The Great Recession of 2007 and Quantitative Easing

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From the course by University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1245 ratings

University of California, Irvine

The Power of Macroeconomics: Economic Principles in the Real World

1245 ratings

In this course, you will learn all of the major principles of macroeconomics normally taught in a quarter or semester course to college undergraduates or MBA students. Perhaps more importantly, you will also learn how to apply these principles to a wide variety of situations in both your personal and professional lives. In this way, the Power of Macroeconomics will help you prosper in an increasingly competitive and globalized environment. This course is also available in Portuguese. To join the fully translated Portuguese version, visit this page: https://www.coursera.org/learn/macroeconomia-pt/

From the lesson

The Warring Schools of Macroeconomics

A "Mid-Course" Appraisal by Prof Navarro 1:25

New Classical Economics and Rational Versus Adaptive Expectations 7:39

The Great Recession of 2007 and Quantitative Easing 4:44

How to Forecast the Business Cycles and Structural Trade Imbalances7:25

Meet the Instructors

Dr. Peter Navarro
Professor
Paul Merage School of Business

[SOUND]

The roaring 1990s would truly be a macroeconomist's dream.

A technology boom would usher in the age of the internet

and this digital revolution helped robustly

push the aggregate supply curve out.

This shift of the AS curve significantly increased

potential output, while dropping the natural rate and actual

rate of unemployment.

In this Goldilocks economy, not too hot, not too cold.

Real GDP growth averaged close to 4% a year.

A resultant surge in tax revenues and drop in welfare payments helped balance the

US budget at the end of the

Clinton Administration for the first time in decades.

But, of course, all good things must end.

Just two months after newly elected George W Bush took office.

The March 2001 recession in the United States would start what would be

more than a decade of slow growth and trouble for much of the world.

Consider that in the five and half decades prior to 2001 the real Gross

Domestic Product of the United States grew at a rate of roughly 3.5%.

However, over the next decade that growth would fall to around 1.5%.

So how many jobs do think were lost due to slow growth during the stagnant

2000s? The rule of thumb is that one percentage

point of GDP growth lost is equal to one million new

jobs not created. So a difference of 3.5%

growth versus 1.6% growth in the 2000s is about two

GDP points a year or two million jobs lost per year.

So over a decade, that's about 20 million jobs

not created because of slow growth below potential output.

Not coincidentally, that was about the same amount America needed

to bring it's unemployment rate back down to it's natural rate.

It wasn't just slow GDP growth plaguing the economy.

Wage growth would fall dramatically as well.

In fact, average median household income.

The best measure of income growth. Plunged to roughly zero during the

2000s, after growing close to 2% a year in the previous two decades.

Of course, the worst part of the 2000s was the great recession of 2007.

This was the steepest economic downturn since the great depression.

It was an era characterized by massive

bailouts, not just to private corporations like General

Motors and AIG, but also public corporations

like housing agencies, Fannie Mae and Freddie Mac.

In the slow growth years following the great

recession, the outgoing Bush administration, and the new

Obama administration, would team up to execute

the largest fiscal stimulus in world history.

At the same time, central bankers from Washington and Ban to Tokyo and Seoul,

would print vast sums of money in

their Keynesian struggle to restart their respective economies.

The US Federal Reserve alone added trillions in

liabilities to its balance sheet while printing money.

Moreover, in an effort to stimulate the US economy in an era of nearly zero

short-term interest rates, Fed Chairman Ben Bernanke would inaugurate

a new Keynesian monetary policy tool known as quantitative easing.

Or QE.

QE involves the massive purchase of long-term government bonds by

the Fed to drive up bond process and thereby drive

down yields and interest rates. Of course the Fed's goal in lowering

long-term interest rates was to stimulate both domestic investment and US exports.

Domestic investment benefits from low, fixed long-term

rates because most investment requires longer term financing.

At the same time, lower long-term interest rates, and a flood of easy money,

would help depress the value of the U.S. dollar, giving U.S. exports a boost.

Despite all these Keynesian fiscal and monetary policy stimuli, unemployment

in both the US and Europe would soar to double digits.

Our next question is why, just as in the 1970s,

was Keynesian economics so inadequate at bringing about a full and

robust global economic recovery?

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