Transcript PP--Government Efforts to Combat the Economic Crisis

The “Great Recession”:
The Government’s Response
Housing Bubble Review
#1: The collapse of what company triggered
the popping of the housing bubble?
Lehman Brothers
Housing Bubble Review
#2: What is the general term for removing
government restrictions on what
businesses can do?
Deregulation
Housing Bubble Review
#3: What did the Glass-Steagall Act do?
It put up a wall between investment banks
and personal savings banks.
Housing Bubble Review
#4: The selling of what type of derivative at
first earned AIG a lot of money, but
ultimately led to its collapse?
Credit default swaps
Housing Bubble Review
#5: What is another name for a
Collateralized Debt Obligation (CDO) that
is based on home mortgages?
A mortgage-backed security
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)
Bailout of General Motors
Government takeover
Wall Street Firms Bankrupt or Bought
Bear Stearns
Merrill Lynch
Lehman Brothers
AIG Insurance Company
Government Takeover
BAILOUTS OF COMPANIES
Crash of the Ti
Paulsen/Lehma
Mergers
TARP = Troubled Asset Relief Program
•passed by Congress, okayed by Pres. Bush in October 2008
•a
$700 BILLION Government program to “fix” the
BANKING SYSTEM
J.Stewart clip—
700 b.bailout
G.S. Propped up
J.Stewart
interview re:
use of
The Federal Reserve
• The Federal Reserve has responded to the financial
crisis by lowering interest rates from 5.25% to 0.0%!
• They have hoped this would 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
$787 BILLION fiscal stimulus package in January 2009.
This included a combination of:
• Tax Cuts
• Infrastructure Spending on roads, bridges, tunnels, etc…
• Incentives to business to invest in green technology
•AND A WHOLE LOT MORE
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%