Recession in Advanced Economies: A View from the United States Jeffrey Frankel Harpel Professor of Capital Formation and Growth. The Bellagio Group Toronto, January 30, 2009. The return of Keynes. Most economists still shy away from using the name. But Keynesian truths abound today:
The Bellagio Group
Toronto, January 30, 2009
Initial reaction to troubles:
Reassurance in mid-2--7: “The subprime mortgage crisis is contained.” It wasn’t.
Then, “The crisis may stay on Wall Street, sparing Main Street.” It didn’t.
Then de-coupling : “The US turmoil will have less effect on the rest of the world than in the past.” It hasn’t.
By now it is clear that the crisis-turned-recession is as bad abroad as in the US.
In December 2008, the NBER Business
Cycle Dating Committee proclaimed the
US peak had occurred December 2007.
Recovery unlikely before late 2009.
Housing starts at record lows.
Confidence at record lows…
=> Recession is longest since 1930s.
Could well be as severe as 1980-82.
US employment peaked in Dec. 2007,which is the most important reason why the NBER BCDC dated the peak from that month.
Since then, 2 ½ million jobs have been lost.
Payroll employment series Source: Bureau of Labor Statistics
It confirms:US recession turned severe in September,
when the worst of the financial crisis hit (Lehman bankruptcy…)
Contagion: Falling securities markets & contracting credit.
Especially in those countries with weak fundamentals: Iceland, Hungary & Ukraine…
But even in some where fundamentals were relatively strong: Korea…
Some others are experiencing their own housing crashes: Ireland, Spain…
Recession in big countries will be transmitted to all trading partners through loss of exports.
Housing bubble burst economy
Source: OECD Economic Outlook
World 4.0 3.7 2.5 0.9 3.0
Memo item:World (PPP wts)5.0 4.9 3.6 1.9 3.9
High-income countries3.0 2.6 1.3 0.1 2.0
2006 2007 2008* 2009† 2010†
Developing countries 7.7 7.9 6.3 4.5 6.1
(% change from previous year)
Unemployment is rising flat in 2009.
Monetary easing unprecedented, appropriately. But it has largely run its course:
Policy interest rates ≈ 0. (graph)
The famous liquidity trip is not mythical after all.
As Krugman & others warned us in re Japan in 90s.
& lending, even inter-bank, builds in big spreads
since mid-2007, not just since September 2008. (graph)
Now quantitative easing, as the Fed continues to purchase assets not previously dreamt of.
Policy rates have been cut most of the way to zero. flat in 2009.
OECD Economic Outlook
Likely Obama policy of “financial repair”: flat in 2009.
Infusion of funds will be more conditional,
Vs. Bush Administration’s no-strings-attached.
Some money goes to reduce foreclosures.
I’d consider imposing on banks that want help:
(1) no-dividends rule,
(2) more serious curbs on executive pay, &
(3) no takeovers, unless at request of authorities
The TARP keeps evolving
then to buy toxic loans,
then to recapitalize banks,
then auto bailout,
Now up in the air:
insure banks’ toxic assets rather than acquire them?
create “bad bank” as in “Swedish model”?
outright nationalization not yet under consideration in US.
Unprecedented US fiscal expansion, most of which is still to come.
Obama proposed an $825 expansion
House passed a version. Senate will soon.
Good old-fashioned Keynesian stimulus
Even the belief that spending provides more stimulus than tax cuts has returned
not just from Larry Summers, for example,
but also from Martin Feldstein.
American Recovery & Reinvestment Plan includes:
(as % of GWP; source: IMF)
3/ as % of GDP
Source: OECD Economic Outlook, Nov. 2008.
EU agreed 1.5% GDP expansion in Dec.
Most other countries as well
Is the most obvious candidate for fiscal expansion.
What PRC has announced is less than it sounded.
Fiscal expansion & development of health care, pensions, etc., would be a more productive topic for international discussion than RMB “manipulation”.
As in the classic Locomotive Theory