Week 9

Question 1

How were the economic costs of the crisis?

Answer 1

they were brutal

Question 2

How much did the GDP fall?

Answer 2

more than 4%

Question 3

How much did it take to resume to pre crisis peak?

Answer 3

more than 3 years

Question 4

How much did the US lose in household wealth ?

Answer 4

15 trillion

Question 5

Name some failure of policy before the crisis

Answer 5

Home equity ewas too thin, capital cushions were too thin and too narrow in scope, Too much issuance of short-term like liabilities, without regulatory constraints on leverage and without access, to the safety net.

Question 6

Name some policy failure during the crisis

Answer 6

We escalated too late because of limitations of authority. Fiscal policy turned too tight top soon. Mortgage restructuring authority, resources and incentives were too weak.

Question 7

How much did the GDP fell in the Great Depression?

Answer 7

By 26%

Question 8

How much household wealth was spend 1929 compared to 1931?

Answer 8

3% in 1929 and 16 % in 2008

Question 9

What were the number 2008 and 1929 for peak unemployment?

Answer 9

25% 1929 and 10% 2008

Question 10

Did the US come out faster and stronger than other countries in other crises?

Answer 10

Yes, absolutely. The US recovered fadster than other EU countries

Question 11

Are capital requirements now higher?

Answer 11

Yes, they are now considerable higher

Question 12

What kind of authority does the FDIC have now?

Answer 12

to manage the failure of systemic institutions

Question 13

Why did the US economy recover so slowly?

Answer 13

1. effects of delivering after a crisis following a credit boom.
2. The self inflicted boom pf premature fiscal austerity
3. the external shocks in europe, oil crisis and Japan

Question 14

In which field were many questions left unanswered?

Answer 14

In housing, should we have downpayment requirements etc.

Question 15

Is the regulatory system fragmented?

Answer 15

Yes, it absolutely is.

Question 16

What aspects of crises are unacceptable?

Answer 16

1. The extreme crisis is ex ante

2. Manias are not preventable and there is no over-the horizon radar for preempting panics and crashes

Question 17

What do you need to prepare?

Answer 17

Prepare a system not to prevent failure but to be safe for failure.

Question 18

Name some shock absorbers that Geithner proposes installing?

Answer 18

Impose capital and funding requirements on bank like institutions; systemic surcharge on the biggest.Place margin requirements on repo etc. Impose limits on the shadow system, build in the ability to expand the perimeter of prudential regulation. Require down payments for housing mortgages.

Question 19

According to geithner how large should finance be in the

Answer 19

don´t let the banking system get too large. Do not let your banks borrow too much in foreign currencys

Question 20

Why do you need a strong financial capacity in the crisis?

Answer 20

Shock absorbers will not save you from the risk of the extreme crisis, so you need firefighting tools. The key sources of financial strength are: relatively low public debtless, a credible central bank with a good record of inflation.

the firefighting arsenal must include:

Liquidity for vulnerable parts of the system
Guarantee authority for banks and bank like institutions
capital and resolution authority

Question 21

When the fire in the crisis starts, what do you do?

Answer 21

You let it burn but you build a firebreak around the core. Let it escalate slowly but make it rapid when necessary. Set the perimeter of protection so that you capture the solvent and the systemic but not the insolvent and peripheral.

Question 22

What does the Powell doctrine say?

Answer 22

be overwhelming - fiscal, monetary and financially.

Question 23

Why do you need to prepare for the long war?

Answer 23

The historyof financial crises shows that recovery can sometimes take a very long time. Avoid applying the brakes too early.

Question 24

Why should you impose conditions on the rescue?

Answer 24

limit the scope of the rescue to the core of the financial system. Price it to be valuable in the panic. No naked unconditional guarantees. the guarantees should cover catastrophic risks but not all risk.

Question 25

Why do you need to distinguish the systemic crisis from the idiosyncratic?

Answer 25

faced with a systemic crisis you need to do the opposite of a normal crisis.

Question 26

Why do you need to keep some perspective on moral hazard?

Answer 26

You cannot design a financial system without moral hazard