The financial crisis was a searing experience that damaged household and business confidence in a profound way – with a more lasting effect than the typical economic downturn. The housing bust created both a large housing supply overhang and a large number of households that were underwater on their mortgages. Households needed to repair their balance sheets and bring down their debt service burdens to more manageable levels. Higher levels of unemployment further depressed demand. Credit availability contracted. The tightening of credit standards occurred quite broadly – in housing credit, consumer credit cards and business lending. Some of the credit supply restrictions were imposed by banks that needed to repair their balance sheets, deleveraging by building up capital and working down their bad assets. Fiscal outlays were not high enough to compensate for the contractionary impulse from these first three sources. The crisis led to a significant deterioration in the U.S. federal budget deficit and put pressure on state and local budgets. After the federal budget deficit reached around 10 percent of GDP at the peak, fiscal consolidation occurred at the federal level, as well as at state and local levels, restraining economic activity instead of supporting growth. Productivity growth has also been quite low. In the period before the crisis (2003 to 2008), U.S. nonfarm productivity growth averaged 2 percent per year. Since 2010, productivity has been closer to 1 percent. While some of this decline can be explained by lower capital spending, the decline is difficult to fully explain.
William C Dudley: Panel remarks at Bank Indonesia-Federal Reserve Bank of New York Joint International Seminar Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Bank Indonesia-Federal Reserve Bank of New York Joint International Seminar, Bali, 31 July 2016. *  *  *  Linda Goldberg, Jonathan McCarthy and Joseph Tracy assisted in preparing these remarks. In my remarks today, I will focus on why global growth has been so anemic following the financial crisis and what we can do about it. I think it is fair to say that the global recovery following the financial crisis has been disappointing. Growth is below pre-crisis levels for the United States, Europe, Japan and China. For example, in the U.S., real GDP growth has averaged only about 2.2 percent per year over the period from 2010 to 2015, below the pre-crisis average of 2.4 percent from 2003 to 2008. This slower growth performance has been accompanied by relatively low inflation rates – persistently below the objectives of the monetary policy authorities in the United States, Europe and Japan. As I see it, there are many causes for these persistent shortfalls in growth, and they vary across regions and countries. Let me focus on the reasons for the United States in the post crisis period. Growth has been weaker than expected for many reasons.