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Stimulus or Depression?

Stimulus or Depression?. Steven Kyle Cornell University February 2009. Christmas Spending Plans Year Average Spending Percent Change. American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults. What Will 2009 Look Like?. Still a way to go down in real estate

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Stimulus or Depression?

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  1. Stimulus or Depression? Steven Kyle Cornell University February 2009

  2. Christmas Spending Plans Year Average Spending Percent Change American Research Group Survey Nov10-13; Tel. Interview with 1,100 Adults

  3. What Will 2009 Look Like? • Still a way to go down in real estate • Commercial real estate just starting • House prices still need to fall • Stimulus won’t kick in right away • Only just now signed into law • Further lags after that • Monetary Policy all used up • Consumer Confidence still at rock bottom

  4. Will it Turn Around? • IF we get a big enough stimulus then yes • Eventually, ratios will return to historical levels • See for example • Autos • Household debt

  5. The Gap in Demand • GDP = C + I + G + Net Exports • C is down – People have rediscovered savings • I is down – Why invest if nobody is buying? • NX is down – The rest of the world is in recession also • That leaves only G able to expand

  6. What Kind of Stimulus? • DO • Make it soon • Contribute directly to immediate spending • Extend Unemployment • Aid to state government • Aid to already-in-the-pipeline projects • Try to promote long run growth where possible

  7. How Much? • Historical Context • WW2 is what got us out of the Great Depression – Deficits ranged as high as 25% of GDP – That was likely more than enough but still, it was huge • Chinese just announced stimulus of 20% of GDP • Goldman Sachs estimate of current gap at around 10% of GDP • Too much less dangerous than too little

  8. Pushing on Strings • Don’t think that tax cuts will necessarily be spent • Consumers saved a large part of last May’s stimulus check • What would YOU do with sudden influx of money? • Don’t imagine that incentives to lend = actual lending • Banks don’t want to lend for good reason

  9. About those banks … • Throwing money will work • If we throw enough we WILL make them solvent • Buying toxic assets • The problem is at what price to buy them? • If at market price then problem isn’t solved • If above market price then we should get ownership • But nobody knows the right price because there is no market in these assets

  10. Nationalize the Banks? • Pros • If we are shoveling more money than they are worth then we should get ownership • If we don’t get ownership then we are bailing out stockholders and managers • If we don’t inflict pain on managers why should they avoid doing it again? • Automatic mechanism to recoup bailout money • It has been done successfully before

  11. Nationalize the banks? • Cons • Governments make poor bankers • But are they worse than the geniuses who brought us this mess? • Ohmygod it’s SOCIALISM • But only temporarily – Will sell them back later • Politics very difficult

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