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Principles of Economics Macroeconomics Financial Paralysis

This book delves into the principles of macroeconomics, focusing on financial paralysis in the context of Wall Street and Main Street. Explore topics like safe assets, reducing risk premia, housing market dynamics, and implications of regulatory frameworks. Learn about the challenges in restoring consumption levels and addressing overleverage to prevent future financial crises.

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Principles of Economics Macroeconomics Financial Paralysis

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  1. Principles of EconomicsMacroeconomicsFinancial Paralysis J. Bradford DeLong U.C. Berkeley

  2. Wall Street and Main Street • Wall Street: finance and safe assets… • Reducing risk premia… • Getting banks and others to spend their cash… • Preventing the overleverage that would lead to the next financial crisis… • Main Street: housing… • Restoring consumption to normal levels… • Providing a proper regulatory framework…

  3. Safe Assets • From Credit Suisse • The disappearance of $12 trillion of assets where “credit risk” had not been a concern • And the investors are desperate to replace those assets…

  4. Wall Street • Dodd-Frank • How will it work? • The Bagehot Rule • Lend freely… • At a penalty rate… • Rule broken in 2008-9 • Is there still a lender of last resort there?

  5. It’s Not Fixed… • We are still substantially in excess of what we used to think of as normal… • No plans for further reform… • Great worry about whether Dodd-Frank resolution procedures will in fact work…

  6. The Housing Market: Residential Investment as a Share of Potential GDP

  7. Housing • Housing as a share of GDP rises over time • Especially as the country becomes more congested… • Approximately $1T of excess houses built—that’s 1.3 million or so—during the boom… • Approximately $4T of houses missing—that’s 5.2 million or so—since… • What are the 3.9 million households doing?

  8. Housing Finance • How housing finance used to work: the GSEs… • For a bank, financing a mortgage is a thirty-year investment… • But the government has declared that it is going to change the regulatory framework… • How new mortgages are made will affect how old mortgages are priced…

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