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Paul Krugman: Massive Defense Buildup to Stimulate Economy / Krugman

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"Think about World War II, right? That was actually negative social product spending, and yet it brought us out.

I mean, probably because you want to put these things together, if we say, 'Look, we could use some inflation.' Ken [Rogoff] and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what the basic logic says.

It's very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.

If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better –

...there was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don't need it, we need it in order to get some fiscal stimulus."

Paul Krugman
Paul Krugman: Massive Defense Buildup to Stimulate Economy
Fareed Zakaria GPS
CNN
August 14, 2011
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Library Topic: John Maynard Keynes and Keynesian Economics
Library Topic: 2007-2009 Recession: Boom, Bust, and Beyond

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Commentary or Blog Post

"Here is an embiggened version of the infamous jobs chart prepared by Obama administration economists Jared Bernstein and Christina Romer back in January 2009 (and now updated again by me with data from the August jobs report)."

"In February 2001, nonfarm payrolls hit their business cycle peak of 132.5 million. Ten years later, the latest data pegs February 2011 payrolls at 130.5 million, a 1.5% decline. To put this in perspective, the ten-year period of the Great Depression, 1929-39 saw a 2.3% decline in nonfarm employment, roughly the same magnitude."

"Policymakers have committed substantial sums to addressing the global recession and the global financial crisis, but there is real doubt about their effectiveness. This column explains why the fiscal stimulus might fail."

"OVER the past year Vice-President Joe Biden has been barnstorming around America. As head of Barack Obama's Middle-Class Task-Force, he has stumped for administration policy, attempting to sell the doings of Washington, dc, to the average voter. It's a tricky job. Americans were keenly aware of growing inequality even before the recession; in 2007, the top 1% of earners took home 23.5% of all...

"During his first major White House event since taking office, Vice President Biden on Friday announced that he will be leading a task force on issues affecting the middle class."

"The Senate on Thursday approved a far-reaching financial regulatory bill, putting Congress on the brink of approving a broad expansion of government oversight of the increasingly complex banking system and financial markets.  The legislation is intended to prevent a repeat of the 2008 crisis, but also reshapes the role of numerous...

"Companies have received more than $10 billion to create jobs and renewable energy by building wind farms, solar projects and other alternatives to oil and natural gas under section 1603 of the American Recovery and Reinvestment Act of 2009. The program expired in December, and President Barack Obama proposed last week that Congress revive it in the 2013 budget, says the Wall Street Journal...

"[T]he Cassandras who look, in retrospect, the most prophetic are Carmen Reinhart and Ken Rogoff. In 2008, the two economists were about to publish 'This Time Is Different,' their fantastically well-timed study of nine centuries of financial crises. In their view, the administration wasn’t being just a bit optimistic. It was being wildly, tragically optimistic."

"The current troubles are complex and raise a multitude of questions. Many books and articles no doubt will be written to analyze these various issues in scholarly depth and detail, and certainly anything we might say today must be regarded as preliminary, at best. I focus here on a few aspects of the present episode that relate closely to my own research on the...

"The tea leaves are clear: The Great Recession will not be a second Great Depression. And, as I argue below, President Obama's stimulus package, though imperfect, deserves a great deal of credit for bringing us back to the positive trajectory we're on today. Any reasonable grader of the stimulus's effects on driving recovery and combating joblessness would give the stimulus at least a B+. In...

"Work ... fiscal stimulus that is. Many studies have been released that claim the fiscal stimulus programs that have been pursued in the US since 2008 have not worked. I tend to side with those studies because of my priors. But there are alternative studies, and some claim that the stimulus has indeed worked. Perhaps the reasoned debate over this should be carried on in a reasonable fashion...

Cato Institute's Mark Calabria argues that the current financial reform bill further entrenches big business without actually fixing the issues that contributed to the financial crisis.

"Dylan Matthews has a fascinating post over at the Washington Post Wonkbook. He surveys 15 studies of fiscal stimulus and concludes that 13 of them found a positive effect. Let me begin, as Pete Boettke does, by congratulating Mr. Matthews on his approach. He is reasoned, restrained, and apparently interested in looking at the facts. That is not so common in blog posts about stimulus.

...

"When Barack Obama entered office in January, 2009, the labor force participation rate was 65.7%, meaning nearly two-thirds of working age Americans were working or looking for work.

When the recession supposedly officially ended in June, 2009, the labor force participation rate was still 65.7%."

"American families continued to take an economic pounding in 2010, with median household income declining, health insurance rates remaining dreary and the number of Americans living in poverty reaching a 52-year high, the U.S. Census Bureau reported Tuesday.

According to the yearly status update, real median income for U.S. households dipped by 2.3 percent, coming in at $49,445 in 2010...

"Under the American Recovery and Reinvestment Act of 2009 (ARRA), also known as the economic stimulus package, certain recipients of funds appropriated in ARRA (most grant and loan recipients, contractors, and subcontractors) are required to report the number of jobs they created or retained with ARRA funding after the end of each calendar quarter. The law also requires CBO to comment on those...

"An increasing number of extended families across the USA are under the same roof, living together either permanently or temporarily. Sometimes these arrangements are multigenerational, with adult children, grandchildren or an elderly parent sharing quarters. In other cases, an extended family bunks together, with siblings, cousins, nieces or nephews sharing space.

The reasons are...

"In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York...

In the midst of the current economic downturn, there is one group that seems to be prospering: public employees. While the private sector is struggling to grow and create new jobs, federal government jobs are doing quite well.

"There is no doubt that GM has returned from the brink. It made $8 billion last year, a record high, and regained enough global market share to once again become the world’s biggest automaker, a title it had lost to Toyota. More impressive, it is planning to bump its profit margins from 6 percent last year to 10 percent this year, on par with its best-in-class rivals such as Hyundai and BMW....

Peter Suderman expresses skepticism over the Congressional Budget Office's (CBO) recent estimate on jobs "created or saved" by the American Recovery and Reinvestment Act of 2009 (stimulus package).  Suderman cites the CBO's own reservations about its model as reason for his doubt.

"Many are calling for a 9/11-type commission to investigate the financial crisis. Any such investigation should not rule out government itself as a major culprit. My research shows that government actions and interventions -- not any inherent failure or instability of the private economy -- caused, prolonged and dramatically worsened the crisis."

"As the economic signs grow ever more grim, the opportunities for the Obama administration to drive through its agenda actually are getting better."

"The fallout from the recession has cut deeply into the housing security, employment and income of many Americans. But some parts of the country are clearly faring better than others. Here, three interactive maps show foreclosure and jobless rates as well as household income by county."

"Ordinary people — not just a small fringe group of zealots — are really afraid today. They see the country they adore being attacked at all levels; they see their freedoms under assault, their life savings genuinely in jeopardy, an endlessly anemic economy, a longer period of sustained unemployment than we've experienced in a half-century and a national financial crisis, born of world-...

"Polls show over and over again that jobs are a major concern for Americans, hence the close scrutiny of employment statistics during presidential campaigns. While presidents don't create jobs, their policies can influence the direction of the economy by creating, or not creating, an environment that is conducive to job creation."

"For a while, there has been a strain of center-left American commentary that has viewed China's leaders as some kind of technocratic super-geniuses who have done a much better job of guiding their society than the loons and hacks who would actually, you know, be voted for. Call this the Tom Friedman school of thought.

In reality, China's leaders have a tendency to fall for a lot of the...

"I think we're all aware of the stock crisis that's been exploding this week — all thanks to that pesky little problem called the housing market.

It was also announced this week that the Federal Reserve would bail out AIG, and I heard on NPR this morning that they're considering doing more. So that got me thinking: Just how many...

"Amid a flurry of activity by the Obama administration to help lift the economy out of recession, the ideas of the late renowned British economist John Maynard Keynes on the government's role in helping ease an economic crisis are in the spotlight."

Princeton University Economics Professor Paul Krugman argues in favor of expansionary fiscal policy over monetary policy, stating, "there's not much [Federal Reserve Chairman] Ben Bernanke can do for the economy."

"An alarming data point from the minority side of the Senate Budget Committee: More Americans are being added to food stamps than are finding jobs."

"More than a third of young American families with children were living in poverty last year, according to an analysis of U.S. Census data that offers the latest indicator of spreading poverty in America.

In all, 37 percent of the country's young families -- defined as under the age of 30 -- slipped below the poverty line in 2010, eclipsing the previous high of 36 percent set in 1993,...

"With unemployment hovering near 10 percent nearly two years after President Obama signed his economic stimulus package, Mr. Obama is acknowledging that, despite his campaign promises, 'there's no such thing as shovel-ready projects.'

The president gave that remark in an hour-long interview with the New York Times.

Mr. Obama also told the Times that he should have 'let the...

"Obama's desperate protests that his anti-business rant was taken out of context are betrayed both by that very context and because they are a part of a piece — just one more component of his war against the American entrepreneurial spirit.

He would have us believe that his words 'you didn’t build that' referred to roads and bridges and not businesses.

Given his accompanying...

"We're living through the 'American Dream in reverse,' President Obama declared Friday as he zeroed in on rescuing the swamped middle class.

Reacting with alarm to worsening economic news, Obama said it was a 'disaster' for working families."

"What is quantitative easing?

Short answer: It’s an unconventional monetary tool used by central banks to stimulate the economy.

Answer that might make sense: Normally, when there's a recession or the economy is limping along, the Federal Reserve will reduce short-term interest rates in order to spur more lending and spending. But right now, the Fed has cut...

"The principal problem with the current economic crisis is that the authorities are trying to solve the debt crisis by adding more debt — which is akin to trying to cure a viral infection by injecting more viruses. In case some have forgotten, the United States is undergoing a serious credit crisis, that is, a debt crisis."

"There is no more pressing problem right now than unemployment. Everything else pales in comparison. At last count, there were almost 14 million Americans were out of work, representing 9.1% of the labor force. If we include those who are discouraged and otherwise marginally attached or who have taken part-time work when they would prefer full-time, that number is over 15%. It’s hard to...

"Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,...

"The news media are in the process of creating a great new historical myth. This is the myth that our present financial crisis is the result of economic freedom and laissez-faire capitalism."

"There is an ongoing three way debate between those who believe the Fed should do more to strengthen the recovery, those who believe that the recovery is strong enough to continue on its own, and those who believe that the economy has been so fundamentally altered by the recession that no amount of stimulus can succeed in pushing unemployment down to pre-crash levels. As usual, they all have...

"'The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies,' write economists Glenn Hubbard, Greg Mankiw, John Taylor and Kevin Hassett in a paper released by the Romney campaign. But the paper only mentions two studies, and one of them, by Amir Sufi and Atif Mian, is about Cash for Clunkers, a tiny subprogram of the stimulus.

...

George Mason University Economics Professor Tyler Cowen provides a simple and abbreviated view on various events surrounding the financial crisis.

"U.S. taxpayers likely lost $1.3 billion in the government bailout of Chrysler, the Treasury Department announced Thursday.

The government recently sold its remaining 6% stake in the company to Italian automaker Fiat. It wrapped up the 2009 bailout that was part of the Troubled Asset Relief Program six years early."

"The fates of the American economy and the presidency of Barack Obama are inextricably linked, and both of them hit a bump in April. The economy added 252,000 jobs each month between December and February, but that rate seems to be slowing. Payrolls rose by just 154,000 in March and by only 115,000 in April. Unemployment dropped in April, from 8.2% to 8.1%, but for the wrong reason: an exodus...

Economist Veronique de Rugy explains that contrary to popular sentiment, regulation over the financial sector has actually increased over the past few decades.  As such, de Rugy argues that deregulation was not a cause of the financial crisis.

The Great Recession may have officially ended in 2009 but the Great Hangover continues.

"Dismal figures released by the Census Bureau last week not only brought news of a record number of poor living in poverty in the United States, they also revealed that young people have suffered more than any other group during the nation’s economic downturn."

Chart or Graph

This chart presents the various types of rescue efforts the government engaged in during the 2008 financial crisis and their associated costs. It also includes other federal budget items for comparison.

This chart shows the number of banks that failed from the mid 1920s to 1933.

This chart shows a ranking of the biggest U.S. financial institutions in light of Fed organized bailouts during the height of the financial crisis in 2008.

"Although the economic well-being gap between young and old has been widening for decades, the economic turbulence of recent years has accelerated these trends.

Looking at changes from 2005 to 2009, all households had lower median net worth. But the decline for households headed by younger adults was much steeper.

For households headed by adults ages 65 and older, median net...

This interactive chart shows how stimulus funds have been spent.

"The government's efforts to rescue the economy were bold and complex. Here is an explanation of our methodology to break down stimulus into its component parts.

Q) What is the difference between 'Stimulus 1' and 'Stimulus 2?'

Stimulus 1 is the $787 billion American Recovery and Reinvestment Act, signed into...

"Table 3 shows the delinquency rates of the NTMs [non-traditional mortgages] that were outstanding on June 30, 2008. The grayed area contains virtually all the NTMs. The contrast in quality, based on delinquency rates, between these loans and Fannie and Freddie prime loans in lines 9 and 10 is clear."

"The [...] chart shows the percentage changes in the past five years off the 2006 baseline. You can see gasoline at about 46% of distillates usage is the driver for the big drop in petroleum right now."

This week’s chart by Mercatus Center Scholar Veronique de Rugy shows the growing number of federal government employees.

"According to the Mortgage Bankers Association, foreclosure starts were at an all time record high of 1.42% in the third quarter of 2009, suggesting that foreclosure proceedings were initiated on over 750,000 homeowners between July and September. According to the Hope Now Alliance, roughly 2 million foreclosures have been completed since July 2007."

"This week's chart uses data from the Bureau of Labor Statistics (BLS) Employment to show the number of jobs gained during each presidential tenure since 1945 as well as the unemployment rate. This chart isn’t meant to compare President Obama (who's completed just under one term so far) to President Clinton (who completed two terms.) Rather it is meant to look at how each president...

"The chart [above] illustrates how well, or not, that job creation program has worked so far. Using the most recent data from the Bureau of Labor Statistics and data from the Administration’s website Recovery.gov, it shows the number of jobs lost and the number of jobs 'created or saved' between February and October 2009 by state. This chart also assumes, for the...

"As the chart shows, between April-June 2012 (the most recent three month block for which government data is available), only 200,000 jobs have been created while 265,000 individuals have been added to the food stamp rolls. Additionally, in that time period, 246,000 workers were awarded disability."

"This chart by Senior Research Fellow Veronique de Rugy shows that the administration’s promise that the ARRA bill would reduce unemployment rates and create jobs did not materialize. To this day, $275 billion has been reported spent in grants, contracts, and loans through the stimulus bill and yet unemployment has not decreased. In fact, the latest data from the...

"I divide the economy into two parts. On the one side are the combined public and quasi-public sectors, and on the other side is the rest of the economy. Public, of course, refers to government employees. ‘Quasi-public’, a term I just invented, includes the nominal private-sector education, healthcare, and social assistance industries. I call them ’quasi-public’...

"The First American CoreLogic LoanPerformance Home Price Index reflects a broad range of mortgages nationally. According to this index, home prices have fallen 30% from their peak in 2006. Notably, home prices have shown signs of stabilization in the recent data, according to this and other home price series."

"American families continued to take an economic pounding in 2010, with median household income declining, health insurance rates remaining dreary and the number of Americans living in poverty reaching a 52-year high, the U.S. Census Bureau reported Tuesday.

According to the yearly status update, real median income for U.S. households dipped by 2.3 percent, coming in at $49,445 in 2010...

"This map puts the nation's counties in five equal groups, highest to lowest, based on the county's median household income. Half the households in a county earn more than the median and half earn less."

Click on the link for an interactive county by county look at median household income.

This chart shows the amount of money pumped into the world's financial system by the Fed in collaboration with other central banks during the financial crisis in 2008.

This chart shows the monthly total borrowed by the government from the Fed from 1989 to 2008 in light of several bailout efforts.

"By 2008, the result of these government programs was an unprecedented number of subprime and other high risk mortgages in the U.S. financial system. Table 1 shows which agencies or firms were holding the credit risk of these mortgages- -or had distributed it to investors through mortgage-backed securities (MBS)-- immediately before the financial crisis began. As...

"The combination of Hurricane Isaac, refinery fires, Labor Day driving, and our deficit habit pushed August gasoline prices higher throughout the month. By the time September rolled around, the average price of unleaded self-serve gasoline nationwide stood at $3.84 per gallon. In January, the price was $3.29. That's a whopping 54 cent or 16 percent increase in eight months. Higher priced...

"About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling...

"Petroleum usage history for the past 6 years for this 5 week snapshot - you can see the drop from '06 to '07 was small [...] My experience suggests that if petroleum does not grow at least 0.8% year on year the economy is headed recessionary [...] We see a good improvement in 2010, not anywhere near the recovery we need as we were in an abyss, but it shows improvement. This year, we see...

"Gasoline usage history shows a small rise in '07, then a plunge in '08. Usage level for the next two years was flat, followed by a huge plunge now."

"The close relationship between low downpayments and delinquencies and defaults on mortgages is shown in Figure 5, which compares the increase in FHA 97 percent (or greater) CLTV [combined loan-to-value] or LTV [loan-to-value] mortgages to the increase in the foreclosure start rate on all loans published by the Mortgage Bankers Association."

"The effects of the recent recession, which began in December 2007 and ended in June 2009, have combined to make the years since 2007 the worst period of unemployment in the United States since the 1930s. ...

The extent of long-term unemployment is much greater than would be expected on the basis of its historical relationship with the overall unemployment rate (see Figure 2...). Had...

This country-wide map shows the percentage of mortgage loans that were subprime for a given area.  This particular map is noteworthy because subprime loans were such a big contributer to the financial crisis.  In particular, some of the darkest areas on the map are California and Florida.  It is no coincidence that these states have been among the...

"This chart reports on the percentage change of private employment by state over the past ten years, leaving out the quasi-public sector.

The worst hit states, not surprisingly, are Michigan, Ohio, and Indiana. Massachusetts has a big decline as well, though I’m not sure that it’s fair to remove healthcare and education, which...

"Figure 2 illustrates clearly that the 1997-2007 bubble was built on a foundation of 27 million subprime and Alt-A mortgages and shows the relationship between the cumulative growth in the dollar amount of NTMs [non-traditional mortgages] and the growth of the bubble over time. It includes both GSE and CRA contributions to the number of outstanding NTMs above the normal baseline of 30 percent...

"The number of institutions on the FDIC’s 'Problem List' increased from 775 to 829 during the quarter. Total assets of 'problem' institutions fell, from $431 billion to $403 billion."

"Among the respondents’ views, there is no ambiguity about whether trust in business has fallen as a result of the crisis: 85 percent say it has and—by a wide margin—they blame the decline mostly on financial firms’ misunderstanding of risk (Exhibit 1). That response holds even among executives at financial firms. Among respondents who selected 'other,' many...

"The effects of the recent recession, which began in December 2007 and ended in June 2009, have combined to make the years since 2007 the worst period of unemployment in the United States since the 1930s. ...

The share of unemployment accounted for by the long-term unemployed (people who have been seeking work for more than 26 weeks) has been at an all-time high. Over 40 percent of...

"Another update to the chart used by the Obama administration to promote its stimulus package. (Real figures charted as red dots.) Professor Steve Horwitz says that it's time to call it a failure. It's hard to disagree. Even on its own terms, the stimulus has not delivered the jobs promised. In fact, the situation is worse than the projection of unemployment without the recovery plan.

...

This is an interactive map of bank failures in the United States between January 2008 and October 2010.

"This map shows foreclosure actions by county in comparison to the number of properties in a county. A 'low' foreclosure rate applies where fewer than one in 150,000 properties have had foreclosure actions. The map's 'moderate' rate applies to counties where as many as one in 700 properties and as few as one in 4,000 have had foreclosure actions. To be in the 'high' category, a county must...

"The U.S. economy has not been healthy since 2001 when 9/11 pushed the country into a recession. As the accompanying data tell us, real GDP growth has risen to meet the long-term average of 3.11 percent just once since 2001, and that was in 2004. The combination of wars, financial collapse, natural disasters, and political games has taken a heavy toll on economic growth. No one is talking...

"This map shows unemployment rates for each of the nation's counties. You can also filter the map to show only the highest-income counties, or only the lowest-income counties. The highest have median household incomes in the top 20 percent of all counties, and the lowest have incomes in the bottom 20 percent."

Click on the link for an interactive county by county look at unemployment...

"The December employment report showed that nonfarm payroll employment fell 85,000 since November. (In November, employment ticked up 4,000; November’s gain was the first increase since December 2007.) In addition, the unemployment rate remained at 10.0%. The unemployment rate was 4.9% in December of 2007. In December 2008, 15.3 million people were unemployed. By...

"The issue is the graph on Page 1. It shows two blue lines sloping gently upward and then drifting back down. The darker line — 'With recovery plan' — forecasts unemployment peaking at 8 percent in 2009 and falling back below 7 percent in late 2010.

Three years later, with the economy still in tatters, that line has formed the core of the case against the Obama administration’s economic...

"Here is an embiggened version of the infamous jobs chart prepared by Obama administration economists Jared Bernstein and Christina Romer back in January 2009 (and now updated again by me with data from the August jobs report).

You know, the chart that predicted what the unemployment rate would be if Congress passed the Obama stimulus plan. Note: This chart predicts the unemployment...

"More than half of all respondents—57 percent—say that because of good management, their companies have been less hurt than most by the crisis. Although that figure probably indicates hope for better results than are entirely plausible, it also indicates a confidence in management that runs counter to many other reports. Indeed, even at companies where executives...

"As the chart shows, since January 2009, when President Barack Obama took office, the net change jobs has been negative (-1.3 million), while 5.7 million workers and dependents have been awarded disability and a whopping 15.1 million have been added to the food stamp rolls.

'A total of 46,670,373 Americans are now on food stamps,' according to the minority side of the Senate Budget...

Analysis Report White Paper

"Metaphors shape understanding of the narrative of events (Reinhart, 2009). For example, the received wisdom in the years following the Great Crash of 1929 and the attendant crushing economic contraction was that it had resulted from excesses of speculation and competition. Some of the policy lessons drawn in the 1930s were that cartelization of industry could promote growth, that restrictions...

"Beyond the inconsistencies and implementation problems, financial-institution bailout policy has been unwieldy, inequitable, extremely costly, disruptive, and lacking in transparency and oversight. The policy response of bailouts and maintenance of the status quo has been precisely the wrong response, as it has led to retaining many of the mega-financial...

"Realizing that their traditional instruments were inadequate for responding to the crisis that began on 9 August 2007, Federal Reserve officials improvised. Beginning in mid-December 2007, they implemented a series of changes...

"In an effort to boost hiring and job creation and to invest in a variety of domestic infrastructure programs, Congress passed and the president signed the American Recovery and Reinvestment Act (ARRA), commonly known as the economic stimulus package, in 2009. ARRA represented one of the largest peacetime fiscal stimulus packages in American history. But little is known about the ways in which...

"The question I have been most frequently asked about the Financial Crisis Inquiry Commission (the 'FCIC' or the 'Commission') is why Congress bothered to authorize it at all. Without waiting for the Commission's insights into the causes of the financial crisis, Congress passed and President Obama signed the Dodd-Frank Act (DFA), far-reaching and highly consequential regulatory legislation....

"Executives forecast ongoing economic gloom, but, for the second survey in a row, the percentage of the respondents who think the situation is getting worse hasn’t increased. Many say their corporate-management team is doing a good job in the crisis.

A gloomy economic stasis has taken hold, responses to...

"We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (Smets and Wouters, 2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.52 and modestly...

"In this paper, I argue that public-policy decisions have perverted the incentives that naturally create stability in financial markets and the market for housing. Over the last three decades, government policy has coddled creditors, reducing the risk they face from financing bad investments. Not surprisingly, this encouraged risky investments financed by borrowed...

"This paper reviews the unconventional U.S. monetary policy responses to the financial and real crises of 2007–09, dividing these responses into three groups: interest rate policy, quantitative policy, and credit policy. To interpret interest rate policy, it compares the Federal Reserve’s actions with the literature on optimal policy in a liquidity trap. This comparison suggests that policy has...

"This paper examines mortgage lending and concludes that studies based on data created by the Boston Fed should be reevaluated. A detailed examination of these data indicates that irregularities in these data, when combined with the most commonly used research methodology, appear to have biased previous research toward a finding of discrimination against minority...

"While Keynesianism fell out of style during the 1980s and 1990s — recall that Bill Clinton's secretary of treasury Robert Rubin turned Keynesian economics completely on its head when he claimed that surpluses, not deficits, stimulate the economy — during the recessions of 2001 and 2007-09 Keynesianism has come back with a vengeance. Both Presidents Bush and Obama...

"This paper discusses events surrounding the 2007-08 credit crunch.  It highlights the period of exceptional macrostability, the global savings glut, and financial innovation in mortgage-backed securities as the precursors to the crisis. The credit crunch itself occurred when house prices fell and subprime mortgage defaults increased. These events caused...

"Studying the experience of countries that have experienced great depressions during the twentieth century teaches us that massive public interventions in the economy to maintain employment and investment during a financial crisis can, if they distort incentives enough, lead to a great depression."

"Imagine a team of doctors hovering over the bed of the U.S. economy. With charts in hand and apparatus all around them, the medical team confers about a patient that has been in intensive care since June of 2009, which is when the recession ended. While the patient listens, the senior physician makes a quick rundown:

Unemployment: 8.3 percent.—Should be 4.5 percent by now.
GDP...

"Households headed by older adults have made dramatic gains relative to those headed by younger adults in their economic well-being over the past quarter of a century, according to a new Pew Research Center analysis of a wide array of government data."

"Much of the recent economic debate about the impact of stimulus packages has focused on the size of the crucial government purchases multiplier. But equally crucial is the size of the government purchases multiplicand—the change in government purchases of goods and services that the multiplier actually multiplies. Using new data from the Bureau of Economic Analysis and...

"The U.S recession of 2007 to 2009 is unique in the post-World-War-II experience by the broad company it kept. Activity contracted around the world, with the advanced countries of the North experiencing declines in spending normally the purview of the developing economies of the South. The last time that the economies of the North similarly headed south was the 1930s. This paper examines the...

"Four years into the deepest recession since World War II, the U.S. economy expanded at a rate of only 0.7 percent in the first half of 2011. This means that the economy is growing at a slower pace than the population and that capita output continues to fall.

In response, the president has announced a plan for yet more deficit-financed stimulus spending. Like the two previous stimulus...

Video/Podcast/Media

"As the country struggles with the current financial crisis, there have been the inevitable comparisons with the Great Depression. Marvin Goodfriend, an economics professor at Carnegie Mellon University's Tepper School of Business in Pittsburgh, tells Linda Wertheimer that while people are comparing this financial crisis to the 1930s, there are some big differences...

"Arnold Kling of EconLog talks with EconTalk host Russ Roberts about the role of credit default swaps and counterparty risks in the current financial mess. The conversation opens with the logistics of credit default swaps and counterparty risks and moves on to their role in the financial collapse. The conversation closes with a discussion of the political economy...

"Arnold Kling of EconLog talks with host Russ Roberts about the economics of the housing market with a focus on the role of Fannie Mae and Freddie Mac. The conversation closes with a postscript on the current financial crisis."

"Russ Roberts, host of EconTalk, discusses his paper, 'Gambling with Other People's Money: How Perverted Incentives Created the Financial Crisis.' Roberts reflects on the past eighteen months of podcasts on the crisis, and then turns to his own take, a narrative that emphasizes the role of government rescues of creditors and the incentives this created for...

Cato Institute Director John Samples discusses the passing of the Troubled Asset Relief Program (TARP) and Congress' "abdication of responsibility" to the executive branch.  Samples calls Congress' lack of oversight over the TARP funds a "breakdown of the rule of law."

"William Cohan, author of House of Cards: A Tale of Hubris and Wretched Excess on Wall Steet, talks with EconTalk host Russ Roberts about the life and death of Bear Stearns. The discussion starts with how Bear Stearns and other Wall Street firms made money and how they financed their operations. The conversation then turns to the collapse of Bear Stearns's hedge funds in the summer of...

"Riccardo Rebonato of the Royal Bank of Scotland and author of Plight of the Fortune Tellers talks with EconTalk host Russ Roberts about the challenges of measuring risk and making decisions and creating regulation in the face of risk and uncertainty. Rebonato's book, written before the crisis, argues that risk managers often overestimate the reliability...

"The Fordham Law School Federalist Society hosted this debate between David Epstein, Professor of Political Economy at Columbia University, and Peter Schiff, President of Euro Pacific Capital and U.S. Senate Candidate from Connecticut. Moderated by Fordham Law Professor Nicholas Johnson.

The topic: 'Will the Obama Administrations...

"General Motors CEO Ed Whitacre has bragged in TV commercials and newspaper columns that GM has paid back its bailout 'in full and ahead of schedule.'

As with the Pontiac Aztek, an ugly exterior masks an ever darker problem: Whitacre is being fanciful to the point of deceit. GM received $50 billion in TARP funds (never mind that TARP was only...

"Our economy is in crisis, and our government says that bold action is required. So we're diving in head first to get things back on track. But... what are we diving into exactly? Take a closer look at the government response to our current economic crisis."

"Several former Citigroup officials that testified before the Financial Crisis Inquiry Commission on their former company's past mortgage lending practices. Former CitiMortgage Senior Vice President Richard Bowen told the commission that he warned former Citi executive Robert Rubin about risky mortgages that were a cause of the financial crisis. Congress formed the...

"In the third of three days of hearings held by the bipartisan Financial Crisis Inquiry Commission (FCIC), former Fannie Mae executives Robert Levin and Daniel Mudd testified in the role of their company in the housing market collapse. They faulted Fannie Mae's backing of riskier mortgages on pressures related to increased competition from Wall Street firms and the...

"Former Federal Reserve Chairman Alan Greenspan was the lead witness at the first of three days of hearings by the bipartisan Financial Crisis Inquiry Commission (FCIC). Mr. Greenspan talked about what led up to the financial crisis in the housing markets and reminded the commission of his warning in 2004 to the Senate Banking Committee about sub prime mortgage...

"Former Federal Reserve Chairman Alan Greenspan was the lead witness at the first of three days of hearings by the bipartisan Financial Crisis Inquiry Commission (FCIC). Mr. Greenspan talked about what led up to the financial crisis in the housing markets and reminded the commission of his warning in 2004 to the Senate Banking Committee about sub prime mortgage...

"This is a high quality version of the Financial Services Subcommittee on Oversight and Investigations hearing of May 5, 2009.

Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by...

As the new Chair of the Financial Services Committee, Barney Frank claims that America is becoming more and more unequal with too much wealth concentrating in the hands of a few. To combat this trend, Frank says he will focus on reforming CEO compensation and increasing home ownership among the low and moderate income brackets.

An quick introduction to credit default swaps. Part two can be found here.

"The Corporations, Securities & Antitrust Practice Group hosted this panel on 'Deficit Reduction and the Role of the Federal Government in Regulating Business' on Thursday, November 10, 2011, during the 2011 National Lawyers Convention."

"A mock trial was held to determine whether free market capitalism caused the 2008 economic meltdown. Jeff Madrick, author of The Case for Big Government acted as the prosecutor against free market capitalism and Stephen Moore, co-author of The End of Prosperity, acted as the attorney for the defense. Las Vegas Mayor Oscar Goodman played the role of the judge and...

"Former BB&T Chairman and CEO John A. Allison discusses how mandates like Sarbanes Oxley and the Patriot Act helped cause the housing meltdown and financial crisis. He spoke at the Cato Institute's 29th Annual Monetary Conference held November 16th, 2011."

An easy-to-understand introduction to mortgage-backed securities. Parts two, three, and four can be found here.

"Many regard the financial crisis as a failure of the free market and 'greedy' businessmen. But is capitalism really to blame for our current economic mess?

In this panel Yaron Brook, executive director of the Ayn Rand Institute, and Jerry Jordan, president of the Pacific Academy for Advanced Studies, will argue that today’s...

"So Krugman says wars are good for the economy? I guess wars are only good if we are fighting UFO's from the 'Twilight Zone' and a liberal is Commander in Chief."

"Bankrupting America is back with our second edition of Real or Fake. Can you tell which of these facts about our government's spending are real or fake?

Shrimp on treadmill? Extraordinarily well paid life-guards? Could these possibly be real? Watch and find out."

"Joke-telling robots, expensive walking tunnels, Blackberries for smokers, and training American prostitutes to drink responsibly. What do these things have in common? They're all questionable government spending projects in a time when our economy is struggling and people can't get jobs....or, maybe we just made them up.

Put yourself to the test. See if you can outwit the Rebel...

Higgs discusses the Great Depression and the parallels, especially in terms of government action and failure, to the 2008 recession.

"The Dodd-Frank Wall Street Reform and Consumer Protection Act was aimed at correcting a number of problems relating to the market woes of the last few years. Among other things, it specifically sought to address issues pertaining to the idea that some entities were too big and intertwined with the economy to be allowed to fail. Our panel will discuss the legal (and potential constitutional)...

"All 2,300 pages of the Dodd-Frank Act are now law, representing a vast regulatory expansion. A measure creating as much government intervention as this act does will be debated for years, perhaps even generations. Was this legislation necessary? Will its effects, overall and with respect to specific provisions, be good or bad for the financial system and the...

Primary Document

"When the President signed the Recovery Act in February 2009, every American was feeling the impact of a massive recession. The floor was falling out from under the American economy. Over the last decade, failed economic policies left unemployment rising dramatically. Clean energy, research and technology projects were starved of working capital and the nation’s infrastructure – the roads,...

"In its first report to Congress on December 10, 2008, the Congressional Oversight Panel (COP or the Panel) posed ten basic questions – in effect asking for an explanation of the U.S. Department of Treasury’s goals and methods for the Troubled Asset Relief Program (TARP). The Panel’s questions, in turn, included a number of subsidiary questions, which sought...

Making supplemental appropriations for job preservation and creation, infrastructure investment, energy efficiency and science, assistance to the unemployed, and State and local fiscal stabilization, for the fiscal year ending September 30, 2009....

This blueprint "presents a series of short-, intermediate- and long-term recommendations for reform of the U.S. regulatory structure. The Blueprint, announced in June 2007, is a key part of Treasury Secretary Henry M. Paulson Jr.'s efforts to improve the competitiveness of the U.S. capital markets in the increasingly global marketplace.

...

"The sharp downturn in housing markets across the country, which undermined the solvency of major financial institutions and severely disrupted the functioning of financial markets, has led the United States into a recession that will probably be the longest and the deepest since World War II. The Congressional Budget Office (CBO) anticipates that the recession—...

In this statement SEC Chairman Christopher Cox explains the decision to end the Consolidated Supervised Entities (CSE) program:

"The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to...

"This publication offers a program for financial institutions seeking to apply their mortgage lending standards in accordance with equal opportunity goals and to expand their activity in underserved minority markets. Banks, mortgage companies, and other lenders subject to the Home Mortgage Disclosure Act (HMDA) are referred to as 'financial institutions' or '...

"To reauthorize and amend the Commodity Exchange Act to promote legal certainty, enhance competition, and reduce systemic risk in markets for futures and over-the-counter derivatives, and for other purposes."

"This bill is a central element of Congress' overhaul of financial regulations. It would establish a Consumer Financial Protection Agency with the authority and accountability to supervise, examine, and enforce consumer financial protection laws. Financial transactions falling under the agency's jurisdiction would include mortgages, credit cards, student loans,...

"This dissenting statement is organized as follows: Part I summarizes the main points of the dissent. Part II describes how the failure of subprime and other high risk mortgages drove the growth of the bubble and weakened financial institutions around the world when these mortgages began to default. Part III outlines in detail the housing policies of the U.S....

"We have identified ten causes that are essential to explaining the crisis. In this dissenting view:

  • We explain how our approach differs from others’;
  • We briefly describe the stages of the crisis;
  • We list the ten essential causes of the crisis; and
  • We walk through each cause in a bit more detail....

"This is comprehensive legislation to overhaul regulations in the financial sector. It would establish a new Consumer Financial Protection Agency to regulate products like home mortgages, car loans and credit cards, give the Treasury Department new authority to place non-bank financial firms, like insurance companies into receivership, regulate the over-the-counter...

Federal Reserve Chairman Ben Bernanke provided his semiannual monetary policy report and discussed the financial markets and the general state of the economy in the wake of the continuing financial crisis.

"The Financial Crisis Inquiry Commission has been called upon to examine the financial and economic crisis that has gripped our country and explain its causes to the American people. We are keenly aware of the significance of our charge, given the economic damage that America has suffered in the wake of the greatest financial crisis since the Great Depression....

"Now is the time to act boldly and wisely – to not only revive this economy, but to build a new foundation for lasting prosperity.  Now is the time to jumpstart job creation, re-start lending, and invest in areas like energy, health care, and education that will grow our economy, even as we make hard choices to bring our deficit down. ...

"The agreements we have reached today, to treble resources available to the IMF to $750 billion, to support a new SDR allocation of $250 billion, to support at least $100 billion of additional lending by the MDBs, to ensure $250 billion of support for trade finance, and to use the additional resources from agreed IMF gold sales for concessional finance for the poorest countries, constitute an...

This act was passed by Congress in order "To revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." The FDIC notes that this law "[e]xpanded FDIC powers to assist...

"The global financial system remains under severe stress as the crisis broadens to include households, corporations, and the banking sectors in both advanced and emerging market countries. Shrinking economic activity has put further pressure on banks' balance sheets as asset values continue to degrade, threatening their capital adequacy and further discouraging...

Among other things, the FDIC declares that this law effectively "[r]epeal[ed the] last vestiges of the Glass Steagall Act of...

Mises explained economic phenomena as the outcomes of countless conscious, purposive actions, choices, and preferences of individuals, each of whom was trying as best as he or she could ... to attain ... wants and ... avoid ... consequences.

"Reductions in loan-loss provisions underscored improvement in asset quality indicators during second quarter 2010. The industry’s quarterly earnings of $21.6 billion are up dramatically from the year-ago loss of $4.4 billion and represent the highest quarterly earnings since third quarter 2007. Almost two out of three institutions (65.5 percent) reported higher...

In this hearing, Treasury Secretary Hank Paulson, Jr., Federal Reserve Chairman Ben Bernanke and SEC Chairman Christopher Cox testified about their request to give the Treasury the authority to make an unspecified line of credit available to Fannie Mae and Freddie Mac as well as the ability to purchase equity in either of these government-sponsored enterprises.

"Summary of the Report

  • Fannie Mae senior management promoted an image of the Enterprise as one of the lowest-risk financial institutions in the world and as 'best in class' in terms of risk management, financial reporting, internal control, and corporate governance. The findings in this report show that...

This is a compilation of economic data from the financial, labor, housing and business sectors leading up to and surrounding the time of the crisis.

"The Troubled Asset Relief Program ('TARP') represents a massive and unprecedented investment of taxpayer money designed to stabilize the financial industry and promote economic recovery. The long-term success of the program is not assured. Success — or failure — will depend on whether the Department of the Treasury ('Treasury') has spent, and will spend in the...

"Appropriately, the problem of too-big-to-fail, and the policies that the government uses to address that problem, will be a particular focus of your forthcoming report and in the hearing today. In my view, the too-big-to fail issue can best be understood in the broader context of the financial crisis itself. Accordingly, this testimony provides an overview of the...

"I fully support your important mission, and I hope that my testimony today can assist it. I will start by giving my views on the fundamental causes of the financial crisis, and then turn to the specific topic of today’s hearing—the so-called 'shadow banking' system. My views are based on my long experience in the financial markets, my time as Secretary of the...

"We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and...

"Market stability and support for housing finance are among my highest priorities during this time of stress in our markets. Therefore, after consultations with the Federal Reserve, the Office of Federal Housing Enterprise Oversight (OFHEO), the Securities and Exchange Commission (SEC) and Congressional leaders we are asking Congress, as it completes its work on a...

"First, I will describe, in general, the 'cultural revolution' that Moody’s senior management imposed at Moody’s and compelling evidence of its impact. Second, I will describe the techniques Moody’s senior management used to implement this revolution and why they were successful. Finally, I will describe a particularly egregious example of how the revolution...

"I've analyzed banks since the late 1980s, worked at 6 of the largest brokerage firms, currently work in affiliation with one of the most independent research platforms, and wrote critical research on the banks - in excess of 10,000 pages over the past decade. The more critical issues that I focused on have been the negative implications of slower economic activity...

"You have asked me to address several wide-ranging topics in my testimony today. I will attempt to address those topics by providing you with an overview of Bear Stearns and how we managed our organization, our funding policies and their evolution during 2006 to 2007 and the events leading up to our sale to JP Morgan Chase & Co."

"The Commission has asked me to address several topics related to Bear Stearns, including the historical growth of particular business units at Bear Stearns, certain practices at the company in the years leading up to my departure in August 2007, and various strategic decisions made at Bear Stearns. My career at Bear Stearns spanned over two decades and I was at...

Text of the Community Reinvestment Act which requires financial institutions, among other things, to "demonstrate that their deposit facilities serve the convenience and needs of the communities in which they are chartered to do business."

"The bankruptcy of Lehman Brothers in September 2008 precipitated what, in retrospect, is likely to be judged the most virulent global financial crisis ever. To be sure, the contraction in economic activity that followed in its wake has fallen far short of the depression of the 1930s. But the virtual withdrawal, on so global a scale, of private short term credit,...

Also know as TARP. "To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, to amend the Internal Revenue Code of 1986 to provide incentives for energy produc- tion and conservation, to...

"his website was created under the Recovery Act to show the American public how Recovery funds are being spent by recipients of contracts, grants, and loans, and the distributio​n of Recovery entitlements and tax benefits."

"Treasury today announced a voluntary Capital Purchase Program to encourage U.S. financial institutions to build capital to increase the flow of financing to U.S. businesses and consumers and to support the U.S. economy.

Under the program, Treasury will purchase up to $250 billion of senior preferred shares on standardized terms...

"The rate of unemployment in the United States has exceeded 8 percent since February 2009, making the past three years the longest stretch of high unemployment in this country since the Great Depression. Moreover, the Congressional Budget Office (CBO) projects that the unemployment rate will remain above 8 percent until 2014. The official unemployment rate excludes those individuals who would...

"Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments. All of this resulted in a loss of confidence, which then undermined the firm’s strength and soundness. Those same forces threatened the stability of other banks -- not just Lehman....

Books

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