DOCSLIB.ORG

Housing and the Great Recession October 2012 the Russell Sage Foundation and the Stanford Center on Poverty and Inequality

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Housing and the Great Recession October 2012 the Russell Sage Foundation and the Stanford Center on Poverty and Inequality A GReat ReceSSIOn BRIeF Housing and the Great Recession October 2012 The Russell Sage Foundation and The Stanford Center on Poverty and Inequality INGRID GOULD ELLEN, NEW YORK UNIVERSITY SAMUEL DASTRUP, NEW YORK UNIVERSITY he story of the Great Recession cannot then conclude the brief by considering how KEY FINDINGS Tbe told without addressing housing and, we might find our way out of the downturn. in particular, the dramatic decline in housing The especially close relationship between • Since the first quarter of prices that began in late 2006. A distinctive the housing and labor markets makes it dif- 2006, U.S. households have lost over $7 trillion in home feature of the Great Recession is its intimate ficult, we’ll suggest, to find an exit strategy. equity. In the four prior reces- connection to the housing sector; indeed sions of the last 40 years, the many would argue that the Great Reces- How Bad Is It? effect on home equity was sion was triggered by the widespread failure It would be hard to argue that the downturn comparatively minor; indeed of risky mortgage products. Whatever the in the housing sector has been exaggerated in some recessions home sources of the Great Recession may have by the popular media. In most parts of the equity even continued to in- crease. been, the housing sector is still deeply trou- country, house prices have yet to recover, bled and is a key contributor to our ongoing and many households across the country • For Black and Hispanic economic duress. This recession brief lays have lost much of the wealth they had accu- households, the equity losses out the main features of the downturn in the mulated through homeownership or invested have been particularly severe, housing sector. as down payments. As figure 1 shows, both as have been declines in homeownership. The propor- the growth in equity between 2000 and 2006 tion of low-income house- We begin by taking on two simple but impor- and the losses experienced since then are holds who are severely rent- tant questions of fact. We first ask whether unprecedented in the post-war period. Since burdened (i.e., pay more than the downturn in the housing sector has been the first quarter of 2006, U.S. households 50% of their incomes for rent) as extreme as is commonly believed. Is all have lost over $7 trillion in home equity. As a has also increased during the Great Recession. the publicity about the housing sector truly result, CoreLogic estimates that 22 percent warranted and on the mark? We then con- of homeowners with mortgages are now • The housing crisis may have sider who has been especially hurt by the “underwater,” or have an outstanding mort- various indirect costs, includ- downturn in housing. In the popular media, gage balance that exceeds the value of their ing rising homelessness, there are two narratives frequently pressed, home. deteriorating health among those experiencing foreclo- one that expresses how widespread the pain sure, and declining educa- is, and another that focuses on the extent to Notably, such a housing collapse is not a tional performance among which some sectors of the population have typical recession experience. We see in fig- affected children. been especially vulnerable to the downturn ure 1 that, in the four prior recessions, there in housing. We will present some simple was either a slight downturn in home equity facts on differences in housing outcomes by or a slight reduction in the rate of increase. region, race, and age. None of these prior recessions comes close to the precipitous downturn in home equity Next, we’ll explore the hidden costs of the experienced in the Great Recession. downturn. Although some of the costs have been obvious and well publicized, oth- For further purposes of comparison, we’ve ers haven’t been as well appreciated even also presented in figure 1 the trends in unem- though they’re arguably as troubling. We ployment for each of the five recessions of the RECESSION TRENDS • The Russell Sage Foundation and The Stanford Center on Poverty and Inequality 2 Housing and the Great Recession last 40 years. The Great Recession, like previous recessions, Bankers Association reports that 7.9 percent of all mortgages has obviously brought about a sharp increase in unemploy- were seriously delinquent (at least 90 days past due) at the ment, but one of its truly distinctive features is the severe end of the second quarter of 2011. housing crisis layered on top of all the labor market problems. In short, there is little doubt that this is a housing crisis of The combination of a housing and employment crisis also unprecedented magnitude. makes this downturn especially difficult to reverse. Because of high unemployment rates and heightened job losses, a Who Has Been Hardest Hit? growing number of households have found it difficult to make We next ask whether certain groups and populations have mortgage payments. This combination of negative equity and borne the brunt of the housing crisis. The regional disparities weakened household budgets has pushed many homeown- are perhaps most obvious in this regard. While housing prices ers to default on their mortgages, as they can no longer afford have fallen throughout the country, the housing crash has had monthly payments and are unable to sell their home to pay a disproportionate impact in certain areas, just as the truism off their loan balance. There are other causes of foreclosure, “all real estate is local” would have it. For example, according of course. For example, high-cost mortgages and adverse to the Case Shiller housing price indices, as of the middle of events like divorce and illness make loan payments difficult, 2011, prices had fallen by 59 percent from their peak in Las and some borrowers may strategically default on their under- Vegas, while they had fallen by less than 10 percent in Denver. water mortgages. In general, the markets that saw the sharpest increase in Whatever the mix of causes may be, figure 2 shows that the prices in the first half of the 2000s experienced the greatest rate of foreclosure starts increased fourfold during the reces- declines in the recession. Within any given market, the rela- sion, a spike again much larger than any increase observed in tively less expensive properties typically experienced larger the three other recessions since the start of the data series in price increases during the boom and larger declines during 1980. While foreclosure starts have been declining since the the bust. Figure 3 illustrates this pattern in Boston and Miami. fall of 2010, rates are still high, and the reductions may partly reflect a slowing down of the foreclosure process, rather than Equity losses also appear to have been particularly severe any greater financial stability on the part of borrowers. Very for minority households. A recent study by the Pew Research large shares of borrowers are now late on their mortgage pay- Center found that median wealth fell by 66 percent from 2005 ments and at risk of default in the near future. The Mortgage to 2009 among Hispanic households and 53 percent among FIGURE 1. Unprecedented Home Equity Declines and Sharp Unemployment Increases in the Late 2000s Recession years $14,000 14% $12,000 12% TATE ES L $10,000 10% EA ) ate (%) R S $8,000 R LD 8% ION O LL SH $6,000 6% ($ BI N HOU I $4,000 4% nemployment U $2,000 QUITY QUITY 2% E $0 0% 1970 1975 1980 1985 1990 1995 2000 2005 2010 QUARTER/YEAR Equity in Household Real Estate ($ Billions) Unemployment Rate Source: Board of Governors of the Federal Reserve System; Bureau of Labor Statistics. RECESSION TRENDS • The Russell Sage Foundation and The Stanford Center on Poverty and Inequality 3 Housing and the Great Recession Black households, as compared with just 16 percent among owned their homes in 2010, down from 46.3 and 49.3 percent White households. Multiple studies show that subprime lend- respectively in 2006. ing during the housing price boom was more prevalent in minority neighborhoods, while other research suggests that As shown in figure 5, homeownership rates have also fallen neighborhoods with large shares of minority households also much more sharply for young adults as compared to older experienced the sharpest increases in default. adults. This is both because transitions out of homeownership are less likely for older homeowners and because transitions Reductions in homeownership rates following the housing into homeownership have slowed due to the weak labor mar- crash have also been more extreme for minority groups. While ket, uncertainty about prices, and tightened underwriting. all racial and ethnic groups have experienced a decline in homeownership in recent years, the fall has been sharpest for Far less attention has been paid to how renters have fared in Blacks and Latinos. In figure 4, we see that just 44.2 percent the recession. Although housing prices have fallen and prices of Black households and 47.1 percent of Latino households in general declined during the recession, figure 6 shows that FIGURE 2. Foreclosure Starts Quadrupled During the Great Recession Recession years 1.6% 1.4% 1.2% ATE (%) ATE R 1.0% .8% URE START URE START S .6% O L .4% OREC F .2% 0% 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 YEAR Source: MBA National Delinquency Survey. FIGURE 3. Lower Priced Homes Experienced Greater Price Swings Boston Housing Price Index by Price Tier Miami Housing Price Index by Price Tier 350 350 300 300 250 250 2000 = 100.0) 2000 = 100.0) 200 200 ANUARY ANUARY .S.
Load more

Recommended publications
  • Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling
    NBER WORKING PAPER SERIES FACTS AND CHALLENGES FROM THE GREAT RECESSION FOR FORECASTING AND MACROECONOMIC MODELING Serena Ng Jonathan H. Wright Working Paper 19469 http://www.nber.org/papers/w19469 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 September 2013 We are grateful to Frank Diebold and two anonymous referees for very helpful comments on earlier versions of this paper. Kyle Jurado provided excellent research assistance. The first author acknowledges financial support from the National Science Foundation (SES-0962431). All errors are our sole responsibility. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. At least one co-author has disclosed a financial relationship of potential relevance for this research. Further information is available online at http://www.nber.org/papers/w19469.ack NBER working papers are circulated for discussion and comment purposes. They have not been peer- reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2013 by Serena Ng and Jonathan H. Wright. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Facts and Challenges from the Great Recession for Forecasting and Macroeconomic Modeling Serena Ng and Jonathan H. Wright NBER Working Paper No. 19469 September 2013 JEL No. C22,C32,E32,E37 ABSTRACT This paper provides a survey of business cycle facts, updated to take account of recent data. Emphasis is given to the Great Recession which was unlike most other post-war recessions in the US in being driven by deleveraging and financial market factors.
    [Show full text]
  • Escaping the Great Recession"
    Escaping the Great Recession Francesco Bianchi Leonardo Melosi Cornell University FRB of Chicago Duke University CEPR and NBER April 2015 Abstract We show that policy uncertainty about how the rising public debt will be stabilized empirically accounts for the lack of de‡ation in the US economy during the zero-lower- bound period. Announcing …scal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning …scal discipline, at the cost of increasing macroeconomic instability. This policy trade-o¤ can be resolved by committing to in‡ating away only the portion of debt accumulated during the recession. JEL Codes: E31, E52, E62, E63, D83 Keywords: Policy uncertainty, zero lower bound, Markov-switching models, shock-speci…c policy rules. We are grateful to Gadi Barlevy, Dario Caldara, Je¤ Campbell, Gauti Eggertsson, Marty Eichenbaum, Martin Ellison, Jesus Fernandez-Villaverde, Jonas Fisher, Alejandro Justiniano, Christian Matthes, Maurice Obstfeld, Giorgio Primiceri, Ricardo Reis, David Romer, Chris Sims, Martin Uribe, Mike Woodford, as well as all seminar participants at the NBER Monetary Economics group, SITE-Stanford University, Northwestern University, NY Fed, Chicago Fed, SED Annual Meeting, Cornell University, University of Wisconsin-Madison, Toulouse School of Economics, University of Michigan, Cleveland Fed, UPF, ECB, ESSIM Tarragona, Goethe University, Bonn University, Bank of England, UC Irvine, and the University of British Columbia for useful comments and suggestions. The views in this paper are solely the responsibility of the authors and should not be interpreted as re‡ecting the views of the Federal Reserve Bank of Chicago or any other person associated with the Federal Reserve System.
    [Show full text]
  • Missing Disinflation and Missing Inflation
    Missing Disinflation and Missing Inflation: A VAR Perspective∗ Elena Bobeica and Marek Jaroci´nski European Central Bank In the immediate wake of the Great Recession we didn’t see the disinflation that most models predicted and, subse- quently, we didn’t see the inflation they predicted. We show that these puzzles disappear in a vector autoregressive model that properly accounts for domestic and external factors. This model reveals strong spillovers from U.S. to euro-area inflation in the Great Recession. By contrast, domestic factors explain much of the euro-area inflation dynamics during the 2012–14 missing inflation episode. Consequently, euro-area economists and models that excessively focused on the global nature of inflation were liable to miss the contribution of deflationary domestic shocks in this period. JEL Codes: E31, E32, F44. 1. Introduction The dynamics of inflation since the start of the Great Recession has puzzled economists. First, a “missing disinflation” puzzle emerged when inflation in advanced economies failed to fall as much as expected given the depth of the recession (see, e.g., Hall 2011 on the United States and Friedrich 2016 on the rest of the advanced ∗We thank Marta Ba´nbura, Fabio Canova, Matteo Ciccarelli, Luca Dedola, Thorsten Drautzburg, Paul Dudenhefer, Philipp Hartmann, Giorgio Primiceri, Chiara Osbat, Mathias Trabandt, and three anonymous referees for their com- ments. This paper is part of the work of the Low Inflation Task Force of the ECB and the Eurosystem. The opinions in this paper are those of the authors and do not necessarily reflect the views of the European Central Bank and the Eurosys- tem.
    [Show full text]
  • Escaping the Great Recession"
    Escaping the Great Recession Francesco Bianchi Leonardo Melosi Cornell University FRB of Chicago Duke University CEPR and NBER January 2016 Abstract We show that policy uncertainty about how the rising public debt will be stabilized empirically accounts for the lack of de‡ationin the US economy during the zero-lower-bound period. Announc- ing …scal austerity is detrimental in the short run, but it preserves macroeconomic stability. On the other hand, a recession can be mitigated by abandoning …scal discipline, at the cost of increasing macroeconomic instability. This policy trade-o¤ can be resolved by committing to in‡ating away only the portion of debt accumulated during the recession. JEL Codes: E31, E52, E62, E63, D83 Keywords: Monetary and …scal policies, Policy uncertainty, zero lower bound, Markov-switching models, Bayesian methods, shock-speci…c policy rules. We are grateful to Gadi Barlevy, Dario Caldara, Je¤ Campbell, Gauti Eggertsson, Marty Eichenbaum, Martin Ellison, Jesus Fernandez-Villaverde, Jonas Fisher, Alejandro Justiniano, Christian Matthes, Maurice Obstfeld, Giorgio Primiceri, Ricardo Reis, David Romer, Chris Sims, Martin Uribe, Mike Woodford, as well as all seminar participants at the NBER Monetary Economics group, SITE-Stanford University, Northwestern University, NY Fed, Chicago Fed, SED Annual Meeting, Cornell University, University of Wisconsin-Madison, Toulouse School of Economics, University of Michigan, Cleveland Fed, UPF, ECB, ESSIM Tarragona, Goethe University, Bonn University, Bank of England, UC Irvine, and the University of British Columbia for useful comments and suggestions. The views in this paper are solely the responsibility of the authors and should not be interpreted as re‡ecting the views of the Federal Reserve Bank of Chicago or any other person associated with the Federal Reserve System.
    [Show full text]
  • Macroeconomic Causes of the Financial Crisis and Great Recession
    A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Palley, Thomas I. Working Paper America's exhausted paradigm: Macroeconomic causes of the financial crisis and great recession Working Paper, No. 02/2009 Provided in Cooperation with: Berlin Institute for International Political Economy (IPE) Suggested Citation: Palley, Thomas I. (2009) : America's exhausted paradigm: Macroeconomic causes of the financial crisis and great recession, Working Paper, No. 02/2009, Hochschule für Wirtschaft und Recht Berlin, Institute for International Political Economy (IPE), Berlin This Version is available at: http://hdl.handle.net/10419/59308 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Institute for International Political Economy Berlin America’s Exhausted Paradigm: Macroeconomic Causes of the Financial Crisis and Great Recession Author: Thomas I.
    [Show full text]
  • Crapshoot Investing
    Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market into a Casino Jim McTague Vice President, Publisher Tim Moore Cover Designer Chuti Prasertsith Associate Publisher and Director of Managing Editor Kristy Hart Marketing Amy Neidlinger Project Editor Anne Goebel Executive Editor Jim Boyd Copy Editor Gill Editorial Services Editorial Assistant Pamela Boland Proofreader Water Crest Publishing Development Editor Russ Hall Senior Indexer Cheryl Lenser Operations Manager Gina Kanouse Senior Compositor Gloria Schurick Senior Marketing Manager Julie Phifer Manufacturing Buyer Dan Uhrig Publicity Manager Laura Czaja Assistant Marketing Manager Megan Colvin © 2011 by Jim McTague Publishing as FT Press Upper Saddle River, New Jersey 07458 This book is sold with the understanding that neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services or advice by publishing this book. Each individual situation is unique. Thus, if legal or financial advice or other expert assistance is required in a specific situation, the services of a competent professional should be sought to ensure that the situation has been evalu- ated carefully and appropriately. The author and the publisher disclaim any liability, loss, or risk resulting directly or indirectly, from the use or application of any of the contents of this book. FT Press offers excellent discounts on this book when ordered in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales, 1-800-382-3419, [email protected]. For sales outside the U.S., please contact International Sales at [email protected]. Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners.
    [Show full text]
  • From the Great Depression to the Great Recession
    Money and Velocity During Financial Crises: From the Great Depression to the Great Recession Richard G. Anderson* Senior Research Fellow, School of Business and Entrepreneurship Lindenwood University, St Charles, Missouri, [email protected] Visiting Scholar. Federal Reserve Bank of St. Louis, St. Louis, MO Michael Bordo Rutgers University National Bureau of Economic Research Hoover Institution, Stanford University [email protected] John V. Duca* Associate Director of Research and Vice President, Research Department, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265, (214) 922-5154, [email protected] and Adjunct Professor, Southern Methodist University, Dallas, TX December 2014 Abstract This study models the velocity (V2) of broad money (M2) since 1929, covering swings in money [liquidity] demand from changes in uncertainty and risk premia spanning the two major financial crises of the last century: the Great Depression and Great Recession. V2 is notably affected by risk premia, financial innovation, and major banking regulations. Findings suggest that M2 provides guidance during crises and their unwinding, and that the Fed faces the challenge of not only preventing excess reserves from fueling a surge in M2, but also countering a fall in the demand for money as risk premia return to normal. JEL codes: E410, E500, G11 Key words: money demand, financial crises, monetary policy, liquidity, financial innovation *We thank J.B. Cooke and Elizabeth Organ for excellent research assistance. This paper reflects our intellectual debt to many monetary economists, especially Milton Friedman, Stephen Goldfeld, Richard Porter, Anna Schwartz, and James Tobin. The views expressed are those of the authors and are not necessarily those of the Federal Reserve Banks of Dallas and St.
    [Show full text]
  • The Role of Housing and Mortgage Markets in the Financial Crisis
    The Role of Housing and Mortgage Markets in the Financial Crisis Manuel Adelino, Duke University, and NBER Antoinette Schoar, MIT, and NBER Felipe Severino, Dartmouth College June 2018 Abstract Ten years after the financial crisis there is widespread agreement that the boom in mortgage lending and its subsequent reversal were at the core of the Great Recession. We survey the existing evidence which suggests that inflated house price expectations across the economy played a central role in driving both demand and supply of mortgage credit before the crisis. The great misnomer of the 2008 crisis is that it was not a "subprime" crisis but rather a middle-class crisis. Inflated house price expectations led households across all income groups, especially the middle class, to increase their demand for housing and mortgage leverage. Similarly, banks lent against increasing collateral values and underestimated the risk of defaults. We highlight how these emerging facts have essential implications for policy. We thank Matt Richarson (referee) for insightful comments. All errors are our own. Ten years after the financial crisis of 2008 some of the drivers and implications of the crisis are starting to come into better focus. The majority of observers agrees that mortgage lending and housing markets were at the core of the recession. US housing markets experienced an unparalleled boom in house prices and a steep expansion in mortgage credit to individual households before 2007. Once house prices started to collapse, the drop in collateral values not only lead to increased defaults but also affected the stability of the financial markets. The ensuing dislocations in the financial sector led to a drying up of credit flows and other financial functions in the economy and ultimately a significant slowdown of economic activity, which cumulated in the great recession.
    [Show full text]
  • Coping with the Great Recession: Disparate Impacts on Economic Well-Being in Poor Neighborhoods
    Coping with the Great Recession: Disparate Impacts on Economic Well-Being in Poor Neighborhoods Robert I. Lerman Sisi Zhang Opportunity and Ownership Project An Urban Institute Project Exploring Upward Mobility REPORT 6 Coping with the Great Recession: Disparate Impacts on Economic Well-Being in Poor Neighborhoods Robert I. Lerman Sisi Zhang Given the chance, many low-income families can acquire assets and become more financially secure. Con- servatives and liberals increasingly agree that government’s role in this transition requires going beyond tradi- tional antipoverty programs to encourage savings, homeownership, and private pensions. The Urban Institute’s Opportunity and Ownership Project presents some of our findings, analyses, and recommendations. The authors are grateful to the Pew Charitable Trusts for funding this study and providing thoughtful comments on the report. The authors thank the Ford Foundation and Annie E. Casey Foundation for funding related work under the Opportunity and Ownership Project at the Urban Institute. Copyright © 2012. The Urban Institute. All rights reserved. Except for short quotes, no part of this report may be reproduced or used in any form or by any means, electronic or mechanical, including photocopying, recording, or by information storage or retrieval system, without written permission from the Urban Institute. The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance problems facing the nation. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders. Contents Introduction . 1 Literature . 2 Results. 3 Who Lives in Poor Neighborhoods?.
    [Show full text]
  • From a Recession to the COVID-19 Pandemic: Inflation–Unemployment
    economies Article From a Recession to the COVID-19 Pandemic: Inflation–Unemployment Comparison between the UK and India Vijay Victor 1,* , Joshy Joseph Karakunnel 1 , Swetha Loganathan 1 and Daniel Francois Meyer 2 1 Department of Economics, CHRIST University, Bengaluru 560029, Karnataka, India; [email protected] (J.J.K.); [email protected] (S.L.) 2 College of Business and Economics, University of Johannesburg, Auckland Park 2006, South Africa; [email protected] * Correspondence: [email protected] Abstract: The recession in India and the UK peaked in 2017 due to the implications of new policy initiatives. The outbreak of the COVID-19 pandemic at the beginning of 2020 intensified the crisis, causing a drastic decline in aggregate demand and output. India and the UK have resorted to monetary and fiscal stimulus packages to face the economic crisis. This study investigated the inflation–unemployment dynamics during the recession and COVID-19 times in India and the UK. Using a generalized additive model (GAM), the results of this study revealed that the recession had given way to stagflation in India. In contrast, in the UK, it has led to a more severe recession in the short-run. During the downturn, policy initiatives aggravate the recession and eventually turn to stagflation in India due to inflation caused by the weak supply side. However, in the UK, the policy initiatives during this downturn pushed the economy into a deeper recession due to reduced demand. The outbreak of the COVID-19 pandemic has had a similar recessionary impact on both Citation: Victor, Vijay, Joshy Joseph economies.
    [Show full text]
  • The Great Recession: a Macroeconomic Earthquake
    FEDERAL RESERVE BANK of MINNEAPOLIS ECONOMIC POLICY PAPER 17-01 FEBRUARY 2017 The Great Recession: A Macroeconomic Earthquake EXECUTIVE SUMMARY Why it happened, endured and wasn’t foreseen. The Great Recession was particularly severe and has endured far longer And how it’s changing theory than most recessions. Economists now believe it was caused by a perfect storm of declining home Lawrence J. Christiano prices, a financial system heavily Northwestern University invested in house-related assets Federal Reserve Bank of Minneapolis and a shadow banking system highly vulnerable to bank runs or rollover risk. It has lasted longer than most Introduction recessions because economically The Great Recession struck individuals, the aggregate damaged households were unwilling economy and the economics profession like an earthquake, or unable to increase spending, and its aftershocks are still being felt. Job losses and housing thus perpetuating the recession by foreclosures devastated many families. National economies a mechanism known as the paradox were deeply damaged and have yet to fully recover. And of thrift. Economists believe the economists—who failed to predict either the crisis or the Great Recession wasn’t foreseen because the size and fragility of the recession—have been struggling to understand why they shadow banking system had gone didn’t grasp the fragility of the financial system and the unnoticed. duration of the recession. The recession has had an inor- This essay briefly discusses why the Great Recession is dinate impact on macroeconomics considered both “Great” and a “Recession.” It then turns to as a discipline, leading economists the emerging consensus about its cause, its duration and the to reconsider two largely discarded reasons so few predicted it.
    [Show full text]
  • What Happened: Financial Factors in the Great Recession
    NBER WORKING PAPER SERIES WHAT HAPPENED: FINANCIAL FACTORS IN THE GREAT RECESSION Mark Gertler Simon Gilchrist Working Paper 24746 http://www.nber.org/papers/w24746 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 June 2018 Prepared for the Journal of Economic Perspectives. Thanks to Ben Bernanke and Oscar Jorda for helpful comments and to Sneha Agrawal and James Graham for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications. © 2018 by Mark Gertler and Simon Gilchrist. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. What Happened: Financial Factors in the Great Recession Mark Gertler and Simon Gilchrist NBER Working Paper No. 24746 June 2018 JEL No. E32,E44 ABSTRACT Since the onset of the Great Recession, an explosion of both theoretical and empirical research has investigated how the financial crisis emerged and how it was transmitted to the real sector. The goal of this paper is to describe what we have learned from this new research and how it can be used to understand what happened during the Great Recession. In the process, we also present some new evidence on the role of the household balance sheet channel versus the disruption of banking.
    [Show full text]