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Principles of Economics Macroeconomics Origins of the Lesser Depression

This economic analysis explores the causes and effects of the Lesser Depression, including the collapse of the dot-com bubble, housing price declines, and the financial crisis. It also delves into the policy dilemmas faced by policymakers in managing the crisis and the potential long-term consequences.

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Principles of Economics Macroeconomics Origins of the Lesser Depression

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  1. Principles of EconomicsMacroeconomicsOrigins of the Lesser Depression J. Bradford DeLong U.C. Berkeley

  2. Interest Rates and Spreads, 1995-2002 • The Federal Reserve starts to punch the red button at the end of 2000 • Able to keep Baa real bond rates from rising • Not able to lower them • $4T of fundamental losses in dot-coms

  3. Stock Prices, 1995-2002 • Stock prices fall steeply with the collapse of the dot-com bubble • But widening of interest-rate spreads not large enough to push up Baa borrowing costs • And stock price decline limited to 20%

  4. Interest Rates and Spreads, 2003-2010 • The Federal Reserve starts to punch the red button in August 2007 • Explosion of Baa bond rates in September 2008 • But $500B as opposed to $4T of fundamental losses

  5. Stock Prices, 2003-2010 • Stock prices fall only by 15% until the Fall of 2008 • Then collapse: 50% fall in stock prices • And widening of interest-rate spreads pushes up Baa borrowing costs

  6. The Case-Shiller Housing Price Series • Doubling of nationwide housing prices between 2000 and 2005 • Assumption that there could be substantial regional housing-price declines • But not national housing-price declines • MBS, CDO, AAA • Regulatory arbitrage…

  7. Managing the Financial Crisis • Everybody else (save JPMC and GS) • JPMC and GS • TARP • The Bagehot Rule • Lend freely • At a penalty rate • On collateral good in normal times • Paulson and Geithner • Countrywide • Bear Stearns • Fannie Mae and Freddie Mac • Lehman • AIG • Citigroup • “Liquidity Puts”

  8. Obama’s Post-Election Dilemmas • Monetary? • Banking support? • Financial regulation? • Fiscal? • Long-term? • Entitlements… • Taxes… • Health care… • Climate change… • Inequality… • Mobility…

  9. 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…

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