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Principles of Economics Macroeconomics Financial Paralysis

Principles of Economics Macroeconomics Financial Paralysis. J. Bradford DeLong U.C. Berkeley. Wall Street and Main Street. Wall Street: finance and safe assets… Reducing risk premia… Getting banks and others to spend their cash…

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Principles of Economics Macroeconomics Financial Paralysis

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  1. Principles of EconomicsMacroeconomicsFinancial Paralysis J. Bradford DeLong U.C. Berkeley

  2. Wall Street and Main Street • Wall Street: finance and safe assets… • Reducing risk premia… • Getting banks and others to spend their cash… • Preventing the overleverage that would lead to the next financial crisis… • Main Street: housing… • Restoring consumption to normal levels… • Providing a proper regulatory framework…

  3. 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…

  4. Wall Street • Dodd-Frank • How will it work? • The Bagehot Rule • Lend freely… • At a penalty rate… • Rule broken in 2008-9 • Is there still a lender of last resort there?

  5. It’s Not Fixed… • We are still substantially in excess of what we used to think of as normal… • No plans for further reform… • Great worry about whether Dodd-Frank resolution procedures will in fact work…

  6. The Housing Market: Residential Investment as a Share of Potential GDP

  7. Housing • Housing as a share of GDP rises over time • Especially as the country becomes more congested… • Approximately $1T of excess houses built—that’s 1.3 million or so—during the boom… • Approximately $4T of houses missing—that’s 5.2 million or so—since… • What are the 3.9 million households doing?

  8. Housing Finance • How housing finance used to work: the GSEs… • For a bank, financing a mortgage is a thirty-year investment… • But the government has declared that it is going to change the regulatory framework… • How new mortgages are made will affect how old mortgages are priced…

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