Money, Banking, and Financial Markets

Understand the principles, understand the future
 
Commentary

In the 30 months following the 2000 stock market peak, the S&P 500 fell by about 45%. Yet the U.S. recession that followed was brief and shallow. In the 21 months following the 2007 stock market peak, the equity market fell by a comparable 52%. This time was different: the recession that began in December 2007 was the deepest and longest since the 1930s.

The contrast between these two episodes of bursting asset price bubbles ought to make you wonder. When should we really worry about asset price bubbles? In fact, the biggest concern is not bubbles per se; it is leverage. And, surprisingly, there remain serious holes in our knowledge about who is leveraged and who is not.

The Federal Open Market Committee (FOMC) recently ended another round of large-scale asset purchases, so now is a good opportunity to take stock of what Fed policy has achieved since the peak of the financial crisis in fall 2008.

Back in 2002, then-Governor Ben Bernanke gave a speech entitled “Deflation: Making Sure "It" Doesn't Happen Here.” His message was that the experience of the 1930s taught us the importance of using aggressive monetary accommodation to avoid deflation. As Chairman of the Federal Reserve Board during the financial crisis of 2007-2009, Bernanke and his colleagues took actions that their 1930s predecessors had not. The result was a Great Recession, not another Great Depression...

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Further commentary, click here.

 
Welcome to MoneyandBanking.com ...

... the site where you can learn about finance and economics. We provide commentary on events in the news and on questions of more lasting interest. Because the financial system is constantly evolving, our analysis is informed by a set of core principles: understand the principles, understand the future. The opening excerpts of our two most recent posts appear above. For prior posts, click on the Commentary link to the left, or on the month-by-month Archives to the right. Alternatively, if you are interested in a specific topic, use the tags.

The site also provides material related to our textbook, Money, Banking and Financial Markets, 4th edition, 2014. The Five Core Principles on which the book is based are highlighted here. In addition, Cecchetti and Schoenholtz 4e systematically integrates the use of economic and financial data from FRED, the online database provided by the Federal Reserve Bank of St. Louis. Click on FRED Lessons on the left to access help on how to use this incredible resource.

Steve Cecchetti and Kim Schoenholtz
 

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