When's it all going to end? - Roger Farmer (UCLA)

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Roundtable on Lessons from the financial crisis: how much longer until the end of the crisis?

Barcelona GSE Summer Forum
Barcelona Graduate School of Economics
June 21, 2013

http://www.barcelonagse.eu/summer-forum.html

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When's it all going to end? - Roger Farmer (UCLA)

  1. 1. When It’s All Going to End? Barcelona, June 21st 2013 Roger E. A. Farmer, Distinguished Professor, UCLA and Senior Houblon Norman Fellow, Bank of England
  2. 2. Three Things to Think About June 18th 2013(c) Roger E A Farmer2
  3. 3. Three Things to Think About   Policy Matters June 18th 2013(c) Roger E A Farmer3
  4. 4. Three Things to Think About   Policy Matters   The Stock Market Matters June 18th 2013(c) Roger E A Farmer4
  5. 5. Three Things to Think About   Policy Matters   The Stock Market Matters   The Central Bank Matters June 18th 2013(c) Roger E A Farmer5
  6. 6. Policy Matters 0 5 10 15 20 25 30 1900 1925 1950 1975 2000 Unemployment Since 1890 (Shaded areas are NBER recessions) Before Keynes After Keynes Employment Act of 1946 Unemploymentrate(Percentoflaborforce) 6
  7. 7. The Stock Market Matters 7 The Great Depression 4 8 12 16 20 24 28 32 0 5 10 15 20 25 30 35 1928 1930 1932 1934 1936 1938 S&P 500 (Left Scale) Unemployment Rate (Right Scale) Black Monday October 28th 1929
  8. 8. The Stock Market Matters 8 The Great Depression The 2008 Financial Crisis 4 8 12 16 20 24 28 32 0 5 10 15 20 25 30 35 1928 1930 1932 1934 1936 1938 S&P 500 (Left Scale) Unemployment Rate (Right Scale) Black Monday October 28th 1929 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 3 4 5 6 7 8 9 10 11 12 2005 2006 2007 2008 2009 2010 Unemployment Rate (Right Scale) S&P 500 (Left Scale) Lehman Brothers Collapses September 15th 2008
  9. 9. The Central Bank Matters n  The Fed learned to fix recessions by lowering the interest rate 9 0 2 4 6 8 10 12 1985 1990 1995 2000 2005 2010 Treasury Bill Rate Unemployment Rate Percent Interest Rate and Unemployment (Shaded areas are NBER recessions)
  10. 10. The Central Bank Matters n  The Fed learned to fix recessions by lowering the interest rate n  The Fed ran out of ammunition in 2008 10 0 2 4 6 8 10 12 1985 1990 1995 2000 2005 2010 Treasury Bill Rate Unemployment Rate Percent Interest Rate and Unemployment (Shaded areas are NBER recessions)
  11. 11. How Bad is it? 11 93 94 95 96 97 98 99 100 101 5 10 15 20 25 30 35 40 45 50 55 October 1974 March 1980 July 1981 June 1990 February 2001 January 2008 1974 1980 1981 1990 2001 2008 Employment Peak Job Losses in the Last Six Recessions (Percent of payroll employment in peak month) Percent Months since employment peak
  12. 12. Can we Project this Forward? 12 93 94 95 96 97 98 99 100 101 5 10 15 20 25 30 35 40 45 50 55 October 1974 March 1980 July 1981 June 1990 February 2001 January 2008 1974 1980 1981 1990 2001 2008 Employment Peak Job Losses in the Last Six Recessions (Percent of payroll employment in peak month) Percent Months since employment peak 25 months Feb 2012
  13. 13. Projected End Date 13 93 94 95 96 97 98 99 100 101 5 10 15 20 25 30 35 40 45 50 55 October 1974 March 1980 July 1981 June 1990 February 2001 January 2008 1974 1980 1981 1990 2001 2008 Employment Peak Job Losses in the Last Six Recessions (Percent of payroll employment in peak month) Percent Months since employment peak 25 months Feb 2012 March 2015
  14. 14. But will employment per person recover? June 18th 2013(c) Roger E A Farmer14 .40 .44 .48 .52 .56 .60 .64 50 55 60 65 70 75 80 85 90 95 00 05 10 Employment to Population Ratio This graph paints a much less rosy picture!
  15. 15. Policy Matters   This projection is based on the assumption that policy continues to be active June 18th 2013(c) Roger E A Farmer15
  16. 16. Can we do Better Moving Forwards?   YES June 18th 2013(c) Roger E A Farmer16
  17. 17. Can we do Better Moving Forwards?   Monetary policy   One instrument   Two targets June 18th 2013(c) Roger E A Farmer17
  18. 18. Can we do Better Moving Forwards?   Monetary policy   One instrument   Two targets   The interest rate   Price stability   Growth and employment June 18th 2013(c) Roger E A Farmer18
  19. 19. Can we do Better Moving Forwards?   Monetary policy   One instrument   Two targets   The interest rate   Price stability   Growth and employment   Need a second instrument   Target the stock market directly June 18th 2013(c) Roger E A Farmer19
  20. 20. How? June 18th 2013(c) Roger E A Farmer20
  21. 21. How?   Set up an Exchange Traded Fund June 18th 2013(c) Roger E A Farmer21
  22. 22. How?   Set up an Exchange Traded Fund   Buy shares in the fund in exchange for debt June 18th 2013(c) Roger E A Farmer22
  23. 23. How?   Set up an Exchange Traded Fund   Buy shares in the fund in exchange for debt   Announce a price path for the fund June 18th 2013(c) Roger E A Farmer23
  24. 24. How?   Set up an Exchange Traded Fund   Buy shares in the fund in exchange for debt   Announce a price path for the fund   Increase the price if unemployment is too high June 18th 2013(c) Roger E A Farmer24
  25. 25. How?   Set up an Exchange Traded Fund   Buy shares in the fund in exchange for debt   Announce a price path for the fund   Increase the price if unemployment is too high   Lower the price if unemployment is too low June 18th 2013(c) Roger E A Farmer25
  26. 26. Summary   We learned how to operate monetary policy to generate price stability   It took three hundred years   We need to learn how to operate a new policy to generate financial stability June 18th 2013(c) Roger E A Farmer26

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