Easy Money Policy

1. A “Global Saving Glut” 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

2. The Boom Years: High Real GDP Growth  Declining Unemployment 1997 – 2000 2003/4 - 2006 Growth > ~ 2.5 %  Unemployment

3. 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

4. The Downturn: Slowing GDP Growth  Rising Unemployment Growth < ~ 2.5%  Unemployment

5. Financial System Meltdown At home Interventions/ Nationalizations/ Pre-privatizations Bankruptcies • Gov’t Supported Takeovers • Countrywide  BofA • Bear Stearns  JPMorgan Chase • Silver State Bank Nevada State • Merrill Lynch  BofA • Washington Mutual  JPM Chase • Wachovia  Wells Fargo • Security Saving  Bank of Nevada • IndyMac • Fannie Mae/ • Freddie Mac • AIG • New Century Financial • Lehman Brothers • Washington Mutual Inc. Abroad • Northern Rock • Royal Bank of Scotland • Dexia • Glitnir/Kaupthing/ • Landsbanki • HBOS  Lloyds Bank • Fortis  PNB Paribus

6. Flight to SafetyFlight from RiskTorschlusspanik!

7. Baa-AAA Interest Differential The Good News: 1932 was worseThe Bad News: This downturn isn’t over yet

8. Vicious Spirals Unleashed Demand – Jobs – Wages – Income – Spiral House Price – Foreclosure Spiral Deleveraging – Debt Deflation Spiral Government Revenue – Cutback Spiral Global Repercussion Spiral Macroeconomic Linkages and Feedbacks

9. ResponsesLender 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…Capital Injections • Stimulus Package $787 bil. aka The American Recovery and Reinvestment Act • TARP II • Stress Tests

10. Vicious Spirals Reversed? Tackle them all together! Vicious Spirals Unleashed Refinance Mortgages • Stimulus • Program • Infrastructure • Spending • Tax Cuts Demand – Jobs – Wages – Income – Spiral House Price – Foreclosure Spiral Deleveraging – Debt Deflation Spiral • Revive dual banking system • Cash for Trash • Recapitalize banks • Revive securitization Government Revenue – Cutback Spiral Federal Aid To States Global Repercussion Spiral • G – 20 • Coordinated Stimulus Macroeconomic Linkages and Feedbacks Macroeconomic Linkages and Feedbacks

11. The Stimulus Plan: How to Spend $787 bil. • Tax cuts for individuals $232 bil. • Tax cuts for businesses $ 33 bil. • Aid to States $ 181 bil. • Total funds to Nevada $ 1,460 mil. • Education 480 mil • Infrastructure $ 32 bil. • Transportation $ 48 bil. • Science and Research $ 21 bil.

12. This Time Is Different Average Outcomes of a “Typical” Financial Crisis Economic Statistic Average Outcome • Housing prices -35% • Equity price -56% • Unemployment +7 percentage points • Duration of rising unemployment 4.8 years • Real GDP -9.3% • Duration of falling GDP 1.9 years • Increase in real government debt +86% Note: Financial crises are typically quite long and very costly. The Great Depression (1930s), Japan’s Bubble Economy (1990s), Asia Financial Crisis (1997-8) • Source: Carmen Reinhart and Kenneth Rogoff, “The Aftermath of Financial Crises”HarvardUniversity working paper, December 2008

13. FDR: … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. Workers: Fear of job loss. Business:Fear of deflation. Franklin Delano Roosevelt President, 1933 – 1945

14. Onset of the Depression: Persistent Deflation…Persistent Job Loss Manufacturing Employment $/pound DJIA

15. Onset of the Depression: Bank Runs Deflationary Expectations

16. Rembrandt, The Turk Titian, Venus With The Mirror Andrew Mellon Secretary of the Treasury, 1921 – 1932 “…liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system…People will work harder, lead a more moral life.”

17. The Circular Flow: Consequences of Financial System Meltdown

18. FDR Inaugural Address … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance…This Nation is asking for action, and action now. • A “New Deal”—A New Regime • 1932 • Reconstruction Finance Corp, Glass-Steagall (T-bonds back cash) • March/April 1933 • Loosened Fetters • Emergency Banking Act/Gold to Treasury • CCC and Reforestation Relief Act • May 1933 • AAA/Thomas Amendment (President & gold price/ • BoG & reserve requirement), TVA, Federal Securities Act • June 1933 • NIRA, Glass-Steagall FDIC • October-November 1933 • Commodity Credit Corp, Civil Works Administration • January 1934 • Gold Reserve Act : $ Devaluation: $20.67  $35/oz. • June 1934 • SEC, FSLIC • 1935 • WPA, REA, Wagner Act  NLRB • Schechter Poultry – NRA Franklin Delano Roosevelt President, 1933 – 1945

19. $/pound Producer Price Index

20. New Deal Reflation

23. Fiscal and Monetary Stimulus…And Retrenchment

24. Stimulus and Retrenchment: Recession in Depression

26. The Four Freedoms: • Freedom of belief • Freedom of speech • Freedom from want • Freedom from fear