The Great Recession - A Final Exam

[mike777]

I would like clarity on one point from Mike: As I read your post, it was not, or at least not only, asking what caused the recession but more significantly stating that many economists believe that the financial crisis was caused by the severe recession. You said:

"What caught my eye was the claim that that the financial crisis produced a severe recession rather than the other way around. I don't know but I thought this question was still very much open to debate among economists?"

 

It's then fair to ask: Which economist think this? No doubt the financial crisis and the recession had a feedback relationship but, for example, are there economists who think that the collapse of Lehman Bros was a result, rather than a partial cause, of the severe recession? The economy was in recession before the collapse, but the severe recession was later, no? I suppose it depends on the meaning of severe.

 

And maybe on the definition of cause.

I have read my Aristotle so I know that causes come in four categories. Possibly it was the ontological cause.aka the bullshit cause

 

 

There was a Financial Analyst Journal paper a while ago.

 

I posted a link in some forum here on it but I cannot find it now. This was maybe one or two years ago?

 

Perhaps someone with better search skills than myself could find it or I could just read through 2 or 3 years of journals stashed away upstairs someplace.

 

The big things I remember from it was:

1) the claim the recession caused the finan...crises not the other way around

2) macro economists dont know/agree what causes recessions, any recession.

 

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"Most explanations of the 2007-2008 financial crises-including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble-are inconsistent with the elementary principles of finance."

 

 

 

From a paper by Richard Roll in 2011.

 

I think in the past here in the forums I posted comments from an article written by numerous profs from the Univ of Chicago which basically stated economists dont know what causes a recession but I cannot seem to find it with the search function.

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In any event Roll goes on to suggest that if we misdiagnosis the problem we may be using the wrong treatment protocol and the current medicine may be making the problem worse. Hence the stubbornly high rate of unemployment and lethargic consumer spending.

 

 

He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

 

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All of this reflects back on the current budget talks and whether we should advocate for a larger or relatively smaller public sector.

 

Financial Anaylsts Journal volume 67, number 2. 2011.

[Winstonm]

There was a Financial Analyst Journal paper a while ago.

 

I posted a link in some forum here on it but I cannot find it now. This was maybe one or two years ago?

 

Perhaps someone with better search skills than myself could find it or I could just read through 2 or 3 years of journals stashed away upstairs someplace.

 

The big things I remember from it was:

1) the claim the recession caused the finan...crises not the other way around

2) macro economists dont know/agree what causes recessions, any recession.

 

----

 

 

 

 

"Most explanations of the 2007-2008 financial crises-including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble-are inconsistent with the elementary principles of finance."

 

 

 

From a paper by Richard Roll in 2011.

 

I think in the past here in the forums I posted comments from an article written by numerous profs from the Univ of Chicago which basically stated economists dont know what causes a recession but I cannot seem to find it with the search function.

-----

 

 

In any event Roll goes on to suggest that if we misdiagnosis the problem we may be using the wrong treatment protocol and the current medicine may be making the problem worse. Hence the stubbornly high rate of unemployment and lethargic consumer spending.

 

 

He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined.

 

---

 

 

All of this reflects back on the current budget talks and whether we should advocate for a larger or relatively smaller public sector.

 

Financial Anaylsts Journal volume 67, number 2. 2011.

 

The other side of this is that the path in previous financial crisis led recessions is a slower and longer recovery.

[mike777]

"Most explanations of the 2007-2008 financial crises-including excessive leverage, subprime mortgages, exotic derivatives, reckless risk taking, and easy money that spawned a housing bubble-are inconsistent with the elementary principles of finance."

 

 

In any event Roll goes on to suggest that if we misdiagnosis the problem we may be using the wrong treatment protocol and the current medicine may be making the problem worse. Hence the stubbornly high rate of unemployment and lethargic consumer spending.

 

 

He says that perhaps Human capital values starting falling in mid2007 because the anticipated growth rate in labor income declined

 

 

From a paper by Richard Roll in 2011

 

http://www.cfapubs.org/doi/pdf/10.2469/faj.v67.n2.3

[y66]

Why Economics Failed by Paul Krugman.

 

On Wednesday, I wrapped up the class I’ve been teaching all semester: “The Great Recession: Causes and Consequences.” (Slides for the lectures are available via my blog.) And while teaching the course was fun, I found myself turning at the end to an agonizing question: Why, at the moment it was most needed and could have done the most good, did economics fail?

 

I don’t mean that economics was useless to policy makers. On the contrary, the discipline has had a lot to offer. While it’s true that few economists saw the crisis coming — mainly, I’d argue, because few realized how fragile our deregulated financial system had become, and how vulnerable debt-burdened families were to a plunge in housing prices — the clean little secret of recent years is that, since the fall of Lehman Brothers, basic textbook macroeconomics has performed very well.

 

But policy makers and politicians have ignored both the textbooks and the lessons of history. And the result has been a vast economic and human catastrophe, with trillions of dollars of productive potential squandered and millions of families placed in dire straits for no good reason.

 

In what sense did economics work well? Economists who took their own textbooks seriously quickly diagnosed the nature of our economic malaise: We were suffering from inadequate demand. The financial crisis and the housing bust created an environment in which everyone was trying to spend less, but my spending is your income and your spending is my income, so when everyone tries to cut spending at the same time the result is an overall decline in incomes and a depressed economy. And we know (or should know) that depressed economies behave quite differently from economies that are at or near full employment.

 

For example, many seemingly knowledgeable people — bankers, business leaders, public officials — warned that budget deficits would lead to soaring interest rates and inflation. But economists knew that such warnings, which might have made sense under normal conditions were way off base under the conditions we actually faced. Sure enough, interest and inflation rates stayed low.

 

And the diagnosis of our troubles as stemming from inadequate demand had clear policy implications: as long as lack of demand was the problem, we would be living in a world in which the usual rules didn’t apply. In particular, this was no time to worry about budget deficits and cut spending, which would only deepen the depression. When John Boehner, then the House minority leader, declared in early 2009 that since American families were having to tighten their belts, the government should tighten its belt, too, people like me cringed; his remarks betrayed his economic ignorance. We needed more government spending, not less, to fill the hole left by inadequate private demand.

 

But a few months later President Obama started saying exactly the same thing. In fact, it became a standard line in his speeches. Nor was it just rhetoric. Since 2010, we’ve seen a sharp decline in discretionary spending and an unprecedented decline in budget deficits, and the result has been anemic growth and long-term unemployment on a scale not seen since the 1930s.

 

So why didn’t we use the economic knowledge we had?

 

One answer is that most people find the logic of policy in a depressed economy counterintuitive. Instead, what resonates with the public are misleading analogies with the finances of an individual family, which is why Mr. Obama began echoing Mr. Boehner.

 

And even supposedly well-informed people balk at the notion that simple lack of demand can wreak so much havoc. Surely, they insist, we must have deep structural problems, like a work force that lacks the right skills; that sounds serious and wise, even though all the evidence says that it’s completely untrue.

 

Meanwhile, powerful political factions find that bad economic analysis serves their objectives. Most obviously, people whose real goal is dismantling the social safety net have found promoting deficit panic an effective way to push their agenda. And such people have been aided and abetted by what I’ve come to think of as the trahison des nerds — the willingness of some economists to come up with analyses that tell powerful people what they want to hear, whether it’s that slashing government spending is actually expansionary, because of confidence, or that government debt somehow has dire effects on economic growth even if interest rates stay low.

 

Whatever the reasons basic economics got tossed aside, the result has been tragic. Most of the waste and suffering that have afflicted Western economies these past five years was unnecessary. We have, all along, had the knowledge and the tools to restore full employment. But policy makers just keep finding reasons not to do the right thing.

[mike777]

Just read a short article where the author said the great recession started in August of 2007 when money markets lost their liquidity.

 

Not sure what caused this loss.

 

The focus of the article, based on book about "trading" was really about the principle of trade first, figure out the cause later

[mike777]

I thought it was interesting to compare the trend of this data to GDP

 

Data for this Date Range

 

US Government Gross Output Historical Data

 

March 31, 2014 3.061T

Dec. 31, 2013 3.040T

Sept. 30, 2013 3.048T

June 30, 2013 3.038T

March 31, 2013 3.044T

Dec. 31, 2012 3.049T

Sept. 30, 2012 3.082T

June 30, 2012 3.046T

March 31, 2012 3.045T

Dec. 31, 2011 3.018T

Sept. 30, 2011 3.042T

June 30, 2011 3.028T

March 31, 2011

------------------------------------------------

 

usa GDP

 

 

Data for this Date Range

 

 

 

March 31, 2014 17.15T

Dec. 31, 2013 17.09T

Sept. 30, 2013 16.91T

June 30, 2013 16.66T

March 31, 2013 16.54T

Dec. 31, 2012 16.42T

Sept. 30, 2012 16.36T

June 30, 2012 16.16T

March 31, 2012 16.04T

Dec. 31, 2011 15.82T

Sept. 30, 2011 15.61T

June 30, 2011 15.46T

March 31, 2011