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 Titans Paulsen/Lehman AIG Insurance Company Government Takeover

Government Takeover of Subprime Mortgages

2 years later —who won

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 •a

700 billion dollar

the U.S.

banking system

Government program to “fix” J.Stewart interview re: use of money J.Stewart clip —700 b.bailout

G.S. Propped up

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% •

Unemployment

rose 4.9% to 6.7% •

GDP growth: 0.0%

•

Fed Funds Rate

5.25  0.25% •

2009 Economy Stock Market

- best year since 2003 – SP500 +23.0% •

Unemployment

rose 6.7% to 10.0% •

GDP growth: -2.6%

•

Fed Funds Rate

0.25  0.00% •

2010 Economy Stock Market

- good year ( SP500 +13.0%) •

Unemployment

fell from 10.0% to 9.8% • GDP growth +2.5% to +3.0% •

Fed Funds Rate

0.00  0.00%