Taylor Presentation

8/3/2019 Taylor Presentation

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LessonsfromtheFinancialCrisisand

Slow

Recovery

for

Teaching

Economics

JohnB.Taylor

StanfordUniversity

October27,2011

7th AnnualEconomicTeachingConference

Cengage Learning,GulfCoastEconomicsAssociation

NewOrleans,Louisiana


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Outline

Differentviewsofthefinancialcrisis,recession,andrecovery Notsurprisingly,economistsdisagree!

Differentimplicationsforteaching

Exampleswillbepresentedthroughouttalkbasedon EmpiricalResearch

UndergraduateTeaching Economics1atStanford

Textbook PrinciplesofEconomics,7e,withWeerapana atWellesley

FirsttoincorporatetheFinancialCrisis, First2eonthefinancialcrisis


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Narrative Economicpolicydeviatedfrombasiceconomic

principleswhich

had

worked

well

Result?Agreatrecession,afinancialpanic,andaveryweak,nearlynonexistentrecovery.

The

deviations

began

with

policies

such

as

amonetarypolicywithinterestratestoolowfortoolong

aregulatorypolicywhichfailedtoenforceexistingrules

Thedeviationsfromsoundprinciplescontinued

when

government

responded

with

an

ad

hoc

bailout

processandtemporarystimulusprograms

Thegoodnews:economicgrowthandstabilitycanberestoredbyadoptingpoliciesconsistentwith

basic

economic

principles.


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OtherNarrative

USpolicywasnotanissueleadinguptothecrisis

Globalcapitalflowsweretheproblem

Caused200709crisis:globalsavingsglut

Oreconomicsfailed

Toomuchfaithinmarkets

Notenough

psychology

Slowrecoverybecausetheinterventionsweretoosmall;needmore


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ImplicationofTwoViewsforBasicEconomics

1.Basically

sound,

but

still

amajor

teaching

moment

2.Needsareformulation

PaulSamuelson

(January

2009)

todayweseehowutterlymistakenwastheMilton

Friedmannotionthatamarketsystemcanregulate

itselfThisprevailingideologyofthelastfewdecades

hasnowbeenreversed.

PaulKrugman blames

modern

economics

(especiallymacro)forthecrisis.

Butofcourseneedtopresentbothviews


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EKGfortheAmericanEconomy


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IllustrativemonetarypolicychartfromSan

FranciscoFed,March1995,JuddandTrehan

198792

199394

196579


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IllustrativemonetarypolicychartfromStLouisFed

February2007,BillPoole


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PolicyDeviationsLeadinguptothe

CrisisandthePanicinFall2008

Interestratestoolowfortoolong

DiscretionaryfiscalstimulusofFeb08($152B)

On

again,

off

again

bailouts

financed

by

central

banksbalancesheet

on forBSCcreditorsbailout,off forLehmancreditors

bailout,on forAIGcreditorsbailout,off forTARProleout

Governmentregulators

and

supervisors

deviated

fromsoundregulatoryrules,especiallyatlarge

banks


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ChartfromThe Economist

(NowinEconomicsinActionbox)


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TheBoomBustinHousing

(nowinEconomicsinActionbox)


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HousingBoomandBust


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Stock PricesDuringthePanic


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TeachingAboutRegulatoryCapture:Explainsfailuretoenforceregulatoryrules

Cozyconnectionsbetween

governmentandthe

financialindustry.

Thisbookshows

governmenthelpingwell

connectedindividuals,who

inturn

helped

the

governmentofficials.

Result:Recklesspolicy


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LinesfromFightoftheCentury

Keynes:Evenyoumustadmitthatthelessonwevelearnedisthatmoreoversightsneededorelsewellgetburned

Hayek:Oversight?ThegovernmentslongbeeninbedwiththoseWallStreetexecsandthefirmsthattheyveled.


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Policymakersthendoubleddown

Discretionaryfiscalstimulusof2009($862billion)

Onetimepaymentsagain

Moregovernmentspendingtoo

Cashfor

clunkers

program

Quantitativeeasingin2009,nowcalledQE1

Purchasesof$1.25trillionofmortgagebackedsecurities,$300billionoflongertermTreasurybonds

QE2in

2010

and

2011

purchasesof$600billionoflongertermTreasurybonds.


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IncomeandConsumptionduringtheTwo

DiscretionaryStimulusPrograms


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Cashforclunkers:incentivesreallymatter

(NowinEconomicsinActionbox)


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Comparewithtextbookdiscussion:

SharpdropinIcausesexpenditurelinetoshiftdown

45-degree line

NewE line

Original E line

Originalincomelevel

Newincomelevel

INCOME OR REAL GDP

SPENDING

Income or real GDP falls by this amount

(more than by amount I falls ).

I falls by this

amount

Original point

of spending

balance

New point of spending balance

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OffsetbyCountercyclicalfiscalpolicy

IncreaseinGraisesGDPdependingonsizeofthe

multiplierand

amount

of

crowding

out

45-degree line

INCOME OR REAL GDP

SPENDING

G rises

25_10


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0

50

100

150

200

250

300

350

400

09Q1 09Q2 09Q3 09Q4 10Q1 10Q2 10Q3 10Q4

Billions of dollars, annual rates

--- Federal government investment--- Federal government consumption

--- Grants to state and

local governments

--- Temporary transfer

payments and credits

to persons

Two-Year Effect of ARRA on Major Federal Budget Categories(Source: Bureau of Economic Analysis)


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1,400

1,500

1,600

1,700

1,800

1,900

2,000

2,100

2,200

2,300

2005 2006 2007 2008 2009 2010

Total receipts of state

and local governments

Recepits less

ARRA grants

Purchases by state

and local governments

Billions of dollars, annual rates


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A Legacy:ExplodingFederalDebt

(ChartnowinFiscalPolicyChapter)


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TowardtheZeroInterestRate


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TheLiquidityTrap


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TheMonetaryBaseandtheSize

oftheFedsBalanceSheet


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International

Economics

Issues


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IllustrativeChartfromtheOECD,March2008


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IllustrativeChartfromtheOECD,March2008


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Chinaspurchasesofforeignreserves


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SoWhyDoEconomistsDisagree?

Studentsandeveryoneelsereallywantto

knowtheanswer

One

reason

is

that

the

details

of

their

models

aredifferent,eventhoughthereisagreement

aboutthebasicprinciples

ThenextthreechartsfromtheNewYorkTimes illustrate

this

well.


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-1

0

1

2

3

4

5

6

2009 2010

With stimulus

If no

stimulus

-1

0

1

2

3

4

5

6

2009 2010

With stimulus

If no

stimulus

The accumulation of hard data and real-lifeexperience has allowed more dispassionate analysts to

reach a consensus that the stimulus package, messy

as it is, is working

New York TimesNovember 12, 2009

NewKeynesian

Smets ECB

RobertBarro

Harvard


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ImplicationsforTeaching Manynewillustrationsofbasiceconomics

Interestingdebates

between

economists

Rulesversusdiscretion

Basicroleofgovernment

Moreintegrationofmicroandmacro

interestratestoolowfortoolong(macro)

housingmarketsincludingbubbles(micro)

stimuluspackage(macro)

regulatorycaptureandmoralhazard(micro)

newinstrumentsofmonetarypolicy(macro)

riskpremia ininterestrates(micro)

debateoversizeofmultipliers(macro)

cashforclunkers,firsttimehomebuyer(micro)


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ManyNewYouTubeVideos

QuantitativeEasing

Explained.

5million

downloads.

Doesn't

getitallrightandbrutalinplaces,butgoodfordiscussion

TheWrongFinancialAdviser CreatedbyNobelprizewinnerBillSharpe

FedChairmanontheDailyShowwithJonStewart.Fromtwo

differentepisodes

of

60Minutes,focusonwhetherquantitativeeasingisprintingmoney.

UnmaskingInterestRates,HonkyTonk Style

MerleHazardsings"InflationorDeflation

InsideJobTrailer

ChristineLagarde in

clip

from

InsideJobHayekKeynesrapvideos"FeartheBoomandBustandFight

oftheCentury

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