The “Great Recession”: The Government’s Response.

The “Great Recession”:

The Government’s Response

#1: The collapse of what company triggered the popping of the housing bubble?

Housing Bubble Review

Lehman Brothers

#2: What is the general term for removing government restrictions on what businesses can do?

Housing Bubble Review

Deregulation

Housing Bubble Review

#3: What did the Glass-Steagall Act do?

It put up a wall between investment banks and personal savings banks.

#4: The selling of what type of derivative at first earned AIG a lot of money, but ultimately led to its collapse?

Housing Bubble Review

Credit default swaps

#5: What is another name for a Collateralized Debt Obligation (CDO) that is based on home mortgages?

Housing Bubble Review

A mortgage-backed security

House of Cards

Caused by

Credit Bubble

Led to

•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.

Credit Crunch

FNMA (Fannie Mae) & FHLMC (Freddie Mac)

Government takeover

AIG Insurance Company

Government Takeover

Wall Street Firms Bankrupt or Bought

Bear StearnsMerrill LynchLehman Brothers

Mergers

Crash of the Titans—Paulsen/LehmanBAILOUTS OF

COMPANIES

Bailout of General Motors

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 interview re: use of

TARP 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 have hoped this would lead more people to borrow money to buy homes and cars

Internet Bubble CollapseHousing Bubble Collapse

Ben BernankeChairmen of Fed

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

GDP = C + I + G + (X-M)

Fighting the 2008-09 Recession

The hope has been that by:

1. Fixing the banking system2. Raising Government Spending3. 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

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%

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%

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%