Transcript January 2009 Macro Headlines

Macroeconomic Issues
2007-2009
The Great Recession: GDP begins to drop
Shaded area
= recession
Employment falls
Unemployment Rises
The Stock Market Plummets
The beginnings of the great recession
• High risk (“sub-prime”) mortgages became
more common over past decade
– Low down-payments;
– Poor credit histories
• Mortgage default rates rise in 2008 because
– Housing prices fell
– Adjustable rate mortgages “reset”
– Worsening economic conditions
• 5.2 million homeowners predicted to lose their
homes between 2008 & 2010
The Financial Crisis of 2008
• Financial institutions experience significant losses
due to defaults on mortgages.
– Several failing financial institutions either acquired by
others or go bankrupt.
• Federal Reserve and U.S. government extend aid to
financial institutions
– Fed lends money to banks
– October 2008: Federal government establishes $700 billion
TARP (troubled asset relief program)
• Stock market drops nearly 50% in 2008
• Difficult for business to borrow
• Consumers cut back on spending
Government attempts to stimulate
the economy
• Feb 2008: Economic Recovery Act
– Approval of $168 billion stimulus package
– Tax rebates to 130 million households
• $600 for single
• $1200 for married
– “booster shot” for the U.S. economy
Government attempts to stimulate
the economy
• American Recovery and Reinvestment Act
passed in February 2009
– $288 b. in tax cuts and benefits
• Housing,, cash-for-clunkers, etc.
– $224 b. for education, health care, and
entitlement programs
• Health insurance for unemployed, extended
unemployment benefits, etc.
– $275 b. for federal contracts, grants and loans
• Support to states, roads, etc.
On-going concerns: the deficit
The decline in the value of $
Other issues
• Will economy have a “double dip”?
• Will inflation be a problem in future?
• How long before unemployment drops to
previous levels?
• Can government balance budget?