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From a Housing Problem to a Financial Crisis. U.S . Housing Prices since 2000. 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

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from a housing problem to a financial crisis
From a Housing Problem to a Financial Crisis

U.S. Housing Prices since 2000

slide2

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

the use and limits of policy
The Use and Limits of Policy

Yields on 10-Year U.S. Government Treasury, AAA, and BBB Corporate Bonds since 2007

slide5

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

responses no bank left behind lender of last resort spender of last resort
Responses: No Bank Left BehindLender 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

  • Stimulus Package $787 bil.

aka The American Recovery and Reinvestment Act

  • TARP II
      • Stress Tests
slide12

The Interest Rate in Japan since 1990.

Japan has been in a liquidity trap since the mid-1990s.

slide13

Government Spending and Revenues (as percent of GDP), Japan, since 1990.

  • Increasing government spending and decreasing revenues have led to steadily larger deficits.
the slow recovery
The Slow Recovery

The Liquidity Trap and Adjustment Failure

do banking crises affect the natural level of output
Do Banking Crises Affect the Natural Level of Output?

The Evolution of Output after Four Banking Crises