[MUSIC] Okay, I want to talk a little bit about lessons from this crisis. And I want to start with trying to measure the impact of the strategy we adopted. So, I'm gonna walk through ten different prisms for looking at impact. It's important to look at lots of different ones because we're trying to measure impacting a bunch of different dimensions. And well I'm gonna try to help solve for the basic problem which is we don't know what the counterfactual would have been. And that creates some challenge for judging efficacy of policy. I just wanna start by making the obvious point that the economic costs of the crisis were brutal, worst recession, worst economic outcome since the Great Depression. Real GDP fell more than 4%. Took us more than three years to return to the pre-crisis level of GDP. The public debt burden of the country increased dramatically because of the cost of the recession, increased by I think 30 percentage points of GDP. Most of that was the cyclical effects of the down turn. At the bottom of the crisis we lost $15 trillion in household wealth. But again, these costs in our view, and I think there's a very strong case for this, would have been much greater in the absence of the measures we ultimately took and put in place. The damage was terrible in part because of set of policy choices and policy failures. If you think about failures in policy before the crisis, here's a list of some. The level of home equity, that basic financial cushion people maintained was very thin, very small relative to the value of debt people borrowed and relative of course, to the losses they faced as house prices declined. The capital cushions in the banking system were too thin. They were not conservative enough. But, more important than that, they were applied much more narrowly than they should've been. They were applied to just a fraction of the US financial system. And there was much too much issuance of short term bank, deposit-like liabilities in the financial system. These are types of financial commitments, or financial instruments that look like deposits. People have this sense they could withdraw on demand at their will for par. And that itself made the financial system rest on very perilous foundation, very venerable to runs and panics. In the crisis we had a bunch of other things, again mostly because of limits of authority, that exacerbated the damage. We escalated late. The crisis got a huge amount of momentum and caused a huge amount of damage before we were able to muster the authority and the tools to try to break the panic. Fiscal policy also escalated somewhat late, and then it turned contractionary. It became a drag on growth too early in the recovery. And as I've just described, the mortgage restructuring process, the tools we had to restructure the mortgage of the American economy were very limited without legislation. And ultimately, therefore we were able to do less than might've been ideal in helping mitigate some of the damage caused by the housing crisis. A second way of looking at the impact of the thing we did. This is a comparison between the size of the shock that hit the American economy in this crisis versus the size of the shock that hit the American economy in the Great Depression. And the difference in outcomes achieved by the different strategies that we were employed in that context. And what you can see from this is that the size of the financial shock measured by the decline in household wealth was about five times greater at the beginning of this crisis than it was at the beginning of the Great Depression. And yet, the damage to the economy was much more limited. GDP fell by a fraction, maybe one-fifth of what it did in the Great Depression. And the rise in unemployment, although tragic and terrible, stopped at 10%, double what it was pre-crisis. Whereas, it rose to 25% in the Great Depression. A third way of looking at the cause is to compare the outcomes that were achieved in the United States relative to other countries caught up in this crisis and past crisis. So this shows the path of employment achieved in some of the worst crises of the last century. What’s important to see about this is it's using the US in line is this crisis is the orange line. The depth of the decline of the United States was much shallower. And the pace and timing of the recovery started much earlier, pace of recovery stronger in many of those cases. The flat line at the top again is Japan, which experiences much less of a contraction but a much longer period of drift moving sideways. Now, if you compare the outcomes of the United States to the outcomes in most of the major economies caught up in this crisis, not the crisis of the last 100 years, you can see that the decline in the US was also softer. US came out earlier, and the extent of recovery relative to pre-crisis levels, much more dramatic. Part of that is because the initial conditions were different. Part of it's because we had greater degrees of freedom than other countries. But a lot of it was how we use that freedom. If you add this line, you can't see the end of it. That's the Great Depression line, again. So these crises, again, much worse than this crisis for most of those economies. A fourth way of looking at this, financial crises are terrible for the economy, because credit stops, sucks the oxygen out of the economy. And although it took some time to get traction, ultimately, and here's one measure of this, we were able to restart a key part of the credit markets very successful, very quickly. This shows the consumer asset-backed securities market, which stopped functioning in the panic of a wave, was still frozen in early 09. But we got going again very, very quickly because of the framework we put it place for to help backstop and support that part of the US financial system. Now this was a terrible crisis, and most people perceived it that way. And if you look at the credible estimates of independent people of what the costs of the rescue and what the crisis might be for the United States, they were catastrophic. So here's a set of estimates. If you look at the third one, that's the estimates of the IMF in early part of 09, which said we would lose $2 trillion, spend more than 12% of GDP, and in stabilizing, re-capitalizing the financial system. These are the direct costs, estimated direct costs, of the rescue at a moment when the crisis was most acute. They're not the costs, the total fiscal costs of the crisis, the lost revenue, the rise in transfer payments, rise in benefits. This is just the cost of the financial rescue, so estimates were $2 trillion. But in the end, the total combined effects cost of the rescue, impact of the rescue with this the tax payer will earn hundreds of billions of dollars. Again, because of the design of the strategy we adopted, because of how forceful we were in protecting the system and getting the economy going again relatively quickly. So on all the most famous unpopular programs of the time, the taxpayer, for example, the capital support programs for banks, the guarantees for banks, interventions in AIG and the other big institutions. And even in Fannie and Freddie delivered a very substantial positive return to the taxpayer. [MUSIC]
