Download Slide 1

The “Great Recession”:
The Government’s Response
House of Cards
Caused by
Credit
Bubble
Led to
Credit Crunch
•Banks were technically “bankrupt” and were
not been lending money (credit crunch).
•This is a major crisis and free markets cannot
work without a functional banking system.
FNMA (Fannie Mae) &
FHLMC (Freddie Mac)
Government takeover
Wall Street Firms Bankrupt or Bought
Bear Stearns
Merrill Lynch
Lehman Brothers
Mergers
Crash of the Tita
Paulsen/Lehman
AIG Insurance Company
Government Takeover
2 years later—who won
Government Takeover of Subprime Mortgages
Government injected huge amounts of
money into the Banking System through the TARP program
TARP = Troubled Asset Relief Program
•passed by Congress and okayed by Pres. Bush in October 2008
700 billion dollar Government program to “fix”
•a
the U.S. banking system
J.Stewart
interview re:
use of
G.S. Propped up
J.Stewart clip—700 b.bailout
The Federal Reserve
• The Federal Reserve has responded to the financial
crisis by lowering interest rates from 5.25% to 0.0%!
• They hope this will lead more people to borrow
money to buy homes and cars
Ben Bernanke
Chairmen of Fed
Internet Bubble Collapse
Housing Bubble Collapse
President Obama’s Plan
President Obama and the Congress passed a
778 billion dollar fiscal stimulus package in January 2009.
This included a combination of:
• ↑ Government Spending
• Tax Cuts
• Infrastructure Spending on roads, bridges, tunnels, etc…
• Incentives to business to invest in green technology
Stimulus package discussion starts 1:34 in
Fighting the 2008-09 Recession
GDP = C + I + G + (X-M)
The hope has been that by:
1. Fixing the banking system
2. Raising Government Spending
3. Lowering Interest Rates
The economy will recover:
•
•
•
•
As people can get loans, consumption
(C) should rise in GDP
As Gov’t spending ↑ (G) will rise in GDP
As confidence rises, business will invest
more, (I) in GDP will rise
All of this should, in theory, eventually lead
to new jobs being created!
Even rappers hurt
•
2008 Economy
Stock Market worst year since 1937
– SP500 -40.0%
2009 Economy
• Stock Market- best year since 2003
– SP500 +23.0%
•
Unemployment rose 4.9% to 6.7%
• Unemployment rose 6.7% to 10.0%
•
GDP growth:
• GDP growth:
•
Fed Funds Rate 5.25  0.25%
0.0%
-2.6%
• Fed Funds Rate 0.25  0.00%
2010 Economy
•
Stock Market- good year
•
Unemployment fell from 10.0% to 9.8%
•
GDP growth
•
Fed Funds Rate 0.00  0.00%
(SP500 +13.0%)
+2.5% to +3.0%