Econ 24-1: First Written Assignment

Due via email to delong@econ.berkeley.edu by 5 pm on Thursday November 17:

The coming of our current Lesser Depression required four things

• A wave of increased savings hitting the United States and looking for safe assets in which to invest itself.
• A collapse of lending standards in housing finance so that investments in mortgages that were in fact highly risky were sold as--and were believed to be--safe investments.
• A failure of risk controls in high finance so that the highly-leveraged banks and shadow banks that were supposed to manage their own risks and distribute and diversify risks throughout the economy instead concentrated them--and were threatened with bankruptcy when the housing bubble collapsed.
• An inability or unwillingness by the Federal Reserve to cut off the crisis in its early stages and fix it.
• A mechanism that turned financial distress on Wall Street into a large-scale collapse in employment.

That's: "required five things…"

Suppose that you have to tell this story to somebody who is unfamiliar with any economics and with the history of the past five years. Write 400 words (i.e., between 300 and 500) explaining as best you can to this unfamiliar audience just how this all happened.

Some free associating brainstorming (TBC):

Bernanke's Global Savings Glut
Global imbalances
wealth effect
opportunistic disinflation (graph)
boom on the European periphery
Current Account Deficits
capital flows
sudden stops
capital controls
Spanish mortgages, strict regulation vanilla terms
monetary policy
bubblenomics
Glass-Steagall
historical precedents
combo monetary and fiscal policy
if policy had been better?
China's stimulus communist efficiency (ironic)
Euro decision-making inefficiency (ironic)
Hopey Changey German worksharing
trade deficits
mortgage dealers financial industry fraud for fees
rating agencies
cooptation
toxic assets
write downs
zombie banks
zombie banks Japanese version
Swedish model
banks sitting on larger reserves, not creating money Minn. Fed Pres speech
liquidity trap
zero bound
shadow banking system
repo
Gary Gorton
Internet Bubble
jobless recoveries 1992, 2001
Volcker recession - S&L crisis

Buzzkills on the right say too much debt before means austerity now. Buzzkills on the left point to the trade deficit and the fact workers wages haven't gone up in 30 years. The wealth effect replaced some of the loss of demand there, which has an element of truth. There's no reason we can't return to full employment however.