sunday, september 06, 2015sunday, september 06, 2015sunday, september 06, 2015sunday, september 06,...
TRANSCRIPT
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Wednesday, April 19, 2023Wednesday, April 19, 2023 11
Understanding the Financial CrisisUnderstanding the Financial Crisis Presentation toPresentation to
Students & Friends of Rensselaer HartfordStudents & Friends of Rensselaer HartfordHartford, CTHartford, CT
James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology
Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA
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Outline of TalkOutline of Talk
1.1. Keynes on Credit Cycles: Keynes on Credit Cycles: - Why we need Regulation- Why we need Regulation
2.2. Where is the Bottom?Where is the Bottom?
3.3. Connecticut is “Middle of the Pack”Connecticut is “Middle of the Pack”
4.4. Government Deficit SpendingGovernment Deficit Spendinga.a. Needed in the Short-termNeeded in the Short-term
b.b. But a Big Problem Long-termBut a Big Problem Long-term
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(1) Biz & Credit Cycles (1) Biz & Credit Cycles J. M. Keynes: 1883-1946J. M. Keynes: 1883-1946
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US Macro-Stability: US Macro-Stability: Better, Room for Improvement Better, Room for Improvement
Source: http://www.nber.org/cycles.html
45% 55%
66%34%
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Bad News: Bubbles are Bad News: Bubbles are EndemicEndemic
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Arlington Williams, “Price Bubbles”www.indiana.edu/~arlwilli/pdf%20files/bigmkts.pdf
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Good News: People Do LearnGood News: People Do Learn
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V. Smith & A. Williams, “Experimental Market Economics,” Scientific American, Dec. ‘92
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Price/10 Year Avg. EarningsPrice/10 Year Avg. Earnings
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Source: http://www.econ.yale.edu/~shiller/data.htm
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The Wisdom of KeynesThe Wisdom of Keynes
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““A sound banker, alas, is not one A sound banker, alas, is not one who foresees danger and avoids who foresees danger and avoids
it, but one who, when he is ruined, it, but one who, when he is ruined, isis ruined in a conventional way,ruined in a conventional way, along with his fellows,along with his fellows, so that no so that no one can really blame him.” one can really blame him.”
- J.M. Keynes (1931)- J.M. Keynes (1931)
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“Paradox of Thrift” Keynes noted:
Consumers cut back on their spending and save more during a recession. This only makes the recession worse.
Similarly for Banks, Loan Loss Reserves (LLR) are often raised in a recession, just when households and businesses most need credit –ensuring more collapses and worsening the recession.
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Insurance => Moral Hazard =>Insurance => Moral Hazard =>Necessity of Necessity of RegulationRegulation
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Moral HazardMoral Hazard of Insurance: of Insurance:
If you had a car that is less damaged If you had a car that is less damaged by any given car crash – would that by any given car crash – would that make you drive make you drive fasterfaster??
If you (and everybody else) drove If you (and everybody else) drove faster, could this actually wind up faster, could this actually wind up making you making you less safeless safe ? ?
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www.nytimes.com/2008/10/03/business/03sec.html www.economist.com/finance/displaystory.cfm?story_id=12480887
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Availability of Bank LoansAvailability of Bank Loans
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Currency & Reserves Up Currency & Reserves Up 4x4x
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/BASE
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But Bank Reserves up But Bank Reserves up 100x100x
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/WRESBAL
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M0 = Currency + Bank M0 = Currency + Bank ReservesReserves ≈ $2.6t ≈ $2.6t
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/BASE
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M1 ≈ $2.4t = Currency + Bank M1 ≈ $2.4t = Currency + Bank DepositsDeposits
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Oct. 17, 20112
http://research.stlouisfed.org/fred2/series/M1
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Money Mult. = M1/M0 ≈ 2.4Money Mult. = M1/M0 ≈ 2.4//2.6 = 0.92 2.6 = 0.92
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/MULT
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Bank Money MultiplierBank Money MultiplierIf If ll = % loans, Reserve multiplier is= % loans, Reserve multiplier is
D = R(1+D = R(1+ l + l l + l 22++… … + l + l ∞∞ ) )== R/(1- R/(1-
l l ))
If M0 = If M0 = Currency (C) Currency (C) + Reserves (R),+ Reserves (R),
M1=M1=CurrencyCurrency + + DepositsDeposits, so:, so:
M1 = M1 = C C + + R/(1- R/(1- l l ) ) = = M0–RM0–R+ + R/(1- R/(1- l l ))
M1/M0 = 1+{M1/M0 = 1+{-R -R + + R/(1- R/(1- l l )}/M0)}/M0
So So M1/M0 < 1 M1/M0 < 1 => => l l < 0 < 0 Wednesday, April 19, 2023Wednesday, April 19, 2023 1818
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Wednesday, April 19, 2023Wednesday, April 19, 2023 1919New Yorker, Oct. 2008
Limits of Fed MagicLimits of Fed Magic
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The Zero BoundThe Zero Bound
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/TB3MS
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The Zero Bound (2)The Zero Bound (2)
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/FEDFUNDS
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The Zero Bound (3)The Zero Bound (3)T.I.P.S.T.I.P.S.
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Quantity of Money EquationQuantity of Money Equation
M*V M*V ≡ ≡ P*YP*Y
MMoney * oney * VVelocity elocity ≡ ≡ PPrice * rice * OOutput =>utput =>
ln(M) + ln(V) = ln(P) + ln(Y) =>ln(M) + ln(V) = ln(P) + ln(Y) =>
i.e., i.e., %%∆∆M + M + %∆%∆V = V = %%∆∆P + P + %%∆∆Y over Y over timetime
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%∆ Money Turnover [ %∆ Money Turnover [ = %∆ (= %∆ (MMoney x oney x VVelocity) elocity) ] ] is Too is Too ProPro-Cyclical because of -Cyclical because of VelocityVelocity
% ∆ (M x V)
% ∆ V
% ∆M
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FISCAL Expansion: Investment Demand = Savings
interest rate FISCAL Expansion:
Money Demand = Supply
GDP
Keynes’s Liquidity Trap: Keynes’s Liquidity Trap:
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Investment Demand = Savings
interest rate
Money Demand = Supply
GDP
FISCAL Expansion: Investment Demand = Savings
interest rate MONETARY Expansion:
Money Demand = Supply
GDP
Keynes’s Liquidity Trap: Keynes’s Liquidity Trap:
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FISCAL Expansion: Investment Demand = Savings
interest rate FISCAL Expansion:
Money Demand = Supply
GDP
Keynes’s Liquidity Trap: Keynes’s Liquidity Trap:
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FISCAL Expansion: Investment Demand = Savings
interest rate FISCAL Expansion:
Money Demand = Supply
GDP
Keynes’s Liquidity Trap: Keynes’s Liquidity Trap:
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Keynesian Multiplier: EvidenceKeynesian Multiplier: Evidence
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Source: IMF World Economic Outlook and IMF Fiscal Monitor, Oct. 2012
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Another Illustration: Multiplier > 1Another Illustration: Multiplier > 1
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NY Times, Oct. 23, 2012
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Okun’s Law (1): Unemployment GapOkun’s Law (1): Unemployment Gap
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Oct. 24, 2012
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Okun’s Law (2):Okun’s Law (2): Output GapOutput Gap
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Oct. 24, 2012
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Okun’s Law (3)Okun’s Law (3)
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Okun’s Law (4)Okun’s Law (4)
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Oct. 17, 2012
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Output Gap ≈ 20% GDPOutput Gap ≈ 20% GDP http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-
Outlook_Testimony.pdfOutlook_Testimony.pdf
A little Stimulus Math:A little Stimulus Math:
20% * $14 tr. = $2.8 tr.20% * $14 tr. = $2.8 tr.
Stim*1.5 = $2.8 => Stim*1.5 = $2.8 => Stim = $1.87 tr.Stim = $1.87 tr.
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(2) Bottom Still a Ways Off(2) Bottom Still a Ways Off Okun’s Law, and Slow RecoveryOkun’s Law, and Slow Recovery Housing RecoveryHousing Recovery probably still a year probably still a year
away.away. Credit Markets Credit Markets still very weak.still very weak. Stock Market Valuation Ratios Stock Market Valuation Ratios like P/E like P/E
and Tobin’s Q are now only at and Tobin’s Q are now only at historical historical averagesaverages..
UnemploymentUnemployment Trend Trend: : http://cr4re.com/charts/charts.htmlhttp://cr4re.com/charts/charts.html
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HousingHousing BottomBottom – A Long– A Long WayWay OffOff
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http://www.nytimes.com/imagepages/2008/10/16/business/16housing.graphix.ready.html
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Why it Matters to EveryoneWhy it Matters to Everyone
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Worst Long-Term UnemploymentWorst Long-Term Unemployment
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Oct. 17, 2012
http://research.stlouisfed.org/fred2/series/UEMPMEAN
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Long Unemployment DipLong Unemployment Dip
Wednesday, April 19, 2023Wednesday, April 19, 2023 4040http://cr4re.com/charts/charts.html
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(3) CT & NY in “Middle of Pack”(3) CT & NY in “Middle of Pack”
Financial Sector down, but ..Financial Sector down, but .. Conventional Banking and Insurance Conventional Banking and Insurance
less vulnerable than Investment less vulnerable than Investment Banks, Financial InsuranceBanks, Financial Insurance
Defense industries well insulatedDefense industries well insulated Pharmaceuticals and Biotech have Pharmaceuticals and Biotech have
good long-term prospectsgood long-term prospects House Price Increases near US Avg.House Price Increases near US Avg.Wednesday, April 19, 2023Wednesday, April 19, 2023 4141
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International Housing PricesInternational Housing Prices
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Sun Belt, Rust Belt ConcentrationSun Belt, Rust Belt Concentration
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2006 Peak of Price-to-Rent2006 Peak of Price-to-Rent
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Wednesday, April 19, 2023Wednesday, April 19, 2023 4545Source: NY Times, April 20, 2010
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(4) More Federal Deficit Spending (4) More Federal Deficit Spending (not Tax Cuts) Necessary(not Tax Cuts) Necessary
Tax cuts to the rich more likely to be Tax cuts to the rich more likely to be saved, not spent or invested.saved, not spent or invested.
Tax cuts don’t have big effect on Tax cuts don’t have big effect on those too poor to pay many taxes.those too poor to pay many taxes.
Unmet needs in Energy, Environment, Unmet needs in Energy, Environment, Health, and Education: good reasons Health, and Education: good reasons to spend.to spend.
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Government Must Government Must Increase Increase SpendingSpending in Severe Recession in Severe Recession
“ “ If the Treasury were to If the Treasury were to fill old bottles with fill old bottles with banknotesbanknotes, bury them at suitable depths in , bury them at suitable depths in disused coal mines …disused coal mines …
It would, indeed, be It would, indeed, be more sensible to build more sensible to build
houses houses and the like; but if there are and the like; but if there are political and practical difficulties in the political and practical difficulties in the way of this, the above would be better way of this, the above would be better than nothing.” than nothing.” (Keynes, (Keynes, General TheoryGeneral Theory, 1937), 1937)
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But We Need But We Need Foreign Coordination Foreign Coordination for US Expansion to be Successfulfor US Expansion to be Successful
Benefits of lone expansion “leak Benefits of lone expansion “leak out,” other countries free ride.out,” other countries free ride.
Alternatives to joint expansion are Alternatives to joint expansion are protectionism and competitive protectionism and competitive devaluations.devaluations.
US long-term “Fiscal Gap” makes US long-term “Fiscal Gap” makes lone expansion untenable. lone expansion untenable.
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Long Term Fiscal Gap: Long Term Fiscal Gap: UnsustainableUnsustainable
http://www.cbo.gov/ftpdocs/93xx/doc9385/06-17-LTBO_Testimony.pdf
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Sure asSure as DebtDebt and Taxes and Taxes
http://www.cbo.gov/ftpdocs/93xx/doc9385/06-17-LTBO_Testimony.pdf
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Implications of Limited Pass-ThroughImplications of Limited Pass-Through
Linda Goldberg (FRBNY) has shown that Linda Goldberg (FRBNY) has shown that
Dollar DevaluationDollar Devaluation means: means:• Improved Earnings on Foreign AssetsImproved Earnings on Foreign Assets• Easier Debt ServicingEasier Debt Servicing• Smaller Trade DeficitSmaller Trade Deficit
And at the same time,And at the same time,
• Minimal Costs in further InflationMinimal Costs in further Inflation
So - What’s Not to Like?So - What’s Not to Like?• FRBNY Governor Frederic Mishkin says FRBNY Governor Frederic Mishkin says
“Devaluation cannot be a policy.” (I think he “Devaluation cannot be a policy.” (I think he means an means an explicitexplicit policy.) policy.)
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The Zero Bound (3)The Zero Bound (3)T.I.P.S.T.I.P.S.
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Inflation/Devaluation Inflation/Devaluation a Powerful Temptation for a Powerful Temptation for
Highly Indebted GovernmentsHighly Indebted Governments
• Germany after WWI• Russia after the Revolution• Soviet Union after the Cold War• Many Developing Countries after spending, investment binges
(See L. Kotlikoff & S. Burns, The Coming Generational Storm, 2004)
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Implications of Limited Pass-ThroughImplications of Limited Pass-Through
Linda Goldberg (FRBNY) has shown that Linda Goldberg (FRBNY) has shown that
Dollar DevaluationDollar Devaluation means: means:• Improved Earnings on Foreign AssetsImproved Earnings on Foreign Assets• Easier Debt ServicingEasier Debt Servicing• Smaller Trade DeficitSmaller Trade Deficit
And at the same time,And at the same time,
• Minimal Costs in further InflationMinimal Costs in further Inflation
So - What’s Not to Like?So - What’s Not to Like?• FRBNY Governor Frederic Mishkin says FRBNY Governor Frederic Mishkin says
“Devaluation cannot be a policy.” (I think he “Devaluation cannot be a policy.” (I think he means an means an explicitexplicit policy.) policy.)
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Inflation/Devaluation Appears Inflation/Devaluation Appears a “Painless” Way Out of Debta “Painless” Way Out of Debt
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Summary of ConclusionsSummary of Conclusions RecessionRecession is is long and deeplong and deep: housing slump, : housing slump,
interbank lending, financial markets likely to interbank lending, financial markets likely to “overshoot” on low side.“overshoot” on low side.
CT, NYCT, NY are “ are “middle of the packmiddle of the pack” for housing ” for housing prices and employment stability.prices and employment stability.
Greatly expanded federal spending Greatly expanded federal spending is is needed in the needed in the short-termshort-term..
Long-termLong-term, however, US government , however, US government debt is debt is unsustainableunsustainable..
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