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Team USA
Lauren Frank
Tricia Murphy-Kennelly
Natalia Ivanytsky
Connor Scogin
Kristina Whitcomb
The Current Crisis
• President Obama:
• “We start 2009 in the midst of a crisis unlike any we have
seen in our lifetime – a crisis that has only deepened over
the last few weeks. Nearly two million jobs have now
been lost, and on Friday we are likely to learn that we lost
more jobs last year than at any time since World War II.
Just in the past year, another 2.8 million Americans who
want and need full-time work have had to settle for parttime jobs. Manufacturing has hit a twenty-eight year low.
Many businesses cannot borrow or make payroll. Many
families cannot pay their bills or their mortgage. Many
workers are watching their life savings disappear. And
many, many Americans are both anxious and uncertain of
what the future will hold.”
Theorized Roots of the Crisis
The International Financial Crisis Started with
Losses in the US Housing Market:
1. Root Cause #1 (Macro-Economic):
Excessive Lending Led to Losses (Subprime Mortgage Crisis)
2. Root Cause #2 (Micro-Economic):
Excessive Land Use Regulation
Exacerbated Losses
EMERGENCY ECONOMIC
STABILIZATION ACT OF 2008
• Stabilizing the Economy
The Emergency Economic Stabilization Act of 2008
(EESA)
- Provides up to $700 billion to the Secretary of the
Treasury.
- In order to: buy mortgages and other assets that are
clogging the balance sheets of financial institutions
and making it difficult for working families, small
businesses, and other companies to access credit,
which is vital to a strong and stable economy.
- EESA also establishes a program that would allow
companies to insure their troubled assets.
Economic Emergency Stabilization Act:
Troubled Asset Relief Program (TARP)
• Troubled assets definition:
• Residential or commercial mortgages and any
securities, obligations, or other instruments that are
based on or related to such mortgages that in each
case were originated or issued on or before March
14, 2008, the purchase of which the Secretary
determines promotes financial market stability; and
• Any other financial instrument that the Secretary
(after consultation with the Chairman of the Board of Governors of
the Federal Reserve System) determines the purchase of
which is necessary to promote financial market
stability (but only upon transmittal of such determination, in
writing, to the appropriate committees of Congress).
TARP…
• The goal of the Act is to:
- Restore liquidity and stability to the financial system of the
United States.
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However, the broad authority granted to the Secretary under the Act must be
exercised in a manner that:
Protects home values, college funds, retirement accounts and life savings;
preserves homeownership; promotes jobs and economic growth; maximizes overall
returns to the taxpayers of the United States and provides public accountability for
the exercise of such authority.
The Secretary has broad power to take the actions he deems necessary to purchase
troubled assets from any financial institution.
These powers include: designating financial institutions as financial agents of the
Federal Government and establishing vehicles that purchase, hold, and sell troubled
assets and issue obligations.
The Secretary, however, must consider several specified factors when deciding to
purchase troubled assets, including: protecting the interests of taxpayers, providing
stability to the financial markets, preserving homeownership, the long-term viability of
the financial institution, ensuring participation of all financial institutions regardless of
size or other characteristics, assisting retirement plans that hold troubled assets and
the needs of local communities.
American Recovery and Reinvestment Act: (2009)
“an unprecedented effort to jumpstart our economy, create or save millions of
jobs, and put a down payment on addressing long-neglected challenges so our
country can thrive in the 21st century”
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Create or save more than 3.5 million jobs over the next two years;
Take a big step toward computerizing Americans’ health records, reducing
medical errors, and saving billions in health care costs;
Revive the renewable energy industry and provide the capital over the next
three years to eventually double domestic renewable energy capacity;
Undertake the largest weatherization program in history by modernizing 75
percent of federal building space and more than one million homes;
Increase college affordability for seven million students by funding the shortfall
in Pell Grants, increasing the maximum award level by $500, and providing a
new higher education tax cut to nearly four million students;
As part of the $150 billion investment in new infrastructure, enact the largest
increase in funding of our nation’s roads, bridges, and mass transit systems
since the creation of the national highway system in the 1950s;
Provide an $800 Making Work Pay tax credit for 129 million working
households, and cut taxes for the families of millions of children through an
expansion of the Child Tax Credit;
Require unprecedented levels of transparency, oversight, and
accountability.
Expected Appropriation of the Budget--
• Education
•Health
Expected Unemployment Rate
with the Stimulus Plan
Federal Open Market Committee:
March 17, 2009 meeting
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The Federal Open Market Committee has an important influence in
monetary policy of the Fed. It is in charge of overseeing open market
operations.
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Job losses, declining equity and housing wealth, and tight credit conditions
have weighed on consumer sentiment and spending. Weaker sales
prospects and difficulties in obtaining credit have led businesses to cut back
on inventories and fixed investment. U.S. exports have slumped as a
number of major trading partners have also fallen into recession. Although
the near-term economic outlook is weak, the Committee anticipates that
policy actions to stabilise financial markets and institutions, together with
fiscal and monetary stimulus, will contribute to a gradual resumption of
sustainable economic growth.
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Federal Reserve will employ all available tools to promote economic
recovery and to preserve price stability
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Decided that it will maintain the target range for the federal funds rate at 0
to 1/4 percent
Federal Open Market Committee,
conT…
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To provide greater support to mortgage lending and housing markets, the
Committee decided today to increase the size of the Federal Reserve's
balance sheet further by purchasing up to an additional $750 billion of
agency mortgage-backed securities, bringing its total purchases of these
securities to up to $1.25 trillion this year, and to increase its purchases of
agency debt this year by up to $100 billion to a total of up to $200 billion.
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Moreover, to help improve conditions in private credit markets, the
Committee decided to purchase up to $300 billion of longer-term Treasury
securities over the next six months.
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The Federal Reserve has launched the Term Asset-Backed Securities Loan
Facility to facilitate the extension of credit to households and small
businesses and anticipates that the range of eligible collateral for this facility
is likely to be expanded to include other financial assets.
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The Committee will continue to carefully monitor the size and
composition of the Federal Reserve's balance sheet in light of
evolving financial and economic developments
RecenTly… “Public PRivATe
invesTmenT PRogRAm”
March 23, 2009
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The Treasury unveiled on Monday, March 23rd, its most recent plan to combat the
crisis, “one of the biggest efforts by the U.S. government yet”
“Public-Private Investment Program”: plan to address two of the biggest problems in
the banking sector: toxic assets keeping banks from lending and the shortage of
capital at major institutions.
The plan’s goal is to free up the capital of banks and institutions and stimulate the
extension of credit. It helps to ensure that credit is available to large and small
households and businesses. This is really important before banks can restore their
capital ratios and lend again.
Using taxpayers ´money, private investors will buy up so-called toxic assets backed
by mortgages and other loans. Goal: buy up at least $500 billion of bad assets (ex.
sub-prime mortgages which are now in danger of default).
This would help cleanse the balance sheets of many of the nation's largest banks,
which continue to suffer major losses
The government will then run auctions between the banks selling the assets and the
investors buying them, hoping to effectively create a market for these assets.
The administration said it will commit $75 billion to $100 billion in order to start the
program off
Much more of a proactive plan. Better than the alternatives--hoping that banks
gradually work off these bad assets or wait for the government to purchase the
assets directly.
Public Private Investment
Program--Will This Work?
• Stock futures were higher Monday morning,
indicating this is seen as a positive step by Wall
Street.
• The government has gotten some positive feedback
from private investors and banks.
Concerns:
• Will government involvement actually spur banks
and private investor groups, such as hedge funds
and private equity groups, to participate?
• Given the fact that the government has retroactively
changed some of the terms of many of the
government rescue programs, will investors be
willing to participate?
Stock Market (DOW) Leaps 497
Points after Plan Announced
March 23, 2009
Spending vs. Regulation
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Group of 20 Nations: White House official Larry Summers,
economic advisor to Obama, had said that the top prioirty of the
G20 meetings would be to boost world demand by stimulating their
economies through tax and spending policies—something that Mr.
Obama can assert that he has already accomplished. But, the
European Countries do not want to do this.
The major European nations: divided among themselves over the
wisdom of taking on more debt to combat the global downturn,
remain more interested in focusing on a new approach to financial
regulation, the issue that they say sits at the heart of the crisis.
At its simplest, this is a philosophical divide about the European
preference for more control over markets, even to the point of
creating international regulators who can reach across national
borders, and an American fear of gradually diminishing sovereignty
over its own institutions.
The mood in Germany: Chancellor Angela Merkel talks about using
the moment to enact what she calls “crucial” reforms. At the same
time the Germans say their modest stimulus package, about 50
billion euros, or $63 billion, less than a tenth of what Congress
passed last month to help the United States economy, is quite
enough for now.
Spending vs. Regulation ctd.
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The French: seem to be siding with the Germans, and so do the
Japanese, who are so debt-laden that they do not want to run up even
bigger deficits.
Gordon Brown, the British Prime Minister: appears to be leaning
toward President Obama’s position that governments ought to spend
first and regulate later.
Yes, officials concede, they have been overwhelmed by the
succession of crises that have hit at once: The rapid disintegration of
banks that required more capital injections, an auto industry bailout
that many inside the administration suspect may be too late to save
General Motors, and the accelerating market downturn.
• They insist that after:
1) urging coordinated spending sprees,
2) Coming up with a plan for Eastern Europe and other vulnerable
economies
3) And beating down protectionist-sounding legislation that has cropped
up around Europe, reforming the global regulatory system is next on
the to-do list.
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Obama on executive compensation
Example: AIG
• Speech by President Obama in February 2009:
• Imposing salary caps on executive compensation.
• “But in order to restore our financial system, we've got to
restore trust. And in order to restore trust, we've got to
make certain that taxpayer funds are not subsidizing
excessive compensation packages on Wall Street.”
• “For top executives to award themselves these kinds of
compensation packages in the midst of this economic
crisis is not only in bad taste - it's a bad strategy - and I
will not tolerate it as President. We're going to be
demanding some restraint in exchange for federal aid - so
that when firms seek new federal dollars, we won't find
them up to the same old tricks.”
Obama on executive compensation
Example: AIG, ctd.
• -“As part of the reforms we are announcing today, top executives at
firms receiving extraordinary help from U.S. taxpayers will have their
compensation capped at $500,000 - a fraction of the salaries that
have been reported recently. And if these executives receive any
additional compensation, it will come in the form of stock that can't
be paid up until taxpayers are paid back for their assistance.”
• -“Companies receiving federal aid are going to have to disclose
publicly all the perks and luxuries bestowed upon senior executives
and provide an explanation to the taxpayers and to shareholders as
to why these expenses are justified. And we're putting a stop to
these kinds of massive severance packages we've all read about
with disgust; we're taking the air out of the golden parachute.”
• Attorney General Andrew M. Cuomo of New York announced late
Monday afternoon that 9 of the top 10 bonus recipients at the
American International Group had given back their bonuses. He also
said 15 of the top 20 bonus recipients in A.I.G.’s financial products
division had given the money back, for a total that he estimated at
about $30 million.
Risks
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Risks of Obama’s Plan
Always the risk that the stimulus plan will not work.
Spending must be timely, targeted, and temporary.
Potential for a short-term stimulus to become a longterm budgetary strain.
• The US already has a huge budget and deficit..
– Projected to be $1.2 trillion this year, the highest since WWII
• Having to borrow internationally.
– The possibility of defaulting on that debt
• If the stimulus works too quickly.
Dissenting Opinions
• Dissenting Opinions: Problems with the Plan
• Many of the tax breaks go to those who
already pay little to no taxes.
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Just a redistribution of welfare spending
Not much to help small businesses
No major long-term tax cut
Do not encourage savings, investment, or
entrepreneurship
• Redistributive policies result in
“progressive” tax rates, which reduce
entrepreneurial activity.
• Stimulus is consumption based.
Dissenting Opinions: Other
Options to Revive the Economy
• Really, it comes down to
how you stimulate
private savings,
spending, and
investment.
• Tax cuts, particularly for
businesses.
– Stimulates increased
employment.
• Eliminate capital gains
and dividend taxes.
– Allows business to
produce the stimulus
– Avoids the expansion
of government
– Avoids the “lock-in
effect”
References
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http://www.treasury.gov/initiatives/eesa/
http://www.nytimes.com/2009/01/25/us/politics/25regulate.html?fta=y
http://www.economist.com/printedition/displayStory.cfm?story_id=12305746
http://www.reuters.com/article/idUKTRE48R48220080928?virtualBrandChannel=10112
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf
http://www.dol.gov/opa/media/press/eta/ETA20090293.htm
http://www.whitehouse.gov/agenda/economy/
http://www.nytimes.com/cfr/world/slot3_20090126.html?_r=1
http://money.cnn.com/2009/03/23/news/companies/treasury_plan/index.htm
http://www.thompsonhine.com/publications/publication1543.html
http://www.newgeography.com/content/00369-root-causes-financial-crisis-a-primer
www.nytimes.com/cfr/world/slot3_20090126.html?_r=1
http://www.heritage.org/Research/Economy/wm2261.cfm#_ftn1
ttp://www.nytimes.com/2009/03/24/business/24markets.html?hp
ttp://www.heritage.org/Research/Economy/wm2263.cfm#_ftn2
http://online.wsj.com/public/page/stimulus-package.html
http://otrans.3cdn.net/ee40602f9a7d8172b8_ozm6bt5oi.pdf
http://dealbook.blogs.nytimes.com/2009/03/23/cuomo-says-many-big-aig-bonuses-were-returned/?hp
http://www.federalreserve.gov/monetarypolicy/fomc.htm