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From a Housing Problem to a Financial Crisis. U.S . Housing Prices since 2000. The best of times. Capital Inflows. Escalating House Prices. Easy Money Policy. Eager Home Buyers. Ambitious Mortgage Brokers. Developer Clout. Innovative Banks. Rating Agencies. Securitization
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From a Housing Problem to a Financial Crisis U.S. Housing Prices since 2000
The best of times Capital Inflows Escalating House Prices Easy Money Policy Eager Home Buyers Ambitious Mortgage Brokers Developer Clout Innovative Banks Rating Agencies Securitization MBSs Bank Regulators Gov’t Sponsored Enterprises
The Use and Limits of Policy Yields on 10-Year U.S. Government Treasury, AAA, and BBB Corporate Bonds since 2007
The best of times Capital Inflows Escalating House Prices Easy Money Policy Eager Home Buyers Ambitious Mortgage Brokers Developer Clout Innovative Banks Rating Agencies Securitization MBSs Bank Regulators Gov’t Sponsored Enterprises
Responses: No Bank Left BehindLender of Last Resort / Spender of Last Resort • Tax Rebate $124 bil. • Fed Fund Rate Cuts • Fannie/Freddie $200 bil. • Bear-Stearns $29 bil. • AIG $174 bil. Fed “Facilities” • Primary Dealer Credit Facility (PDCF) $58 bil. • Treasury Security Loan Facility (TSLF) $133 bil. • Term Auction Facility (TAF) $416 bil. • Asset- Backed Commercial Paper Funding Facility (CPFF) $1,777 bil. • Money Market Investor Funding Facility (MMIFF) $540 bil. • More Fed Fund Rate Cuts … Hold At ~0% • Fed Purchases of Long-Term Securities: GSEs & MBSs $600 bil. • Term Asset-Backed Securities Loan Facility (TALF) $200 bil. • Emergency Economic Stabilization Act/TARP $700 bil. Government Loans Government Equity • Stimulus Package $787 bil. aka The American Recovery and Reinvestment Act • TARP II • Stress Tests
The Interest Rate in Japan since 1990. Japan has been in a liquidity trap since the mid-1990s.
Government Spending and Revenues (as percent of GDP), Japan, since 1990. • Increasing government spending and decreasing revenues have led to steadily larger deficits.
The Slow Recovery The Liquidity Trap and Adjustment Failure
Do Banking Crises Affect the Natural Level of Output? The Evolution of Output after Four Banking Crises