1. Easy Money Policy Capital Inflows Eager Home Buyers Innovative Banks Rating Agencies Ambitious Mortgage Brokers Securitization  MBSs Escalating House Prices Gov’t Sponsored Enterprises Developer Clout Bank Regulators The best of times A “Global Saving Glut”

2. The Boom Years: High Real GDP Growth  Declining Unemployment 1997 – 2000 2003/4 - 2006 Growth > ~ 2.5 %  Unemployment

3. Easy Money Policy Capital Inflows Eager Home Buyers Innovative Banks Rating Agencies Ambitious Mortgage Brokers Securitization  MBSs Escalating House Prices Gov’t Sponsored Enterprises Developer Clout Bank Regulators The best of times

4. The Downturn: Slowing GDP Growth  Rising Unemployment Growth < ~ 2.5%  Unemployment

5. Financial System Meltdown At home Gov’t Supported Takeovers Countrywide  BofA Bear Stearns  JPMorgan Chase Silver State Bank  Nevada State Merrill Lynch  BofA Washington Mutual  JPM Chase Wachovia  Wells Fargo Security Saving  Bank of Nevada Interventions/ Nationalizations/ Pre-privatizations IndyMac Fannie Mae/ Freddie Mac AIG Bankruptcies New Century Financial Lehman Brothers Washington Mutual Inc. Abroad HBOS  Lloyds Bank Fortis  PNB Paribus Northern Rock Royal Bank of Scotland Dexia Glitnir/Kaupthing/ Landsbanki

6. Flight to Safety Flight from Risk Torschlusspanik!

7. Baa-AAA Interest Differential The Good News: 1932 was worse The Bad News: This downturn isn’t over yet

8. House Price – Foreclosure Spiral Demand – Jobs – Wages – Income – Spiral Deleveraging – Debt Deflation Spiral Government Revenue – Cutback Spiral Global Repercussion Spiral Macroeconomic Linkages and Feedbacks Vicious Spirals Unleashed

9. Responses Lender of Last Resort / Spender of Last Resort Tax Rebate $124 bil. Fed Fund Rate Cuts Fannie/Freddie $200 bil. Bear-Stearns $29 bil. AIG $174 bil. Fed “Facilities” Primary Dealer Credit Facility (PDCF) $58 bil. Treasury Security Loan Facility (TSLF) $133 bil. Term Auction Facility (TAF) $416 bil. Asset- Backed Commercial Paper Funding Facility (CPFF) $1,777 bil. Money Market Investor Funding Facility (MMIFF) $540 bil. More Fed Fund Rate Cuts … Hold At ~0% Fed Purchases of Long-Term Securities: GSEs & MBSs $600 bil. Term Asset-Backed Securities Loan Facility (TALF) $200 bil. Emergency Economic Stabilization Act/TARP $700 bil. Government Loans Government Equity…Capital Injections Stimulus Package $787 bil. aka The American Recovery and Reinvestment Act TARP II Stress Tests

10. House Price – Foreclosure Spiral Demand – Jobs – Wages – Income – Spiral Deleveraging – Debt Deflation Spiral Government Revenue – Cutback Spiral Global Repercussion Spiral Macroeconomic Linkages and Feedbacks Vicious Spirals Reversed? Tackle them all together! Stimulus Program Infrastructure Spending Tax Cuts Federal Aid To States Refinance Mortgages Revive dual banking system Cash for Trash Recapitalize banks Revive securitization G – 20 Coordinated Stimulus Macroeconomic Linkages and Feedbacks Vicious Spirals Unleashed

11. The Stimulus Plan: How to Spend $787 bil. Tax cuts for individuals $232 bil. Tax cuts for businesses $ 33 bil. Aid to States $ 181 bil. – Total funds to Nevada $ 1,460 mil. Education 480 mil Infrastructure $ 32 bil. Transportation $ 48 bil. Science and Research $ 21 bil.

12. This Time Is Different Average Outcomes of a “Typical” Financial Crisis Economic Statistic Average Outcome Housing prices -35% Equity price -56% Unemployment +7 percentage points Duration of rising unemployment 4.8 years Real GDP -9.3% Duration of falling GDP 1.9 years Increase in real government debt +86% Note: Financial crises are typically quite long and very costly. The Great Depression (1930s), Japan’s Bubble Economy (1990s), Asia Financial Crisis (1997-8) Source: Carmen Reinhart and Kenneth Rogoff, “The Aftermath of Financial Crises”HarvardUniversity working paper, December 2008

13. FDR: … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance. Franklin Delano Roosevelt President, 1933 – 1945 Workers: Fear of job loss. Business: Fear of deflation.

14. Onset of the Depression: Persistent Deflation…Persistent Job Loss $/pound DJIA Manufacturing Employment

15. Onset of the Depression: Bank Runs Deflationary Expectations

16. “…liquidate labor, liquidate stocks, liquidate the farmer, liquidate real estate. It will purge the rottenness out of the system…People will work harder, lead a more moral life.” Rembrandt, The TurkTitian, Venus With The Mirror Andrew Mellon Secretary of the Treasury, 1921 – 1932

17. The Circular Flow: Consequences of Financial System Meltdown

18. FDR Inaugural Address … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance…This Nation is asking for action, and action now. Franklin Delano Roosevelt President, 1933 – 1945 A “New Deal”—A New Regime 1932 Reconstruction Finance Corp, Glass-Steagall (T-bonds back cash) March/April 1933 Loosened Fetters Emergency Banking Act/Gold to Treasury CCC and Reforestation Relief Act May 1933 AAA/Thomas Amendment (President & gold price/ BoG & reserve requirement), TVA, Federal Securities Act June 1933 NIRA, Glass-Steagall  FDIC October-November 1933 Commodity Credit Corp, Civil Works Administration January 1934 Gold Reserve Act : $ Devaluation: $20.67  $35/oz. June 1934 SEC, FSLIC 1935 WPA, REA, Wagner Act  NLRB Schechter Poultry – NRA

19. $/pound Producer Price Index

20. New Deal Reflation

23. Fiscal and Monetary Stimulus…And Retrenchment

24. Stimulus and Retrenchment: Recession in Depression

26. The Four Freedoms: – Freedom of belief – Freedom of speech – Freedom from want – Freedom from fear