The Great Depression of 2008?

Transcription

1 The Great Depression of 2008? Gerald P. Dwyer Federal Reserve Bank of Atlanta University of Carlos III, Madrid

2 Who Is Speaking? These views are mine and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System.

3 Questions Are we in a depression? Are we at the beginning of a depression? Is something like the Great Depression likely to happen?

4 A Lot of Overwrought Discussion Associated Press report Retail sales fell off a cliff in September plunging by the largest amount in three years How much? 1.2 percent

5 Not only reporters Joseph Stiglitz, a Nobel Prize winning economist, this Summer said the economy was in the worst recession since the Great Depression The Great Depression Hoax, Wall Street Journal, Todd G. Buchholz,

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7 Stock Exchange Indexes January 2, 2007 through October 17, Level 8 7 Wilshire 5000 S&P 500 NASDAQ 1/1/2007 4/2/2007 7/2/ /1/2007 1/1/2008 4/1/2008 7/1/ /1/2008 Date

8 8 Unemployment Rate January 1995 through September 2008 Unemployment Rate 6 Level /1/1995 3/1/1999 3/1/2003 3/1/2007 Date Shaded bar: NBER Business Cycle Contraction

9 Other Developments $488 million cut in $7 billion S.C. state budget Cuts for state universities especially Runs on money market funds

10 Run on Money Market Funds Money market funds are similar in some ways to banks Generally give you back a dollar on demand when you deposit a dollar in them Prime Reserve fund failed to do that on September 17, 2008 People started taking their funds out of money market funds

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13 A Depression? A repetition of the catastrophe of the Great Depression today is practically impossible. Gottfried Haberler, Prosperity and Depression, 1963, Preface

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16 Pigs Flying and Depression Won t say that a depression can t happen Won t say that pigs can t fly What do we mean by flying? Will say that the economy definitely is not in a depression now

17 What Is A Recession? Business economists definition Two quarters of real GDP decline National Bureau of Economic Research definition A significant decline in economic activity spread across the economy Lasting more than a few months Normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

18 What Is A Depression? A severe recession President Harry Truman 1958 A recession is when your neighbor loses his job A depression is when you lose your job Dictionary A period of low general economic activity marked especially by rising levels of unemployment About.com A 10 percent decline in real GDP

19 What Is A Good Definition of a Depression? There is no sharp dividing line between depression and recession; recession simply denotes a mild depression. Gottfried Haberler, Prosperity and Depression, 1963, Preface

20 Great Depression of May have been the most severe in U.S. history Real Gross Domestic Product fell by a third Prices fell by a quarter or more Stock prices fell by 75 to 90 percent

21 Industrial Production in the U.S. January 1929 to December Industrial production Year

22 Consumer Price Index January 1929 to December CPI Year

23 Unemployment Rate 1929 to 1943, United States official rate 'corrected' rate Percent of labor force Year

24 25 Unemployment Rate 1929 to 1943, United States 8 Unemployment Rate January 1995 through September official rate 'corrected' rate Percent of labor force Percent of labor force Year 0 3/1/1995 3/1/1999 3/1/2003 3/1/2007 Date Shaded bar: NBER Business Cycle Contraction

25 What Caused the Great Depression? Repeated runs on the banking system Federal Reserve dealt with them poorly Other policies were not so great Repeated attempts to try to patch financial system Increases in taxes Smoot-Hawley tariff May even have contributed to the stock market crash

26 Current Problems Banks are not sure which other banks are solvent Banks not lending to each other Makes it harder for a bank to be sure it will have funds Difficulty valuing some securities related to mortgages Troubled securities toxic securities Hard to know which firms are solvent and which are not

27 Current Policies Federal Reserve is lending reserves to banks Troubled securities Federal Reserve has been taking troubled securities as collateral and lending Treasury securities to financial institutions Treasury will be buying some troubled securities Treasury will be providing insurance on some troubled securities Treasury is buying preferred stock in some banks

28 Great Depression Was Very Persistent Industrial Production in the U.S. January 1929 to ipdecember 1941 Unemployment Rate 1929 to 1943, United States official rate 'corrected' rate Industrial production Percent of labor force Year Year

29 What Made the Great Depression So Persistent? Had the laws of supply and demand been repealed? The government Organized firms to raise prices Organized workers to raise wages Introduced price supports for firms Raised tax rates frequently

30 Depression in U.S.? Does the economy reflect difficulties that are liable to persist for a while? Yes Are we in a depression? NO! Could we have a depression? There is little reason to predict one at this point Could we have another Great Depression? Would require dramatic policy errors A repetition of the catastrophe of the Great Depression today is practically impossible. Gottfried Haberler