bonds. In 2008, everything switched. 27

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Origins of the money related/monetary emergencies Underestimated hazard in budgetary mkts Failures of corporate administration Households sparing too small, obtaining a lot of Federal spending shortfalls Monetary arrangement simple 2004-05 Excessive use in budgetary foundations Housing bubble Low national sparing Stock market bubble Stock market crash Housing accident China's development Financial emergency 2007-08 Lower long haul econ.growth Eventual loss of US dominion Homeownership predisposition Predatory loaning Excessive intricacy MBSs Foreign obligation CDSs CDOs Gulf insta-bility Oil value spike 2007-08 Recession 2008-09 28

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They did. Files topped in late 2006, and fell 1/3. The "dark swan": speculators thought lodging costs would never go down. 29

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Financial emergency: bank spreads climbed forcefully when sub-prime home loan emergency hit (Aug. 2007) and up again when Lehman emergency hit (Sept. 2008). Source: OECD Economic Outlook (Nov. 2008). 30

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My most loved month to month pointer: add up to hours worked in the economy It affirms: US subsidence started Dec. 07, handed extreme over Sept. 08 , when the most exceedingly bad of the money related emergency hit (Lehman chapter 11… ) 31

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National pay has been more dependable than GDP, despite the fact that they should gauge a similar thing . Subsidence of