Christina Romer: The aftermath of financial crises: It doesn't have to be that bad

April 8, 2014 1:21:51
Kaltura Video

Christina Romer examines financial crises of the past and explains implications for what Europe and other areas should do today, and for what policies should be used in future crises. April, 2014.


[ Inaudible Discussion ]
>> Hello everybody, good afternoon.  I'm Susan Collins, the Joan and Sanford Weill Dean of the Gerald R. Ford School of Public Policy, and I'm delighted to see so many of you here with us this afternoon for another in our series of Policy Talks @ the Ford School Lectures.  It would help if I turn the microphone on as a good place to start.  So again welcome.  I'm delighted to see so many of you here and we have a very special program this afternoon.  Our speaker is Christina Romer who is the Class of 1957-Garff B. Wilson Professor of Economics at the University of California, Berkley.  It's a special pleasure for me to welcome her here because we were contemporaries in graduate school.  And so, I have had the distinct pleasure of knowing Christy for quite a long time.  And have always enjoyed her insights and her thoughts.  Well initially, her work--she was known for her work on the causes of the Great Depression and policy responses and implications for policy today.  Her recent research however, has focused somewhat less on monetary policy and also on fiscal policy's impact on economic activity.  A hallmark of her work has been combining statistical evidence with a narrative approach as well but incorporates some of the much more nuanced information that we can get from looking at the historical record.  While recognizing her expertise in the midst of the global financial crisis, she received a call from the White House.  And from 2009 through 2010, she served as the Chair of President Obama's Council of Economic Advisers.  To list just a few of her honors, Christie [assumed spelling] is a Guggenheim fellow; a fellow of the American Academy of Arts and Sciences.  She also serves on the Josh Hausman to join our faculty and w're delighted to have him here as well.  Christie [assumed spelling] and she is the recipient of the University of California, Berkeley's Distinguished Teaching Award.  And I'm particularly grateful for that because we are one of the beneficiaries of your teaching.  Having recently hired Josh Hausman to join out faculty and we're delighted to have him here as well.  Christie earned her BA in Economics from the College of William and Mary and her Ph.D. from MIT where she met her husband David Romer who we're delighted is with us here today as well.  David welcome.  Well, I'd like to remind our audience that if you have a question for Christine Romer, please write it on one of the cards that you should have received when you came into the room today.  Ford School volunteers, we'll pick up the cards at around 4:40 p.m. and they'll be circulating.  So if you have questions, we look forward to them.  We are delighted to also take questions from Twitter.  And if you want to tweet the question in, please use the hashtag policy talks.  During the Q and A session, we will have the questions read, so Josh Haustman, his Macroeconomic seminar, we have two students from that group who will be reading your questions.  Yuan Chen [assumed spelling] and Ben Lusher [assumed spelling].  So with no further ado, it is my great pleasure to welcome Christina Romer to the podium.
[ Applause ]
>> Well thank you it is such a pleasure and an honor to be here today.  David and I were calculating--I think the last time I was here was my first year as an assistant professor and I'm going to confess it's was 27 years ago.  So anyway, it is a delight to be back and to be here with you.  So, this afternoon, I'm going to talk as you can guess from the title up there about what happens after financial crisis and why?  And kind of the issues, the follow, you know back before 2008, modern economists kind of rarely thought about financial crisis.  Even though we were aware they could still happen and indeed had happened in countries like Sweden and Japan in the not too distant past.  Financial crisis are banking panics as they're often called.  We're mainly relegated to the province of economic history.  It was something that we could ignore because they were quite rare and we thought fairly easily managed with out conventional tools of monetary and fiscal policy.  But then, we live through 2008, and the meltdown on Wall Street.  And I think we saw first hand just how terrifying and how destructive a financial crisis could be.  And that experience I think has renewed interest in panics and sort of what panics do to the economy.  And do a whole let do all a whole research or new research.  And the conventional wisdom has just one--very much from the view we could ignore financial crisis to the view that they are just incredibly important.  Indeed I'd say the new view is that crisis give rise to recessions that are particularly severe and long lasting.  And Carmen Reinhart and Rogoff are the most well-known proponents of this view.  Their book, "This Time is Different" had the very good fortune to be published just months after the failure of Lehman Brothers.  And its view is that while a policy makers always try to claim that this time is different.  In fact the aftermath of financial crisis is usually the same usually pretty retched.  And now I say just about everyone is adopting this view.  So, especially journalist and politicians on both sides of the Atlantic trying to explain why their economies are still struggling now five or six years after the financial crisis readily invoke the persistent negative effects of a financial crisis.  And just recently Janet Yellen in her first press conference as our new Federal Reserve Chair in explaining why the US was likely to need easy monetary policy for quite a while yet invoked the long lasting devastation caused by the financial crisis.  Well, in my talk this afternoon, I'm going to discuss some new evidence on this important topic.  And it's actually--it's appropriate that David is here 'cause it's based on a research that we're currently conducting together.  And I think what you'll find is that our new research yields a somewhat more complicated picture of the impact of crisis either than the old school.  We can safely ignore them or the new school; they are a death sentence for the economy.  We find that crisis certainly matter.  They depress output in the near term but their impact is on average pretty moderate and fairly short-lived.  Now, in addition to examining what happens on average following financial crisis, we're also going to look at the range of experiences.  And here's I think the really important point.  We find substantial variation in the impact of crisis in different countries in different time periods.  For example, Japan sank into a decade's slogan [phonetic].  Down following its financial turmoil in the 1990s whereas Sweden came just roaring back from its crisis around the same time.  And I think this range of experiences raises an obvious question, what accounts for these differences?  And in my talk, I'll try to suggest what I think are the most important factors explaining this variation.  And then finally, the reason I think we care about understanding the range of experiences is very relevant to the audience here at the Ford School.  And that is of that policy makers can figure out how better to respond the next time we face a financial crisis.  So, what does our analysis suggest might be effective strategies for dealing with financial disruption?  And I'm going to argue that measures to both prevent crisis in the first place and policies to better manage their effects are important.  And if this mix of proactive and reactive policies can help make sure that crisis don't have severe and long lasting results.  Or as I suggested in my title would be aftermath of a financial crisis just doesn't have to be that bad.  OK.  So let me start on the impact of financial crisis.  What's the question of sort of what typically happens after a financial crisis?  That is if we look over many countries and many time periods, what's the usual or the average result of a financial melt down?  Since Reinhart and Rogoff's work is so well-known, I think it's useful to start by reminding you what they do and what they find.  And actually their basic methodology is delightfully simple, right?  So using a variety of sources especially study done by scholars at the international monetary fund, Reinhart and Rogoff identified the dates of financial crisis in a large sample of countries.  And then they just look at what happened to real GDP per capita around the time of financial crisis.  And they're going to focus on the percentage fall in GDP from a it's high to its low, right?  And here's a picture of sort of their key result.  The names down the middle shows you a sample of countries and when they had a financial crisis according to their chronology.
^M00:10:05 To the left you see the peak-to-trough decline in GDP and to the right, the duration of that decline.  So how many years was GDP falling?  And the dark bar that I've highlighted in red there in the middle is the average.  And what you're supposed to see is that the average fall and output per capita around the times of a financial crisis was about 9.3 percent.  And the average length of a fall was about two years.  Now to put these numbers a little bit in perspective in a typical recession in the US, since 1947, GDP only fell about 2 percent and the fall lasted significantly less than a year.  So you can see that Reinhart and Rogoff's numbers do suggest sort of truly retched economic performance following the average financial crisis.  Well once we have this, an obvious question is, is there anything about what Reinhart and Rogoff do that should make us nervous about their findings?  And here I actually wanted to be very clear.  I'm just using Reinhart and Rogoff as an example.  There are actually a number of studies that use quite similar approaches.  And I think one drawback of this literature is that the definition of crisis tends to be a little squishy.  It has an element of we know one when we see one.  Also the identification of crisis is done after the fact by scholars who know what happened to output in the various countries.  And we think that this combination, the kind of fuzziness in the definition of a crisis and the sort of exposed identification makes it possible for some bias to creep in.  There's perhaps a natural tendency to look just a little bit harder for a financial crisis before a known severe recession.  Finally, like the definition of crisis, the empirical methodology used in this literature tends to be somewhat imprecise.  Reinhart and Rogoff for example looked just at the decline in GDP around crisis.  But in some places, the decline in GDP started well before the crisis and may have had nothing to do with the crisis itself.  For example, one of the big observations here, Finland in 1991 is particularly interesting, right?  Finland, one of its major trading partners was the Soviet Union.  When we start to have the political upheaval and the vengeful break up of the Soviet Union that dealt a real blow to the Finish economy.  And so their GDP started falling and in fact well before they had a financial crisis.  And indeed when we look at it, after their financial crisis, they actually grow just fine, right?  So that most of that big fall really predates the crisis.  All right.  So those are some of the possible concerns or why we think there might be room for yet another paper in this literature.  So David and I in our new research are going to try to improve on existing studies in two ways.  One is by identifying crisis more accurately we hope.  And the other is by trying to use a more precise empirical technique to estimate their impacts.  And I should point out this work is incredibly a preliminary.  I'd love to say that it's hot off the presses and the truth is it's not even that far along.  It's literally hot out of the computer program.  So, it will certainly be involving and we hope improving as we actually get around to writing it up over the next couple of months.  All right.  So let me describe what we do to sort of what we think is to better identify crisis.  So that's where most of the work in the project has been.  To get around the problem of looking harder for crisis when we know output went down in a country, David and I are going to focus on the accounts of contemporary observers.  And in particular, since 1969, an international group, The Organization for Economic Co-operation and Development or the OECD as it's usually called has written a long document every six months describing what's going on in a sample of advanced countries.  And this volume called the OECD Economic Outlook appears to be very thorough and a fairly consistent in its reporting of what's going in these countries both across countries and over time.  And our basic strategy actually picks up on something that Susan described.  It was a common strategy of ours in research.  Is that we're going to use these sources we're going to read what the analyst of the OECD said about financial conditions in a country.  And that that's how we're going to identify when crisis or financial disruption were generally was happening.  And our hope is that since these analysts are working in real time and they don't know what actually happened in the economy that we're going to get around of some of those spheres of bias that we mentioned before.  OK.  So that's kind of--oops, I have been--I had all these nice flags.  All right, so what do we actually do when we read these account?  So we're going to use real time sources, that's the OECD Economic Outlook.  Then what are we going to look for?  What's kind of our definition of crisis since I've said there was sort of a fuzziness in existing definition.  So in particular, what we're going to look at is what we call sort of descriptions of financial stress.  And in particular, we're going for evidence that contemporary observers felt that the provision of credit was being constricted by something other than tight monetary policy.  Or more technically, what we're looking for is evidence that something was causing a rise in the internal cost of funds for banks relative to a safe interest rate.  So things like balance sheet problems or large number of loan defaults or just a rise in the perceived riskiness of financial institutions.  And then, an important innovation is that we're going to scale the degree of financial stress from zero to 16, right?  So rather than just saying do we have a crisis or not, try to give you a range of what's the level of financial stress is.  Besides obviously giving us more information by having this scale of financial distress, we hope that it will also help to minimize errors, with the 0, 1 variable, it matters a lot whether you call something a crisis.  If you're allocating things along a scale from zero to 16, any mistakes that you make are going to tend to be less consequential.  OK, so what's going to come out of our analysis is a scaling of financial stress in 24 advanced countries, I should have said that.  The OECD is about the countries of Western Europe, North America, Japan, Australia, and we're going to do this every half year, between 1967 and 2007.  We're going to stop before the recent episode mainly 'cause the recent episode is what we're trying to understand.  And so, we want to use the past to give us a window into that.  All right, so this graph shows you our new crisis variable when we see financial stress.  It's showing you the 10 countries in the OECD for which we actually see some financial distress, a non-zero observation.  The other 14, the analysts of the OECD never see any financial stress.  Now you can see a number of things here.  One is there basically was no financial distress anywhere in the 70s and the 80s.  But in the 90s, you actually have a fair amount in a number of countries.  Another thing that certainly is true is that in our measure, we see most of the same things that are--that show up in other chronology.  So for example, if you could see it, the purple here, that's Sweden, right?  They had a famous financial crisis in the early 1990s.  The black line that just goes up and stays up, that's Japan, that indeed had a lot of financial distress for very extended period of time.  Now, though the same things kind of show up in our measure, most of the same things as in other chronologies, the timing is actually often quite different.  And so this is just some example that's a little bit close to home.  This is the United States in the S and L crisis.  Those two blue lines are Reinhart and Rogoff's start and end date for when they say there was a crisis in the US.  And then, the red line is our measure of financial stress, and you'll see that the analyst of the OECD absolutely said there was a period of pretty acute financial stress here in the US.  But it's much later than sort of the 1984 that Reinhart and Rogoff choose.  They don't see it as the OECD until really 1990.  And in general, if there's sort of a common thread here is when we date crisis using our real time sources, there almost always a fair amount later than most of the existing chronologies.  OK.  So that's sort of what comes out of our--the sort of the input that we're going to generate.  So now the whole question is, well what does our new series tell us about on average what happens to output or the economy after a financial crisis.  And here's where out second, what we like to think of as an innovation is going to come in.  We're going to try to have what we hope as a more precise empirical approach.
^M00:20:02 And our methodology is pretty straight forward.  We're going to have data from the OECD countries on--the two we're going to focus on are industrial production.  So the output of mining and manufacturing and then real GDP, so, a much--a very broad indicator economic conditions.  And what we know is sort of what happened after financial crisis.  The way we're going to do this is to run regressions.  We're going to--There're going to be time series cross-section regressions by which we just mean we are going to use the variation in output and crisis across countries and across time, to identify the impact of crisis at different horizons.  Do countries having crisis do worse than countries that don't?  And in this process, we're going to control for lots of thing.  So, leg output, country specific factors, precisely so that we can take into account what was normally happening in each country.  And then finally, we're going to summarize the results with an impulse response function and that just means it's going to show us what happens to output for the five years following a crisis relative to what otherwise would have happened.  And to give you a sense of magnitude, so you're be able to kind of scale them in your head.  When we do the stimulation of what does the crisis seemed to do to output, we're going to consider a fairly big financial disruption.  So think of our scale from 0 to 16, we are going to look at 8, right?  Some sort of halfway in between.  But a fair amount of disruption.  OK, so let me start with the results for industrial production.  So this picture just shows you what's going to happen to industrial production following a moderate prices.  If you look at our full sample of 24 countries and the solid line is the--the point estimate of the impact and that dash line is the two standard error bonds.  So to give you a sense of your sort of statistical precession.  And what you're supposed to see from this is in--and this is in half years after the crisis.  In period zero, so the same path years you have the crisis, industrial production falls 4 percent and it's highly statistically significant that's why it's--those bands are fairly narrow.  Now important thing is, it actually not that big and a way to kind of get sense to that, in work David and I did probably 27 years ago and presented to you when we were here last, was looking at the effects of pretty extreme, you know, when you have a period of monetary contraction in the US, so I've kind of run n eh mill, the feds decide that once again, inflation down.  kind of run of the mill, the fed decides that want to get an inflation down.  We found that those kind of episodes reduce industrial production about 12 percent, right?  So about 3 times as much as we estimate the financial crisis does.  The other being that we find pretty striking is just how quickly the results go away.  Remember the fact that we thought we learn from Reinhart and Rogoff is that the recessions after a financial crisis are not only severe, they're really long lasting.  And this is saying that by two years after the crisis, you're certainly back to normal and actually well before that, you are recovering quite significantly.  All right, now here's the results for real GDP.  So as I mentioned, that's a broader indicator.  Again let's look at the contemporaneous impact when you have prices in our example in countries.  It looks like real GDP falls about 3 to 3 and a half percent.  Again, and it's highly statistically significant.  So there's a--That's why we always want to say, they're absolutely is in effect there.  But again, I want to give you the sense--it doesn't seem to be that big.  And again, remember Ryan Harden [assumed spelling] number was 9.3 percent.  So again, about three times of what we are finding.  Now, for GDP in the full samples, oops, oops, sorry.  Unfamiliar clicker.  Oh wow.  We really wemt through a lot.  OK.  There we go.  Nope, one more.  For the full sample, it's looks like the effects are pretty persistent.  The GDP falls and then actually stays low for the next five years though the standard errors are starting to get a little fatter on you.  Interestingly, that's being driven very much by the observation for Japan.  So I already mentioned, Japan had a lot of financial crisis.  They also had some uniquely bad GDP performance and you're just kind of--to help you focus on this.  This is the--our crisis variable for Japan and what you suppose to see is, unlike many countries, when they have a financial crisis, it doesn't like go away.  It's there for more than a decade.  I think this is like 15 years including periods where it goes really high.  That's the highest measure we get in any country is up here and this one is also certainly over what we think of as that kind of eight pretty significant financial distress.  The reason I emphasized this is if you take Japan out of the sample, the results look very much like for industrial production.  So, you get a fall in GDP again, without 3 percent, but it goes away actually again within sort of that two-year period.  So, it depends on whether you think Japan is a very telling example and you want to put a lot of weight on it or do you think it's kind of weird.  In which case, you might want to leave it out of your sample, but the important thing is it matters.  So, that's our finding.  All right, so sort of where do all of these leave us, right?  This is kind of our new empirical work.  I think what I'd like you to see from this is that the simple conclusion that crisis are obviously horrible for an economy, I think just really doesn't hold and I think our bottom line is it's more complicated than that.  So, we absolutely think we see a strong year term, negative correlation between crisis and output but it's just not very big, and except in the case of Japan, the effects don't seem to last for very long.  OK, so that's kind of the empirical work.  I think this reference, since we've already gone down the road in talking about Japan, that kind of leads very naturally to the next topic that I want to discuss, and that is the variation in the impact of crisis and possible explanations for it.  So again, kind of think about what we've just done, so the impulse response functions that I showed you really captures sort of the usual or the average response to output to crisis in all of our episodes.  But we think there's actually a kind of straightforward way to say, "Well, can we get a sense of the variation in the--in what happens to output after crisis?"  And the way we're going to do this is actually--so let's start with just a sample of the periods of kind of extreme financial stress that we find.  So, all of the episodes that we have where our measure above an eight and we actually have six of those, or seven if you count that fact that Japan hits eight twice.  And what we're going to do is kind of a thought experiment.  We're going to do the very simple procedure of--let's just make a simple forecast of where output was headed before the crisis.  So, just using logged [phonetic] outputs and country-specific factors, what would you have predicted was going to happen to the crisis up through, you know, using data up through the half year before the crisis hits and then just compare that kind of simple forecast to what actually happened?  All right, so that's--these are the six cases where we have a significant amount of financial stress.  The red light in each case is that simple forecast of where the economy was headed and the blue line is what actually happened.  And what I hope you will see is that--and four of the cases, so the US, and--all of these are in the early 90's--Norway, Sweden, and Finland, the actual line in that simple forecast aren't really very different, all right?  And that's kind of a way of saying, you know, what happened to output was actually pretty well captured by the trajectory that we were on right before the crisis.  So, it doesn't suggest much of kind of an additional impact to the crisis itself, but for two countries, Japan and Turkey, it sure looks like that actual line is way different from your simple forecast and that's a way of saying, at least in those two episodes, it does look like the aftermath of the financial crisis was truly wretched relative to what you would have forecast or what it looked like, the trajectory that they were on.  All right, so that's a way of capturing very visually the amount of variation we see in the output consequences of a crisis.  All right, well that's just kind of pushes the mystery back a bit.  We know there is variation.  What might explain it?  And I think perhaps the most important factor that I've mentioned is just persistent or repeated crisis.  Perhaps the most important reason that some cases are so much worse than others is that the crisis themselves are so much worse than others.  They're so much more persistent and severe.  And here, I can't resist a bit of a digression on The Great Depression here in the United States.  Because, you know, the depression is often giving kind of--as the poster [phonetic] child for the idea that financial crisis do indeed have long lasting effects, right?  So, in the usual telling of the story, The Depression, we had a financial crisis in 1929.  For the next three years, output plummeted, and for the seven years after that, output was still pretty lousy, right?  So, that certainly sounds like a financial crisis having a very severe and long lasting consequence.
^M00:30:06 Now, the first problem with this conventional story is that, the US didn't actually have a financial crisis of this as we would define it 1929.  There was indeed a big fall in the stock market, but this is actually one time when the fed actually stepped in and helped to stabilize the financial system.  And the result was that they were actually relatively few bank failures and not much disruption in the financial system, not much of a rise if you want in the internal cost of funds for banks, at least for the first year or so.  And this picture really helped you to see that.  So this is a picture of he deposits in failed or suspended banks, right?  So just, how many banks we are getting into trouble in the late 1920s and the early 1930s.  And what you're suppose to see is not very many in 1929 and 1930 that the first big wave of bank failures and real distressing the financial markets doesn't occur until October of 1930.  And in fact this is--I just put in vertical lines where Friedman and Schwartz, the very famous historians of the great depression, identify four waves of banking crisis.  So October of 1932 and 1931, the spring and the fall and then the last one was in early 1933, just leading out to Roosevelt's inauguration.  And this is the picture that shows you industrial production, the measure of output and then the vertical lines are those same Friedman and Schwartz, when do we have a financial distress.  What you suppose to kind of see is it does indeed look like a big cost of declines in output are these waves of banking crisis.  But after each of these to the first three, output does indeed go down, following these waves of bank in crisis.  Isn't that kind of makes sense.  They destroy confidence.  They make it hard to get credit all the things that we usually think a financial crisis might do.  Something else so that stands out from this picture is, what the heck happened after the last wave of banking crisis right?  So Roosevelt as they said, you came in, in the midst of what's arguably the worst of the banking crisis and yet the very next month industrial production started to rise.  So I think that far from showing that the effects of financial crisis are inevitably terrible, maybe what the depression provides is, some of the most compelling evidence that in fact the financial crisis doesn't have to devastate the economy for long time afterwards.  And I'll say I a bit more about why output recovered so quickly in the spring of 1933 in a little bit.  The important thing that I want you to take in this is why was the depression is so horrible.  It wasn't because we have one financial crisis that then had be severe effects.  It was that we had these waves of crisis that just wouldn't go away.  And I think the analogy to Japan is really a very clear that a key right reason I think why Japan's experienced was so awful is that it's financial crisis systems help itself was incredible persistent.  And I showed that you picture before, the financial--Japan had some financial disruption for more than a decade.  And so I think the bottom line from the experience of both the depression in Japan is that one other reasons by the aftermath of crisis is sometimes so bad, this is the crisis themselves are sometimes so bad.  All right, chapter number 2, having the currency crisis at the same time, right?  So, right, as I've describe right, a financial crisis involves a disruption in the supply of credit.  So banks failed.  Credit spread rise, credit becomes hard to get.  A currency crisis is something different.  So typically, these effects of country that has to fix the exchange rate, for example, Turkey in 2001 had pegged it's exchange rate to the dollar and the Euro, and a currency crisis, people lose confidence that the Central Bank and the rest of the government will be able to maintain that fix exchange rate. And usually, what ends up happening is the exchange rate falls precipitously.  And previous work is found that financial crisis that happened at the same time as the currency crisis seemed to be followed by more severe declines in output.  Now why this is?  May be is just having two of these things that one has a bigger effect on confidence, a bigger effect on wealth, but it might also be, in terms of the policies used to deal with the currency crisis.  What is the Central Bank do confronted with a loss of confidence in its currency and the exchange rate, it often jacks up interest rates which may deal a blow all of it's own to output and the rest of the economy.  Well, the reason I've mentioned this is remember Turkey was our other case where the output consequences of a crisis look particularly bad.  And one possibility is what was going on in Turkey is they also had a currency crisis.  So you just see this is just a picture of their exchange rate.  It did indeed plum it about the same time that they have a financial crisis.  OK, so that's factor number 2.  Factor number 3, other shocks, right?  And this makes you think a really important idea.  You know, crisis don't in fact usually come out of nowhere.  For the most part, they're often triggered by something and whatever triggers the crisis often has effects of it's own on the economy.  And the most obvious example of this is an asset price bust.  So, think about 2008, why did our financial markets get into so much trouble.  It was the big run up in house prices.  All of the sort of over buy and bad lending that went with that, when house prices came down financial institutions got into trouble.  But when house prices came down, that had also had sort of effects on the economy, above and beyond anything having to do with the financial crisis, right?  So, we know that a lot of homeowners suddenly found themselves a little [inaudible] lot less wealth because their house had gone down, in value a lot more death relative to their wealth and that it may have affected their spending.  Here is actually is just a nice picture from a recent study.  It's a scatter plot.  So along the horizontal axis, we have what was the change in house price.  So as you move to the left, house prices are falling more and on the vertical access, this is the change in consumers spending and each one of those gods is a county in the United States, and so what you are suppose to see from this pictures that counties that had more of drop in the value of houses also had a bigger drop in consumer spending, right?  So that's a way of saying above and beyond any effects of the crisis, there was an effect on consumer spending and output coming from just the collapse of house prices themselves.  So I think one of the reasons, we want to say why was the aftermath of the 2008 crisis so horrible, it's probably not just that the financial crisis was bad and caused problems, there were other shocks that were also bringing down the economy at the same time.  All right.  The final factor I want to mention in explaining this variation in outcomes across episodes is the policy response.  You know, I already mentioned that one reason the combination say about financial crisis and the currency crisis may be so bad involves policy, right?  The action is taken to defend the currency like a rise in interest rates may make the impact to the crisis worse.  And again I just--I can't resist coming back to the great depression because this is another one of those episodes where policy clearly played a role in exacerbating the decline in output.  Remember as I discuss, we had these waves of banking panics in the early 1930s.  So obviously the Federal Reserve didn't take aggressive enough actions really stop these waves of panics.  But I think something that is less well-known and even more surprising is that actually, in the midst of all of this, in the midst of unemployment going up to 20 or 25 percent, they actually took some major contractionary policy actions.  And in particular, in 1931, all right.  So this is a picture of the discount rate which is just the rate at which the Federal Reserve lends to banks.  And one of the things you see, remember I said, that when the financial--when the stock market crash happened in the fall of 1929, the Fed kind of tried to help, right?  So they dropped the discount rate and that's part of why we don't see financial panics immediately or certainly banking panics immediately in 1929.  But what's really striking is in October 1931, the Fed decided to raise the discount rate by 2 percentage points.  And they did this because in September 1931, Britain decided to go off the gold standard.  And so, to reassure investors that the United States wasn't going to go off the gold standard, they said, we'll show you, we'll raise our interest rate and stab ourselves in the foot.  But anyway--But that--and that was a pretty consequential action.  So, in essence they were taking this measure to try to save off currency crisis.  Similarly, on the fiscal side, you know, when you have a terrible decline in output, your budget deficit tends to go up 'cause tax revenues are down.  And Herbert Hoover in 1932 was very concerned by the sky rocketing budget deficit in the US.  And so, he decided to have a significant tax increase, again in the middle of a very severe economic downturn.
^M00:40:04 And this mix of contractionary monetary policy and contractionary fiscal policy is yet another reason why the depression was to wretched.  Well I think something similar at least on the fiscal side, surely explains why the 2008 financial crisis had seem to have such severe and persistent effects particularly in Europe.  Following the meltdown in Greece in the spring of 2010, investors lost confidence in the bonds of a number of the southern European countries, so countries like Spain and Portugal came under extreme pressure to raise taxes and cut government spending.  And I actually remember vividly taking a trip to Europe in May of 2010 with then Secretary of the Treasury Tim Geithner to actually try to urge some moderation in how much fiscal restraint was happening.  Now in truth, the thing I remember best about that trip was the plane flight.  So tell you a little bit.  We were flying in a military plane and--even though both of us had Cabinet rank, the Chair of the Council of Economic Advisers, the Secretary of the Treasury.  But one thing you quickly learn in Washington is that the Secretary of the Treasury completely outranks the CEA chair.  And what that meant in this particular case was that Tim got the one state room on the plane.  And at some point in the middle of the night, we hit some pretty extreme turbulence.  And I saw Tim's security detail rush to his cabin, and being a quite nervous flier and you know, grabbed one of the agents, like are we going down?
[ Laughter ] 
And he said, "No ma'am.  We were just afraid the Secretary might have fallen out of bed."  So, I allowed us to how we should all have such worries.  But the message that we were trying to deliver on that trip is that if everybody rushed towards fiscal contraction at the same time in Europe, it could be devastating.  Unfortunately that message did not seem to have gotten through.  And indeed, many of the countries undertook extreme fiscal contraction and we see in countries like Greece and Spain that it have to take sort of some of the most severe fiscal austerity measures.  Their unemployment rates are now up in the low 20 percent range.  The reason why I mentioned this and spend some time on this, I think fiscal contraction is an important part of why the recovery in this particular episode has been so slow.  It's not that financial crisis always lead to large and long lasting faults and output.  Rather, contractionary policy dealt a second serious negative shock to many economies just as they were starting to recover.  All right, so the bottom line of this discussion is that I think several factors explain why the aftermath of crisis is sometimes so much worse than others.  Particularly persistent or repeated financial crisis tend to lead to worse outcomes.  Combining the currency crisis and the financial crisis can make things worse.  But it's also the case that other shocks including contractionary policy may account for some of the variation that we see across episodes.  OK.  So, so far, I've talked about you know, sort of what typically happens and what explains some of the variation and what happens after crisis.  The last topic I want to talk about is in some way is the most important which is, well what does all of this analysis suggest about possible strategies for dealing with crisis.  What can policy makers do to try and ensure that the aftermath of financial crisis isn't that bad?  And here I'd say surely that the first and best piece of advice is don't have a crisis, right?  So, our new, you know, our new evidence suggests that financial crisis are not the knock out blow, perhaps that the other estimate suggests they might be.  But even in our new chronology and our new analysis, financial crisis are definitely a shock that takes a total on the economy on output unemployment particularly for the first six months after crisis.  And I think they have the potential to be very painful if the crisis is allowed to drag on or if it's compounded by other factors.  So surely the best thing, don't ever start down that road.  All right.  So that's just again kind of pushes the mystery one level back, what can we do to not have a financial crisis and we could have another whole, you know, several hour talk on that topic.  But I'll mention what I think is the most important which I actually think is better financial regulation.  In particular, I have to say, I've been persuaded by some of the recent research that suggest that sort of the simple, the most effective way to ensure financial stability is to just have higher capital requirements for financial institutions.  That just means that banks and anything that operates like a bank would be required to have a larger amount of invested capital.  I think requiring financial institutions have a bigger cushion of invested capital does at least two tings.  One is, it means owners have a lot of skin in the game.  And so, they're naturally going to act more responsibly to protect their investment.  And it means that there's more invested capital to take whole assets.  If there's a severe down turn and loan defaults rise.  And as results, depositors and other creditors know the bank is likely remain solvent and so, they're not going to panic, when trouble starts to happen.  OK, so I didn't clearly preventing crisis, that's the first invest strategy.  So, what he would do if a country forgot to follow rule number one?  What's the best crisis if--what's the best strategy of a crisis nevertheless happens?  Well, strategy number two, if it happens get it over with this fast as possible, right?  And that kind of--but, I think that makes a lot of sense.  One of things that came out so strongly from saying what I showed you about Japan or the great depression is that one in the main things that makes the outcome of a crisis much worst is if it drags zone [phonetic] or if you have repeated persistent of financial crisis.  So, to prevent that government need to move quickly to stabilize the financial system.  And sometimes, you can do that just sort of the old fashion way.  Provide a lot of liquidity.  This is the quintessential, what's the Central Bank is supposed to do in a crisis?  It's supposed to just land any bank that wants cash cash as long as they have good collateral.  And certainly the Federal Reserve did that in a big way in 2008.  Unfortunately, it often takes a lot more than that just stop a modern panic.  And it did the one of things we've seen is that governments often may have no choice, but to actually bailout financial institutions.  They may need to absorb some of the losses and rebuild the capital buffers before the panic actually subsides.  And this is really--this is what the tarp legislation did back in 2008 and 2009.  So, if you're not up and all your acronyms, right, so this was appraisal legislation with the blessing of President Bush.  So, it was done before president Obama came into office.  So, it was Secretary the Treasury Hank Polston said Chair Ben Bernanke got together and convinced congress to approved 800 billion dollars of funds to stabilize the financial system.  And the main things that those funds we're use for was to just build up the capital reserves of our biggest financial institutions.  And I can tell you it's someone who had to interact the lot with congress in January of 2009 and December 2008 this is probably the single most hated piece of legislation ever, both by Congress and by the American people.  But, I think importantly it worked, right.  That it played actually, I think a crucial role in stabilizing the American financial system.  And because it worked, in fact things [phonetic] for fairly quickly able to raise private capital to strengthen in their and the government ended up getting most of that 800 billion dollars back.  All right, in addition to stabilizing the financial institute--the financial system, governments often need to do even more than that to make banks actually healthy and ready to land again.  And so, one of the things that I think, when people say, what went wrong in Japan?  It's infects--the government did just enough often to stop the most acute part of the crisis, but not enough to actually make their financial system healthy, right.  So, for much in the 1990's, but we often say is that Japanese banks were zombies, right.  So, they were still operating.  So, they worked technically living.  But, they're basically insolvent, right.  So, they were dead in the economic sense.  And they had the basic problem.  They had a bunch of questionable loans on their balance sheets.  And so, they were afraid to do more landing.  And this made them prone to further ways of panics.  And it was really only after the Japanese governments sort to made banks in Japan realized their bad loans and put in the significant amount of public capital did their financial system actually start working again.  Now the classic sort of counter example to Japan is Sweden, right.  So, Sweden had its financial crisis in 1993 and in that case the government moved incredibly quickly.  So you guys we see this as our measure financial stress in Sweden.
^M00:50:02 And what you see is it absolutely shoots way up to a pretty significant level.  But then it comes back down within a year.  So, just think in your mind a different--the picture for Japan is where it stretches up and elevated for almost 15 years.  In Sweden, what happen is the most trouble banks were kind of immediately nationalize.  Their losses, we're immediately realized.  They were recapitalized by the government.  And then they were sold back to the private sector.  And I think experts think that this very aggressive approach was the key reason why the panic was such a sort of one off event and why Swedish growth recovered as so quickly.  All right, so, strategy number three.  Deal with the company in shocks?  So, in some sense right everything I told you about so far has to do with the crisis themselves, so, either don't have one or if you have one get it over with this soon as possible.  But, what are the things are--what else might be helpful.  What are things I've come to feel is important is actually deal with some of the other shocks that maybe go in a long with the financial crisis.  So, again, kind of come back to the case of the United States in 2008 and 2009, as I described this collapse of house prices obviously [inaudible] in our financial system.  But it also [inaudible] on the balance sheets of ordinary families that we found ourselves to the lot less wealth, we had taken in all these debts in the mid 2000.  And so, a lot of households just really were afraid this ban, right.  They were trying to pay down other credit cards, their home equity loans and that kind of things.  And so, they weren't out there buying cars and appliances and all those things that employed people when we produce cars and appliances and things like that.  And I actually this actually resonates with me, because I'll confess that, you know, back in 2009, I was actually some what skeptical of measures sort of to deal directly with the debt loads of home owners.  I wrestled with this but it seemed to me that the people own homes were already sort of been the upper of the income distributions.  So, when we thought about doing programs that might target health particularly the home owners that made me uneasy to simply because they were better off to many the other that were suffering during the crisis.  But I think no -- If I knew then what I know now about sort of how slow the recovery was going to be.  And in particular how slow consumers' spending was going to be incoming back precisely, because of the effects of this high debt loads.  I think I might have propose or certainly worked for other policies.  And certainly one of the things I really regret cause I think I wouldn't pushed much harder, had I again kind of know what was going to happen for changes bankruptcy law.  So, I think one of the key facts about our current bankruptcy system is to the bankruptcy judge can't write down or restructure a home loan sort or the only recourse there is to put it into for closure.  And I think making it possible for a bankruptcy judge to write the principle on the loan a moved colorfully referred to as cram down, I think makes a lot of sounds, right?  It would have gotten some of the most troubled home owners out from under those very high debt burdens and actually ended up probably lower in the losses for bank.  Because a lot of value was lost when a home has to go through for closure.  But sort of has some more general matter I think policy makers need to look at what else is going on in the economy a long with financial crisis.  And often they need to deal directly with those other shocks.  All right, strategy number four.  Well, use monetary and fiscal policy aggressively, right.  So, these four strategy just says we've got some conventional tools, fiscal policy, monetary policy, they're potent, they're effective and based with the financial crisis, you should used them very, very aggressively.  I think this is a lesson that was followed somewhat in 2008 and 2009, but not has much as it needed to be.  So, if again kind of remember back in 2008 and 2009.  The federal absolutely took some very expansionary monetary policy. T they quickly drop their interest rate that they control the federal funds rate to zero.  And then they took even some actions beyond that like buying a whole lot of mortgage facts and securities to try to push down mortgage interest rate which weren't already I down to zero. Likewise, the US did a very large physical stimulus.  The American recovery and reinvestment act.  And I have to tell you that though like the tarp, the recovery act has become very controversial.  I think it was incredibly helpful.  And importantly that's not just my opinion.  It's effect the conclusion of the non partisan congressional budget office.  And about a half doesn't recently published research studies on just what did other recovery act to do.  But if you were to ask me what was sort of the main mistake that both of Fed and the administration made it was to not be even bolder in our policy response.  I think the actions taken re absolutely helpful they explain a lot about why the US economy turn the corner in the summer of 2009.  But I think we all know that that recovery is not been yearly strong or as thorough as any of us would have like.  And so, one lesson that I take from the 2008 experience is that in responding to a financial crisis policy needs to be very, very aggressive.  So, extraordinary times really do call for extra ordinary responses.  And again here I'm going to keep coming back to the great depression, because probably the best example of a truly bold and aggressive monetary and fiscal response was Franklyn Roosevelt.  And in fact it was such a bold response is often referred to as Roosevelt regime shift 'cause he really fundamentally changed by the policy regime.  What it he do?  Well, first he came in and the middle of financial crisis.  To try to stop that, he basically shot the entire financial system we had a bank holiday that basically said you couldn't reopen your bank until someone who've been into inspect the books and declare that it was safe.  And this is something that seems to have occurred of got to--give them the economy or the American people sort of cool in off period.  And it seems shows stop the big grand's.  Probably even more extraordinary were Roosevelt's monetary actions.  So, like 2008, by 1933, interest rates were basically down to zero.  So, we didn't have our conventional monetary policy tools.  But, Roosevelt nevertheless found the way that he do big monetary expansion, mainly he took his off the gold standard roughly a man factor coming into office.  We were off the gold standard.  He allowed the dollar to depreciate about 30 percent.  We had a big increase in the gold's.  There are lot of gold's slowed in.  He used that to increase the money supplies.  We actually had a quite significant monetary expansion.  And then, as Josh's [phonetic] has wonderful working his dissertation talks about there was a big physical expansion as well.  So, starting as early is as 1933, the government budget deficit certainly went up, because we pass all sorts of relief programs, public works, things like that that are in their bonuses.  The important thing is this sort of regime shift absolutely had an impact.  And it had an impact that a modern policy maker can only dream off, right.  So, this is a picture of the red line is the unemployment rate, the blue line is what happen the real GDP that gray vertical is when Roosevelt came into office at the start of 33.  And just look, real GDP increase 11 percent in 19--between 1933 and 1934.  The unemployment rate fell 3 percentage points in one year, right, so, just an incredible amount of recovery very, very quickly.  I think the best modern example of a truly bold policy response, probably comes outside the United States in 2009.  And inspect in a number of Asian countries.  Confronted with financial difficulties and plunging trade especially China and South Korea, undertook fiscal stimulus programs that were significantly larger than our recovery act at least relative to the size of their economies.  And the growth in those economies recovered substantially more relative to what have been happening before than in countries taking smaller actions.  And one ways that I think this is such an important point to make is that one of the reasons why China and South Korea could be so bold in their physical policy response in 2009 was that they started the recession with very low levels of government debt.  So, I think one quarterly to the lesson that policy needs to be bold in response the financial crisis is it actually briefly important to run responsible physical policy in good times, because, you never know, when you might need to run irresponsible fiscal policy in bad times.  All right, last strategy avoids self inflicted wounds, right?  So, in some sense right all of my previous advice had been do this, do this.  This one is, don't do that and the "don't" is as I said, cause self inflicted wounds.  And by this what I mean is policy makers need to refrain from actions like monetary and fiscal contraction that make outcomes worst.  Now, you might think this is pretty obvious piece of advice and it wouldn't even warrant, you know, taking a few minutes to say.  But in [inaudible] one common feature of a financial crisis is that countries do seem to compound the problems by switching the contractionary policy prematurely.
^M01:00:10 And perhaps the clearest example of this, of self inflicted wounds is the United Kingdom in 2010.  So, unlike say Greece, in Spain and some other countries of seven Europe, Britain wasn't actually under any pressure for markets to get their management deficit down.  Nevertheless in 2010, the new British government decided now would be a great time to do a fiscal austerity program.  And if you look at this is a picture I just love.  It shows real GDP the red line is the UK, the blue line is the Eurozone, and the yellow lines the US.  And what's you're supposed to do is kind of everybody was starting to grow coming out of mid-2009 and then Britain, when they did the--their fiscal austerity program, basically put themselves back into recession and a period of really roughly three years of almost no GDP growth.  And it's only really been in kind of the last year that GDP has started to grow again in the UK.  The same thing tends happen with monetary policy.  One of the almost frustrating things for a monetary economist is to look at what happen in Japan following their financial crisis in the 1990s and the 2000s.  At what point, right, they were actually starting to get some attraction doing some expansionary monetary policy, and they stop sort to just is it was the beginning at the paid of dividends.  I think importantly, it's not hard to understand, why this premature switch to contractionary policy frequently happens.  Financial crisis tend to cause governments have to spend a lot of money either to bail out their financial system or to do a big fiscal stimulus.  And policy makers become nervous when they see rising levels of government debt.  So, in natural response is to say let's get that budget deficit down as quickly as we can.  Likewise, central bankers confronted with the financial crisis often have to flood the system with liquidity, so, the money supply gets big.  And before long, monetary policy maker starting to get nervous that the swollen [phonetic] money supply is going to cost inflation.  So they take measures.  Let's get that down as soon as we can.  I think more than anything, I suspect that policy makers like everyone else following a traumatic event just want to get things back to normal.  And I think there's a tendency to think that if they normalize policy, that will help to accomplish getting back to normal.  But in fact, that logic is almost always wrong that by withdrawing policy support for an economy to soon, premature policy tightening actually prolongs the pain of the crisis rather than hastens the recovery.  All right, so we've obviously been through lots of material this afternoon, very quickly to serve where does it all leave us?  I think my bottom line is, financial crisis obviously matter.  They are a shocked to the nervous system of the economy and even our new estimates as I suggest say that crisis take a toll in the economy at least in the near term.  I think my whole point though this afternoon is that a crisis doesn't have to be a mortal blow.  Some economies actually do reasonably well following a financial crisis.  And therefore we shouldn't just throw up our hands and say we're all doomed, if a financial crisis occurs.  I think better policy along many dimensions can just make a huge difference, ending the crisis quickly, taking aggressive actions to restore growth, those are just some of the keys to making sure that the aftermath of a crisis isn't that bad.  And as I've try to suggest this afternoon I think kind of no episode kind of captures everything that I've been saying better than the great depression, right.  That we often think of the depression as one crisis and one terrible downturn.  As I've described, there was in fact a very complex event with waves of banking panics or crisis.  There were banking panics in October of 1930 and 1931 which were indeed followed by plunging output and skyrocket in an employment.  But, there was another way of panics such I've suggested probably the worst.  In early 1933 that was in fact followed rapid growth and robust recovery.  So, what explains the difference?  Obviously lots of things matter.  But, I think a really important one was policy.  Herbert Hoover failed to stop the crisis and compounded their effects with contractionary monetary and physical policy.  Franklin Roosevelt on the other hand moved quickly to stabilize the American financial system and took aggressive monetary and physical actions to try to get growth going again.  So, I think we need to learn from this example and all of the others that I've talked about this afternoon.  What happens after financial crisis isn't written in stone?  It's largely in the hands of policy makers and we need to them to be Roosevelt's and Hoover's.  Thank you.
[ Applause ]
>> Hi, my name is--sorry, my name is Ben Lasher [assumed spelling].  I'm a master student here at the Ford School of Public Policy.  So, our first question today comes from the audience.  How much does the zero lower bank [phonetic] are now about interest rates battle the [inaudible] of financial crisis.  If nominal interest rates are at zero, is the after [inaudible] lowers?
>> That's a great question and in fact, David can tell you that last night in the hotel room I said, "Oh, shoot.  You know I forgot to mention the zero lower bound."  So, anyway, so, you just you're confirming all of my fears.
[ Laughter ] 
So, I actually--the reason I didn't mention this, I couldn't figure out where to put it in the talk, right?  So, it's about the policy response which was the last part and yet as you describe, it maybe a factor that explains why some aftermaths are worse than others.  So, and I think that's the right way to think about it.  So, for anyone that isn't up in all of these, right, so--right, what do you norm--what would the Fed normally do and confronted with a, you know, falling out, put our crisis, or whatever, is going to drop interest rates.  And as I described in 2008, the Fed absolutely did that, and by December in 2008 they dropped the fund's rate effectively to zero, right?  And that's what we mean by the zero lower bound.  And I think it's absolutely is a part of what has made this episode particularly bad is because we didn't have sort of our usual tool of monetary policy that we could, you know, that--the quick and easy, let's just keep dropping interest rates.  Likewise, if you think about what some of what went wrong in Japan?  You know, probably for the first decade, they didn't hit the zero lower bound.  But for the second decade that they had financial crisis, they were at the zero lower bound.  So, that is one of the things that probably constrained the policy response.  So, I do think it--it is something that matters.  Part of why, you know, I--I think the case of say Roosevelt matters is we were at the zero lower bound then as well.  And Roosevelt nevertheless found that there are other monetary actions you can take.  Just swelling the money supply, the sort of something very close to what we've called quantitative using today, and it actually worked really well.  So, even though you were at the zero lower bound, it was a tool that was still there.  So, it certainly would be--I think the aftermaths are going to tend to be worse when you're at the zero lower bound.  But again, it's not a death blow that there are things that the economy can, that the policy makers can do, even monetary policy.
[ Inaudible Remarks ]
>> Hi everyone, may name is a Hugh [assumed spelling] [inaudible].  I'm also a master student at the Ford school.  So, here comes the second question from our audience.  In 2008, we saw a large increase in oil price.  So, the question has been, does insuring for oil price drops at deficit results?
>> We don't know.  So, we've never done that or wait, David's here, so, yes.
>> It's an [inaudible] of Global Factor [assumed spelling] and company.
>> OK, you're absolutely right.  So, this is, I kind it was a little quick and dirty for in case they were non-technical people in the audiences about what our regression procedure was.  So, the way I describe it is, we were using--right, we have lots the countries, lots of financial crisis, what happens on the average after this.  And I describe that in thinking about what happens on average, we control for what happened in output before, a country's specific factor.  We also include a time fixed effects.  So, basically a specific factor for each quarter, precisely, to take account of kind of, you know, things that are happening worldwide in each period.  And so, to the degree that oil prices are there that we would have controlled for that.  You know, I think, again, one of the things we didn't--so, I think for what we've found before oil price is, you're not going to be a big part of the story, sort of thinking about as we go and think more about 2008, sort of the fact that oil price has went up and went down, sort of thinking what they--what--how that sort of factors in could be interesting.
>> All right, so, this question comes to us from Twitter.  What explains the sum [phonetic] increasing crisis across the OECD in the nine months [phonetic]?
>> OK.  Is that certainly jumps out at you when you look at that picture, right?  Sort of nothing happening in the 1970s and 80s and a lot of them in the 1990s.
^M01:10:06 I think, this is not something again that we have a particularly informed opinion about and not say we've done research on. I think, I'm probably in the school of thought that the other thing that goes on is sort of financial, deregulation and financial innovation, sort of both were happening big time in the 1990s.  And I think part of what exactly went wrong is innovation--you know, so, innovation, not only did regulation not keep up with innovation at the same time we're doing all these innovation were deregulating.  And the David often describes you know, we're reading this OECD and--this OECD documents and the whole thing is that they're written in real time.  And it's really a little unnerving like you reading about Sweden, or you're reading about Norway and--you know, before their crisis, it's we're doing great things.  They're liberalizing their financial markets.  They're getting rid of all these regulations and we as modern people knowing what happens like, "No, don't, don't."  But anyways, so I think that is a big part of sort of what went on and why the numbers look or why the crisis did sort of heavy resurgent's.
>> So, this question has been, what factor in [inaudible] crisis, is it the pearl [phonetic] prolonged that in fact to be in terms of unemployment rates, although the [inaudible] recurring as in unemployment wages [phonetic] is still too high.  So, you've got something more about it unemployment rate?
>> That actually again a great question, so, you're--I think in our empirical analysis, we tended to look mainly at industry of production in GDP in part because it's sort of seems--it's more consistent to over countries and how you measure unemployment rates and things--are--is somewhat more difficult and how to make that consistent across countries.  But absolutely, one of the striking sort of facts about this recession has been just how long the unemployment rate has stayed high.  Employment, I guess, you know, having kind of said all that, I think I tend to come down, so, there is a tendency to say as you--or sort of as the question or kind of phrase it, well, GDP growth has been perfectly fine but unemployment has stayed really high.  And, I think a key fact is relative to sort of where we were, GDP growth hasn't been OK, right?  So, we have gone back to kind of normal GDP growth, so, if you think normal fir the US's, you know, two and a half percent a year, yes, we've been doing that.  But normally when you had this terrible recession you'd have a period where GDP would grow four percent, six percent, you know, coming out of the great depression that grew 10 percent a year.  And that exactly what we haven't had this time is that period of really robust GDP growth.  We just kind of went back to at best normal and often below normal.  So, I think, the main reason why unemployment had stayed so high is because we have not had this really aggressive sort of recovery of GDP.  But then there are certainly other factors beyond that.  So, there are, you know, I think one of the things that is certainly worried me both as a policy maker and then someone watching policy, you know, just because this recession has dragged on so long, part of what that does, is then create a core of people that have been unemployed for a very long period of time.  And one of the most distressing things is that it becomes harder and harder for them to ever get a job.  And so, just what we often is called in the literature these histories since the facts that a period of very high in employment may just make the normal unemployment rate higher.  And I think that is, you know, certainly one of the things that has made me very concern than and I [inaudible]--we are seen some of that going on now.
>> All right, so, another question from Twitter.  Is any of the derogation in crisis due to the underlined composition of affecting economies, especially heavily financial institutes [phonetic]?
>> So, by that--by that logic, right, we should want to be saying--you know, so, like--in this particular episode, right, so, the United States we have a big financial sector, so, the financial crisis has a particularly big impact.  I guess--I mean, I don't think I have informed to answer on that.  My sense is, you know, huh--David, do you want to answer this one?
[ Laughter ] 
>> I don't think we know it.  There were countries who make crisis much [inaudible] on the internet [inaudible].
>> [Inaudible] United States and the UK and current episode, but you're employing like Sweden was like--you know, one of the things like Sweden--I did the example, so, Sweden's crisis measure goes up, goes down and I did this nice song and dance about they recognized their loses.  They recapitalize the banks, right?  They had six banks, right?  So, it's really easy to kind of do that.  I mean, six big banks, but still, you know, it's not like trying to do the American financial system.  And so--but that's the way, I've just doing concretely these countries having financial crisis a lot of them in the 90s.  We're not your big financial centers.  So, anyway, so, I don't have a good sense of whether that might be explain me what's going on.  It's not something we've looked at yet.
>> So, the next.  So, the next of question talks about--ask about policy making.  So, all the [inaudible] illustration, what's debts can be taken to path the way for better technology policy?
>> Oh, that's a lovely question.  You know, I think, you know, I have a very--I often tell a story that, for any academic in the audience.  The first time I sent a paper toward journal, like within a month I got a response that said, "We love your paper, we want to publish it."  Bet no--yeah, so, I thought, wow, publishing is really fun, right?  Never happened again, right, never ever, ever, ever since then, it's like, if you're luck you get a painful revise and resubmit.  But the same as true, a policy making, right?  So, think about my time in Washington.  It's like, I went there.  We passed to recover the act within a month and then we did have reform legislation and then we did, you know, financial regulatory reform.  So, I have this vision like, you know, you--and you know, I often tell the story, I mean it was a fantastic time to make policy because, you know, one of the things, the president was very much--he's an evidence based kind of guy, right?  So, the way you want an argument with him is to have smart people like Josh [assumed spelling] working for you at the CEA and say, get me the best evidence we have, right?  And so, we would just like, do studies and run the CPS tapes and resonated and you often won arguments that way, and got to really influence policy.  You know, the trouble--that's how policy ought to be made, right?  It ought to be made on the basis of evidence and if people looking at the evidence just passionately and saying just what's true and what's right.  And for a brief shiny window, it did feel like it was like that.  I think it's much less like that now and I don't know what the answer is other than to--men, this is normally where I'd say, please go out and vote for evidence-based policy making, right.  That's--I think, that's the only, you know, the only way you can do that and the thing I find the most frustrating is, you know, people being feeling free to say, you know, things that just aren't true or where there are ten studies on one side and at most, one bad one on the other side and that doesn't matter.  That doesn't seem to carry the day.  And I don't know of anyway to make it carry the other than for voters to insist on it.  But that's, I think the ultimate [phonetic] of what has to happened.
>> OK, so, this is our last question.  What advice do you have for women in male dominated fields like economics and this is [inaudible].
[ Inaudible Remark ] 
>> Well, since I--I have my husband sitting here, I'll say marry well.
[ Laughter ] 
So, I've really, I mean, truthfully, I mean I think one of the things that has, you know, made it possible for me to do wife as an academic and to working government is having a supported spouse and I often, and this is a terrible story, and please don't ever tell the IMF [phonetic].  But David, when I was going to Washington, times that he walked here on Washington saying, "I'm looking for the Dallas job possible."  Because, and he went worked for the IMF.  So, sorry, sorry.  You are in such trouble.  But it was right we are kind of new, we had a son at home.  I was going to have a job that was 80 hours a week and the only way I could ever possibly do that, is it he was willing to be one that was always home, meeting the plumber and doing the laundry and for two years that was what he did.  And so, I mean, I think that.  You know, it is a partnership.  One of the things I often claim is I really want him to go, have to the job and I want to be at home meeting the plumber, 'cause it--sometimes the policy job was not the most fun.  But anyway, but I think, you know, so, I think that is the--it certainly a big part of it.  The other thing that really struck me and I don't quite know sort of how I feel about this, you know.
^M01:20:01 Berkley is--and I would guess, it's the same at Michigan.  Berkley is a uniquely well adjusted place.  So, being a woman just never kind of, I didn't notice, right?  It was just, that was a happy collegial place and I don't think anyone noticed that I was woman.  Washington was definitely different, and I definitely found it stressful and it sometimes felt like it was a club and I was knocking on the door.  And the one thing that the women in the White House, so, one of the nice things is there were a lot of women in the White House.  We just started having dinner together every, you know, couple a weeks and it mattered just the sense of, you know, there is a little bit of complaining and there was a lot of mutual support.  And I think that was important but also became our network.  And so, some of you know, sometimes when I was not in a meeting and I suddenly showed up on the manifest, I knew that there was some--someone watching out for me, and more often than not, it was one of the other women in the White House.  And I think that is probably, you know, it's a shame we have to be that way, but I think that mutual support, you know, whether it's a group of women or just a mutual support of colleagues, of mentors, those kind of things, I think that matters a lot.  So, that's the best advice I can give you.  So, anyway, thank you so much.  This has been really wonderful.  Thank you.
[ Applause ]
>> I've like to thank Christie for her hath [phonetic] off the computer new work, and of the implications that she shared with us.  I'd also like to thank all of you for coming and all of the questions.  I know we didn't have time for all of them, so, I hope you will stay and join us for a reception, just in the back in the room here and we can continue the conversation.  So again, thank you for joining us for the Policy Talks @ the Ford School.
[ Applause ] 
[ Inaudible Remark ]
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