of treasuries before the crisis began. in that respect it's not like we began buying them from scratch. we've always owned a significant amount of these securities. so the green shows the baseline where we started from. now what else air peered on the feds' balance sheet on the asset side during this period, the dark blue represents assets acquired or loans made during the crisis period. and you can see in late 2008 our loans outstanding to financial institution and some other programs rose very sharply. you can also see as time passed and certainly by early 2010, those -- those initiatives to address financial strain had been greatly reduced. if you look at the far right, by the way, you see a little bump there right recently. th the swaps.

we reinstituted and extended the swap agreesnknd other major central banks and there has been some usage of that in an attempt to try and reduce strains in europe and that shows up as a little bump there at the far th. now, again, we owned about $800 billion in treasury securities at the beginning of the crisis. as you can see from the red, labeled lasps we added about trillion in new securities to the balance sheet during the stn and then the top there you have other assets, a variety of things that could be security reserves and otherte. now why were we doing this? why were we buying thesethis is

which monotists like ohers have. the basic idea is when you buy treasuries and gse securities t balance sheet, that reduces the securities in the market. investors want to hold those hold aies in order to be amount. they have to receive a lower yield or put another way, if there's a smallerai securities the market they're willing to pay a higher price for the securities which is the inverse of the yield. so again by securities bringing them on our balance sheet, reducing the available supply of those treasuries we effectively lowered the interest rate on longer term treasuries and on gse securities as well. moreover extent that

investors no treasuries and gse securities to hold in their portfolios the extent that they ve to over securities like corporate bonds that also raises the prices and lowers the yields on those securities. so the net effect of theser yie across a range of securities. and of course, as usual, interest rates have supportive stimlative effects on the monet policy by another name instead of focussing on the short-term rate, we were focussing on the long-term rates. the basic logic to th economy is really the same. you might ask the question, the fed's going out and buying $2 trillion of securities, how do we pay for that?

the answer those securities by crediting the bank accounts of the people who sold them to us. ntd those a showed up as are reserves that the banks would hold with the fed. so the fed is a bank for banks. si accounts with the fed essentially, those are called reserve accounts. so as the purchases of securities occurred, the way we paid for them was basically by increasing the -- the amount of reserves that banks had in their accounts with the fed. so you can see this here. this is the liability side of the fed's balance sheet. of course, assets and liabilities including capital have to be equal. so the liabilities side had also to rise near $3 trillion as you can see. now, take a look first, if you

look at this, take a look first at the light blue line at the bottom. the light blue line at the bottom is currency. federal reserve notes in circulation. sometimes you hear the fed is printing money in orto we acqui. i've talked about that in giving some examples. as a literal fact the fed is not printing money to acquire these securities. you can see it from the balance sheet here, the light blue line is basically flat, the amount of urrency in circulation has not activities. what has been affected is the purple area. those are reserve balances. those are accounts that commercial banks hold with the fed and their assets in the banking asystem and liabilities of the fed and that's basically how we pay for the -- for those securities. so the banking system has a e reserves. but they are electronic entries

at the fed. they basically just sit there. they're not in circulation. they're not part of any broad measure of the money called the monetary base. but again, they're not -- they aren't cash. then there are other liabilities including treasury accounts and a variety of other things that the fed does. we act as the agent, the fiscal agent for the treasury. the two main items you can see are the notes in circulation and the reserves held by the banks. so what do the lasps or the quantity ative easing what does it do? well, we anticipated when we took these actions that we would be able to lore interest rates and that was generally successful. for example, as you probably know 30-year interest rates have fallen below 4% at a historically low level. other interest rates have fallen as well.

corporate credit has fallen, the rates of interest that corporations have to pay on bonds, for example, have fallen. boat because the underlying safe rates have fallen, but also because the spreads between corporate bond rates and treasury rates have fallen as well reflecting greater confidence in the financial markets about the economy. and lower long-term rates have in my view and i think in terms of the analysis we do at the fed have promoted growth and although, as i'll talk about the effect on housing was probably weaker than we had hoped. we've got mortgage rates down very low. you would think that would stimulate housing. as you probably know, the housing market is not yet -- has not yet recovered. now, of course, always we have a dual mandate. we always have two objectives. one of them is maximum we inters

to mean keeping the economy growing and using its full capacity. low interest rates are a way of stimulating growth in trying to get people back to work.her rt mandate is price stability, inflation. we've been quite successful in keeping inflation low. it's helped, volcker and greenspan has persuaded markets that the fed was committed to low inflation. there's a lot of credibility the fed has built up over the last 30 years or so. as a result markets have been confident that the inflation low and inflation expectations have stayed low. and except for some swings up and down related to oil prices, overall inflation has been quite low and stable. at the same time, while we've kept inflation low we've also made sure that inflation hasn't

gone negative. particularly around the time of qe 2 november falling it was well below normal levels. the concern was that we might get into a negiv deflation. those of you familiar with the japanese situale for their economy now for quite a few years. we wanted to avoid deflation. i talked about deflation in the context of the green so monetar against the risk of deflation by making sure that the economy dn just one more comment on large scale asset purchases. a lot of people don't make a very good distinction between monetary and fiscal policy. of course, i'm sure you understand they're very different tools. fiscal policy is the spending

and tax yax tools of the federal government. monetary policy has to do with the feds' management of interest rates. these are very different tools. in particular when the fed buys assets as part of an lsap or qe program, this is not a form of government spending. it doesn't show up as government spending because we're not actually spending money, what we're doing is buying assets which at some point will be sold back to the market and so the value of that -- of those purchases will be earned back. in fact, because the fed gets interest, of course, on the securities that we hold, we actually make a on these lasps. what we've done over the last three years is transfer about $200 billion in profits to the treasury. thaton reducing the deficit. these actions are are not deficit increasing, they are significantly deficit reducing.

all right. so a major tool we use when we ran out of room for short-term interest rates was lsaps asset purchases. the ore tool that we have used to some extent as well is communication about monetary policy. to the extent that we can clearly communicate what we are trying to achieve, investors can better understand our objectives and our plans and that would make monetary policy more effective. the fed has made a lot of steps to become more transparent about monetary cy to make sure people understand what we're trying to accomplish. here's one example, this is a picture of me giving a press conference. so four times a year now after two day fmoc meetings i give a press conference and answer questions about the policy decision.

this is a new thing in terms of trying to explain what the policies are. another recent step in terms of communicating more clearly was to put out a statement that described our basic approach to monetary policy and in particular gave for the first time a numerical definition of price stability. many central banks around the world already have a definition of price stability. we in our statement said for our purposes we're going to define price stability as2% inflation. finally the fed has begun to provide guidance to the investors and public about what we expect to do with the federal fund rate in the future given how we currently see the economy. given how we currently see the economy we tell the market

something about where we think the rates are going to go. to the extent that the market better understands our plans that's going to help reduce uncertainty in financial markets and to the extent that our plans are in some sense more aggressive than the market anticipated. we'll also tend to ease policy conditions. so again, monetary policy has been used to try to help get the economy back on its feet. the recession was very severe a. there's a committee called the national bureau of economic research which officially designates the beginning and end dates of recessions. i was a member of that committee before i became a policymaker. and they determine that this

recession began in december 2007 and ended in june of 2009. it was a long recession. when they say the recession ended that means not that things are back to normal it means the contraction has stopped and the economy is now growing again. we've been growing now for almost three years. averaging about 2.5% a year. but as i'll describe we're still some distance from being back to normal. when you say the economyngern r mean that things are not great, we're now growing. this shows the path of real gdp. the graybar shows the period of the official national bureau of economic research recession. you can see it begins in

december 2007 and real gdp begins to decline during that period. in mid 2009 the recession is officially over. since then the blue line is moving up since the real economy has been expanding. >> it's worse than that in a way, this was the most severe recession in the post world war ii period, you would expect that recovery would be quicker as the economy comes baing to its

normal levels. in fact, it's been slower on average in terms of growth than previous post war recoveries. the question -- sorry, so an implication of course of the sluggish recovery is only very slow and proven in the unemployment rate. the unemployment rate rising sharply during the recession period. peaking around 10% and now coming slowly down to its current value of about 8.3%. that's still quite high, obviously. here's housing single family housing starts. as we discussed in the last lecture in the previous one, housing starts collapsed even before the recovery -- before the recession began.

this is one reason if you think you've asked the question, why has this recovery been more sluggish than normal, one reason is the housing market. in a usual recovery housing comes back. it's an part of the recovery process. the construction workers get put back to work. realed industries like furniture and appliances began to expand. that's part of the recovery process, but in this case, we haven't seen it. why not? there's still a lot of structural factors in the housing market which are preventing a more robust recovery. on the supply side, we still

have a very high excess supply of housing, a high vacancy rate, the graph shows you the percentage of housing units in the united states which are vacant. that's come down some, but it's still well above normal levels. foreclosed homes, homes where the seller is unable to find a buyer. there are a lot of homes on the market and that produces excess supply and falling house prices. on the demand side, you might think that a lot of people would be buying houses these days because one thing is true about the housing market is that the houses are really affordable. prices are down a lot. mortgage rates are are low. so if you're able to buy a house, you can get an awful lot of house for your monthly payment now compared to where you were a few years ago.

but being able to take advantage of that affordability requires among other things that you get a mortgage. and this graph show what's happening in the mortgage market. the lines show the -- the bottom line shows the .10% of people receiving mortgages. before the crisis people with relatively low credit scores were able to get mortgages, but since the crisis you can see the whole bottom part of that yellow area has been cut away implying that people with lower credit scores and 700 is not a terrible credit score are unable to get morms. just in general, there's been -- there's been much tighter conditions in terms of trying to find a mortgage. so even though housing is very

affordable, and monthly payments are affordable, a lot of people are unable to get -- are unable to get mortgages. so the implications for the economy with a lot of excess supply in the market with a lot of people unable to get mortgage credit or afraid to get back into the housing market, house prices have been declining as shown by the picture on the right. recently we've seen some leveling out, some flattening out. but so far not enough of a pickup. declining house prices mean it's not profitable to build new houses. so construction has been quite weak. more broadly existing homeowners when they see their house prices down, may mean they can't get a home equity line of credit. it may mean that they just feel poorer. so that effects not just their housing behavior, but also their willingness and ability to buy

other goods and services. that's one of the reasons the declines in housing prices and to some extent also stock prices are part of the reason why consumers have been cautious and less willing to spend. the other major factor, of course, housing was a big reason for this crisis in recession, of course, the other major factor was the financial crisis and its impact on credit markets. that is another reason why the recovery has been somewhat slower than we would have hoped. as i've discussed, the u.s. banking system is stronger than it was three years ago. the amount of capital in the banking system over the last three years has increased by $300 billion. very significant increase. and generally speaking we're seeing credit terms getting a bit easier. we've seen expansions in bank lending and a lot of categories. so there is certainly some improvement in banking and

credit. there are some areas where credit remains tight. i've talked about mortgages where if you have anything less than a perfect credit score it's hard to get a mortgage these days. other categories like small businesses have found it difficult to get credit. the inability to start a small business or to get credit to expand a small business is one of the reasons why job creation has been relatively slow. >> another aspect of markets has to do with the european situation, which i haven't gotten into it. following with the financial crisis in europe, there's now a second stage whereby the solvency issues of a number of

countr countries like greece and portugal and ireland can pay their creditors have le conditions in europe and those have affected the u.s. by creating risk aversion and by volatility in the financial marketsbe -- been a negative factor. it can't solve all the problems that there are. in particular what we're seeing in this recovery is a number of structural issues relating for example, to the housing market to the mortgage market so banks, to credit extension. and to the european situation and other kinds of policies, fiscal policies or housing policies whatever they may be

are really needed to get the economy going again. so the fed can provide a stimulus. it can provide low interest rates. monetary policy by itself can't solve important structural and other problems that affect the economy. this is all a bit discouraging. again, it's taken a while to get back to where we are and we're still a long way to where you'd like to be. let me say a couple words about the long run. if crisis is very deep. we have a lot of people who have been unemployed by a long time. if you're unemployed for six month ors a year or two years your ability to get reemployed will decline. so that is a problem, clearly. there are many other issues that

the united states was facing even before the crisis like federal budget deficits. those have not gone away. in fact, they've gotten somewhat worse through the process of the recession. clearly there's been some real our economy. that said, i think it's really important to understand that our ec short-term shocks in the past. some not so short-term. but has been able to recover. we have a lot of strengths in this economy. it's of course, the largest economy in the world between 20% and 25% of all output in the world is produced in the united states. even though we have something more like 6% of the world population or less. and the reason that we are so productive a has to do with the diverse set of industries that we have our entreprenure, which the best in the world. the flexibility of our labor

markets and our capital markets. and our technology, which remains one of our very strongest points. increasingly technology has been driving economic growth. and with some of the finest yooifts in the world and researchers centers and as a magnet for talented people from around the world, the united states has been very successful in the research and development area. so that has also been a source of ongoing growth and innovation in our economy. now, again, we have weaknesses and the financial crisis highlighted a few. but we've always tried of course to address that. i'll come back to it biening our financial regulatory system. here's a picture i find kind of interesting. to put a little perspective on what we've been talking about for the last few lectures. the dashed line shows a constant growth rate of a little over 3%

in real terms. this is a means a constant growth rate. you can see that the united states economy going back to 1900 has grown pretty consistently around 3% for more than a century. you can see in the 1930s, you can see the big swing as the great depression pulled output . then you can see is movement above the trend line during world war ii. after world war , to the trend line. there were recessions and booms and busts in the post war period. but remain pretty close to the trend line. if we look to the very far right, you see where we are today. we are below the trend line. there are debates about whether or not that decline is in some way permanent. i think there's a reasonable chance look at the long run of history that the u.s. economy will return to healthy growth somewhere in the 3% range.

there are factors to take into account like changes in our population growth rate and our aging of our population and so on. but broadly speaking what this picture shows is over long periods of time our economy has been successful in maintaining long-term economic growth. just saying a few words about regulatory changes. you recall that i discussed the last couple of lectures the vulnerabilities in both the private and public sector in the financial system. on the public side, the crisis revealed many weaknesses in our regulatory system. we saw what happened in lehman brothers and aig. the too big to fail problem, the effects that they had on our system. more generally the problem of lack of any attention the systs opposed to individual ssystem.

so there has been a very substantial amount of financia regulatory reform in the united states. the biggest piece of legislation is dodd-frank act. i'm sure you know legislation is named after the chairman of the real vent committees barney frank is -- was the head of the house financial services committee when the democrats controlled the house in 2010. and senator chris dodd was the head of the house -- the senate banking committee. and so this wall street reform and consumer protection act passed in the summer of 2010 was a comprehensive set of financial reforms addressing many of the vulnerabilities that i talked about earlier. what were the vulnerabilities. one of them was the fact that there was nobody sort of watching the whole system. nobody looking at the look for risks and threats to