The Federal Response to The 2008 Financial Crisis

The Federal Government's Response to the 2008 Financial

Crisis

Analysis & Recommendations

The Federal Government's Response to the 2008 Financial Crisis Analysis & Recommendations

Table of Contents Background and History ........................................................................................................................ 1

Government Response and Criticism of Those Programs .................................................................... 3

Policy Outcomes ................................................................................................................................... 8

Recommendations ................................................................................................................................ 9

Concluding Thoughts .......................................................................................................................... 11

References .......................................................................................................................................... 12


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Background and History Governmental response to recession is a primary area of macroeconomics research. When the United States encountered a severe financial crisis in 2008, the federal government implemented a variety of policies designed to shorten the ensuing recession. These included the Economic Stimulus Act and the American Recovery & Reinvestment Act, which are reviewed in this paper. We offer recommendations based on an analysis of the effectiveness of these programs.

Many pundits and politicians attempt to trivialize and simplify the reasons why the United States’ financial and housing sectors crashed in 2008, leading up to the worst recession since the Great Depression of the 1930s. However, looking back to more than just the few years that led up to the crash of 2008, it is observable that there are several factors that contributed to the financial and housing crash (see Appendix 1 “Globalization Timeline Infographic.”) We believe some of the most crucial contributing factors leading up to the financial crash include:

Fixed Income Investments Driven by growth in the developing world, global fixed income investments

doubled from 2000 to 2007, reaching approximately $70 trillion. Higher yields attracted investors discouraged by the low return on U.S. Treasuries. The U.S., unlike other countries, does not restrict foreign entities from purchasing and owning unlimited amounts of residential and commercial real estate. As the housing market boomed and grew rapidly, a ready pool of investors wanting to invest in the housing market led to creative but risky options, such as Mortgage-backed Securities and Collateralized debt obligations, which were complex investment structures that were not necessarily understood by all parties involved.

Subprime Lending A sophisticated market for investment options developed and a large and

continually growing number of mortgages became necessary, so lenders started to relax their criteria for lending to individuals to meet this demand. Lenders also believed in the myth that home prices would continue to rise. As a result, they issued loans to consumers that would otherwise never qualify. At a point, the terms of lending became so lax that they became known as a “No income No Job No Asset loan” (NINJA Loan), which meant that anyone could get a mortgage. Competition in the lending markets was high, so as a few lenders started to reduce their lending criteria, others inevitably followed suit ("Mortgage Crisis Timeline"). Fannie Mae and Freddie Mac bear some blame here as well, as they underwrote and purchased these loans from the originators


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without due diligence and strict criteria.

Consumer Behavior Coming out of the dotcom burst, Alan Greenspan attempted to revive the

economy by keeping the federal interest rates low. This had a direct impact on the mortgage interest rates, which suddenly made homeownership appear more affordable, creating an environment in which the demand for homes was greater than the supply, thereby driving up home prices. This in part due to a world in which lenders were issuing subprime mortgages, and qualification criteria were not an issue. Anyone could get a loan, regardless of whether they could pay back the loan, causing the median home prices to increase to 4.6 times the median household income at its peak in 2006 (Smith). The trend of increasing home prices also led to the belief that the prices would continue to rise, thereby creating a spiraling effect of more people getting into the market without consideration for the risky mortgage terms. Consumers took on more debt and saved less. Home ownership in US increased to an all-time high of 69.2% in 2004 (Smith). However, this crashed in 2010 when homes lost value and in some places, it became cheaper to own a home than rent (Smith).

Credit Rating Agencies A major structural problem is three so-called independent rating agencies, which

are sponsored by the same companies that ask the agencies to rate their financial products. Investment bankers invested in financial instruments that were rated highly by the agencies. In many cases, tranches of bundled toxic mortgages were issued high ratings. Rating agencies did not have historical precedence on this market, and thus relied on data that did not fit with the current financial models. Since investment decisions were made based on bad data, the inevitable bubble could not be avoided.

Government Regulations, or lack of, on the Banking and Mortgage Industry During the years leading up to the crisis, regulations on banking institutions were

massively reduced and relaxed (see attached Appendix 1 for a 40-year timeline of the chain of events leading up to the crash of 2008). For instance, the AMTPA act of 1982 increased flexibility for mortgage lenders to write adjustable rate mortgages to make homeownership more affordable. This assumed that the buyer’s income would increase before the adjustable mortgage matured. Similarly, the Commodity Futures Modernization Act of 2000 formally exempted derivatives from regulation for major players. One of the major contributors to the debacle was credit default swaps, which was a derivative that fell under this act. Approximately 90% of subprime mortgages issued in 2006 were adjustable rate mortgages. These subprime mortgages were


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bundled and sold to large investors, but when housing prices peaked, these mortgage backed securities (MBS) became junk. The revenue source for MBS, mainly homeowners, could no longer pay the mortgage, because they could not borrow against the equity, their incomes did not grow prior to the maturation of the adjustable rate mortgage, or they merely lost their jobs because of the frantic layoffs and downsizing that occurred in response to the crash.

Government Response and Criticism of Those Programs In response to the financial crisis, the federal government enacted several

policies to stimulate the economy out of the recession, including the Economic Stimulus Act and the American Recovery & Reinvestment Act.

Economic Stimulus Act In February of 2008, President Bush signed into law the Economic Stimulus Act.

The United States (US) federal government moved quickly to stop the coming recession by approving a three-part Economic Stimulus Act (Kopecki). Created to provide a tax rebate for US individuals, the Act targeted those who had low to medium income and were taxpayers. Second, the stimulus plan provided tax incentives to stimulate business investment through provisions for companies to accelerate depreciation for capital investments, therefore encouraging companies to invest in property, plant and equipment. Lastly, the Economic Stimulus Act increased the limits imposed on mortgages eligible for purchase by government run agencies such as Fannie Mae and Freddie Mac (Economic Stimulus Act).

Part One: Tax Incentives for the Individual Taxpayer The Economic Stimulus Act’s tax rebates were issued in denominations of $300

per person or $600 for married US taxpayers filing jointly. In addition, individuals received $300 per dependent under the age of 17. The tax rebate payment could not exceed $600 for an individual taxpayer or $1,200 for married taxpayers ("House Follows Senate in Approving Economic Stimulus Plan.").

Part Two: Increased Government Agency Limits Imposed on Mortgages The Economic Stimulus Act raised the limit on mortgage amounts available for

governmental protection through government backed mortgage insurance. Increased limits and protections encouraged lenders to lend to US consumers to help monetary liquidity in the US market. In addition, governmental agencies, such as Fannie Mae and Freddie Mac, tried to halt or reduce the rapid decrease of home values, which threatened US homeowners’ equity lines of credit and therefore their ability to consume products and services. ("Economic Stimulus: What Is the Economic Stimulus Act of 2008?")


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Part Three: Tax Incentives to Stimulate Business Investment Corporations, business entities and sole proprietors typically decrease large or all

real capital investments when determining a recession is coming (Hungerford). Therefore, the Economic Stimulus Act provided generous tax credits or deductions to corporations, business entities and sole proprietors to increase spending on investments in property, plant and equipment to help the US economy through business consumption. The capital purchases had to meet four requirements to receive the tax incentive. The purchase had to be for capital assets, which were not classified as regular business expense. The expenditure had to be necessary for the continued success of the business or corporate entity. The purchase needed to be solely used for the business and not for personal use. Lastly, the business needed proof of payment for the capital purchase ("Business Deductions Are Critical for Tax Savings.").

American Recovery & Reinvestment Act In February 2009, President Obama signed into law the American Recovery and

Reinvestment Act, also known as the “Stimulus.” The goal of the act was to create and save jobs and to increase economic activity and investment, while keeping the government spending transparent and accountable. The Obama Administration set aside $787 billion (increased to $840 billion in 2012) to implement the Recovery Act ("The Recovery Act."). The goals set forth by the stimulus were tax cuts and benefits, funding for entitlement programs and federal contracts, and grants and loans ("The Recovery Act."). The ARRA is considered both a jobs bill and an economy-boosting bill, with the following funding caps: $288 billion in tax cuts; $244 billion for education, health care and entitlements; and $275 billion in contracts, grants and loans ("Stimulus Funding: Who Gets It and How?").

Tax Cuts & Benefits Many of the tax cuts and benefits were targeted towards individuals, while others

focused on businesses. These individual cuts and benefits covered a large scope of topics including education, income tax, and child tax credits. The American Opportunity Tax Credit helped students and their families with the burden of higher education. The individual EITC (Earned Income Tax Credit) increased in 2009, and more families qualified for additional child tax credits. In terms of transportation, people who bought new vehicles were able to deduct local and state taxes on new car purchases. Homeowners were also rewarded with incentives to increase energy efficiency of their houses, while homebuyers were eligible for up to an $8,000 credit if they purchased between Sept. 1, 2008 and May 31, 2010. Other parts of the tax cuts and benefits included reduced Cobra premiums for workers who lost their jobs, an increase from 65% to 80% in health care coverage tax credits for health insurance premiums, and the Making Work Pay Tax Credit, which allowed Americans increased take-home pay in


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2009 and 2010. Lastly, $250 was paid to Social Security Recipients, Veterans and Railroad Retirees, which exempted the taxation of the first $2,400 of unemployment benefits received in 2009 ("The American Recovery and Reinvestment Act of 2009.").

Business could receive credits by hiring returning veterans and “disconnected youth” and increasing energy efficiency, and they could receive subsidies from their COBRA plans. However, some of the credits and cuts only applied to specific industries. For example, schools and energy and public projects could use municipal bond programs to finance projects, and the Net Operating Loss Carry-back program allowed “small businesses [to] offset losses by getting refunds on taxes paid up to five years ago ("The American Recovery and Reinvestment Act of 2009."). From March 2009 to June 2012, the Office of Tax Analysis estimated that $290.7 billion in tax benefits have been made available ("$290.7B in Recovery Act Tax Relief.").

Funding for Education, Healthcare and Entitlement Programs Programs that fall under the category of Entitlement include Medicaid/Medicare,

Unemployment, Family Services, Energy, Economic Recovery Payments, and Housing and Agricultures. Within these seven categories, there has been a total of $264B paid out above the categories as follows: 40% to Medicaid/Medicare, 23% Unemployment, 21% to Family Services, 8% to Energy, 5% to Economic Recovery Payments, 2% to Housing and 0.3% to Agriculture (“Entitlement Programs.”).

Approximately 89% of the nearly $106B allotted to the Medicaid/Medicare funds were given to Health and Human Services to help states fund Centers for Medicare and Medicaid Services. The rest of 11% went mostly to the Medicare HITECH program, while about 0.4% went to the general management of the Medicare and Medicaid programs. The Medicare HITECH program was developed to assist healthcare institutions with the implementation of certified Electronic Health Records (EHRs) (“Entitlement Programs.”). Unemployment, the next big benefactor of the American Recovery and Reinvestment Act, only received about a 23% share of the entitlement program but equated about $61B in funds “Entitlement Programs.”). The next major beneficiary of the ARRA entitlement program was family services, which includes the Food Stamp Program, Temporary Assistance to Needy Families, Child Support Enforcement and Foster Care and Adoption Services. A total of $55B was paid into the Family Services programs, with about $48B of this amount going directly to food stamps (“Entitlement Programs.”).

The Energy sector was allotted about $21B in funds of which 92% were used as grants for “specified energy property” (“Entitlement Programs.”). This means that the government would reimburse applicants for a portion of the expense of the property on which projects that produced energy through specific sustainable means like large wind,


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solar, geothermal ("Payments for Specified Energy Property in Lieu of Tax Credits."). Economic Recovery Payments covers Social Security and Veteran’s Affairs Compensation and Pensions, with 96% of the almost $14B paid into this entitlement program went to the Social Security Administration’s Economic Recovery Payments, Recovery Act. The Recovery Act is split into 3 parts, with the first being to hire more staff to more effectively process Disability and Retirement claims, second to help build the National Support Center, which is the computer system that houses all the Social Security Data, and third to pay for administrative costs associated with the Economic Recovery Payments being given to Veterans ("Social Security Administration (SSA) Agency-wide Recovery Act Plan.").

All of the funds for the Housing Entitlement program were given as Grants to States for Low-Income Housing Projects in Lieu of Low-Income Tax Credits. This $5.6B sum was used to spur the development of affordable housing, create, and retain jobs (“initiative”). Last and least is the Agriculture Entitlement program, with $964M given for Agricultural Disaster Relief (86%), Trade Adjustment (10%) and Agriculture Assistance (4%). While Agriculture Disaster Relief and Aquaculture Assistance are self-explanatory, Trade Adjustment for Farmers is a program that assists farmers who want to adjust their product production. This program gives participants the tools to raise certain approved commodities ("Approved TAA Commodities.").

Funding for Federal Contract and Grants & Loans Through the American Reinvestment and Recovery Act, the government paid out

$261B in contracts, grants and loans to different categories. The major beneficiary of these contracts, grants, and loans was the Education Sector with about $94B (36%) in funds paid out. The other sectors were paid out as follows: transportation (15%), Infrastructure (13%), Energy/Environment (12%), Research and Development/Science (6%), Housing (5%), Health (5%), Public Safety (2%), Family (2%), Job Training/Unemployment (2%) and other such programs. (“Contract, Grant, and Loan Programs.”)

Nearly half of the $94B in education funds was given to Elementary and Secondary education to help states stabilize education during the recession. The other 50% of the funds were used towards programs such as financial aid, special education, school improvement and education for the disadvantaged. The over $26B given in grants, loans and contracts to the transportation sector was used to improve highway infrastructure. The other nearly 33% was used towards the development of high-speed rail corridors, airports and public transit. (“Contract, Grant, and Loan Programs.”)

The $33B allotted to infrastructure was paid out to diverse programs. Under this category is the Tribal Assistance Grant, which was given over $6B, Federal Buildings


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Funds, which was given about $5B and the Broadband Tech Opportunities program, which was given $3.5B. The rest of the parties that benefitted from these contracts, grants and loans were the US Army Corps of Engineers, the Army, Telemedicine, the Air Force, Rural Water and Waste Disposal, the Navy, National Guard, US Fish and Wild Life and the Marine Corps. (“Contract, Grant, and Loan Programs.”)

The $30B in Energy and Environment grants, loans and contracts were mostly used to fund Energy Efficient and Renewable Energy Projects, while the remaining 49% of funds were used for a variety of projects. These Energy and Environment Projects included Environmental cleanup projects, Uranium Enrichment Decontamination, the procurement of energy efficient government vehicles, geological surveys and historic preservation of national parks to mention a majority of the activities. (“Contract, Grant, and Loan Programs.”)

The $15.9B given out for Research & Development/Science was used for a breadth of topics. The top six beneficiaries of the funds include The National Science Foundation, the Department of Energy, the National Institute of Health, Fossil Energy Research and Development, National Cancer Institute and the National Institute of Allergy and Infectious Disease. These six institutions account for 55% of the funding. The remaining 45% of the loans, grants and contracts are spread over a diverse number of programs, including other National Institutes such as Diabetes, Lung and Blood and Neurological Disorders. This segment also includes NASA funding, Department of Defense, Prosthetics Research and the Environmental Protection Agency. (“Contract, Grant, and Loan Programs.”)

Only $14B in funds was doled out for Housing loans, grants and contracts. A majority, 90%, of these funds were distributed between Indian Public Housing, Community Development, Rental Assistance and Homelessness Prevention. The balances of the funds were used for Department of Defense Homeowners Assistance Fund, Housing Insurance, Army Family housing and Air Force Family Housing. (“Contract, Grant, and Loan Programs.”)

The Health Sector received about $12B in funds of which they used over a third to give to states as savings on state contributions for prescription drug costs. The remaining two thirds of the grants, loans and contracts were distributed to the Veterans Health Administration, Indian Health Services, nutrition programs for Women, Infants and Children, Prevention and wellness programs, substance abuse and mental health programs, the CDC for Disease Control Research and the construction of state extended care facilities. (“Contract, Grant, and Loan Programs.”)

Public Safety grants, loans and contracts were used for Aviation security, Violence against Women projects, US Customs and Border Patrol, Emergency food and


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Shelter, Wildfire Management and the Bureau of Alcohol, Tobacco, Firearms and Explosives. However, about 47%, of the $5.7B in funds were used by the Department of Justice. (“Contract, Grant, and Loan Programs.”)

A total of 60% of the $5B given to Families was used for Children and Family services, while the other 40% was given as grants to states for childcare and development. Meanwhile, $3.8M of the $4.8M paid out to Unemployment and Training was given for the Training and Employment services, while the other 20% of the funds was used towards Rehabilitation and Disability services, Community Service Employment for the Elderly, the Job Corps and Maritime operations and training. (“Contract, Grant, and Loan Programs.”)

Policy Outcomes The stimulus and the ARRA caused the federal debt and outlays to dive deeper

into the red, exceeding a trillion dollars in 2012. In 2013, the US government stated that the official unemployment rate rose to 7%, while the SGS Alternate Unemployment Rate indicated that the national unemployment rate was 23% (Williams). Using Shadow Government Statistics’ published figure, it is clear that “President Obama’s $862 billion ‘stimulus’ plan, promising to bring the unemployment rate down to 5.3%,” did not work (Woodhill). Conley and Dupor argued that the Stimulus did not actually save jobs, stating that it “created and/or saved an estimated 450,000 government jobs and destroyed or prevented an estimated 1 million private sector jobs” (Conley and Dupor).

Critics of both plans mention that “if the Government could spend America into prosperity, good times would have arrived long ago” (Bandow). The CBO estimated that ARRA would increase the budget deficit to over $833B over a period of 2009-2019 (USA). The ARRA only raised real GDP between 0.1% and 0.8% and lowered unemployment between 0.1% and 0.6% (USA). Government spending, such as the spending enacted through ARRA and the Stimulus, can cause a shift away from production in private business sectors to government projects, causing a crowding out effect. It can be argued that ARRA and the Stimulus were necessary to create some short-term benefits, however, after these benefits dissipated, the American public were left with the fiscal deficits created by these programs, which include a huge debt to GDP ratio along with persistently low economic growth. Now, the American people are stuck financing ever-higher interest charges that the Government pays by issuing even more debt to cover the interest owed on the stimulus debt (USA). Economist Valerie Ramey said, “For the most part, it appears that a rise in government spending does not stimulate private spending; most estimates suggests that is significantly lowers private


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investment” (Bandow).

One reason why the ARRA was not as effective is that one-time cash payments were given to individuals and had less of an impact than a change in disposable income. Moreover, tax transfer provisions do not lead to any significant increase in consumption, because “households largely saved the transfers and tax rebates” and “state and local governments used the stimulus grants to reduce their net borrowing (largely by acquiring more financial assets) rather than to increase expenditures, and they shifted expenditures away from purchases toward transfers” (Taylor).

Recommendations The macroeconomic issues in the 2000s are due to the underlying structural

changes to the economy rather than the regular cyclical changes of expansion and contraction. However, the response by the government to the macro-economic issues in 2000s, such as the recessions in 2001 and 2007, has been similar to earlier decades, wherein the government tried to adopt a Keynesian or Monetarist cure for recession by applying fiscal and monetary measures to navigate the economy out of recession.

The government tried to bring the US economy out of recession by various fiscal stimulus measures, such as tax cuts and government spending, in addition to monetary stimulus programs, such as the bond purchase program. However, these measures have failed to stimulate the economy to the level it was at before due to various underlying structural issues. Some of the structural issues elaborated in the course that could have led to reduced effectiveness of the stimulus include too much leakage resulting from foreign imports outpacing exports, driving an increasing trade deficit and easy money policies leading to crowding out of investments, and consequential reduction in domestic investments. When the deficit caused by expansionary fiscal policy is funded by borrowed money, through sales of government bonds and securities, there is a potential for increase in interest rates causing reduction in private investments (owing to high cost of capital). This is referred to as a direct “crowding out: effect. However, to keep the interest rates down, the Fed adopted easy money policies, such as the “bond buy-back” program. However, such easy money policies can lead to inflation driving up the interest rates and driving down the investment thus causing indirect “crowding-out.”

The following policies, if pursued diligently, will restore unemployment to its normal levels, lift the country out of recession, and place it on a growth trajectory.

Jobs Act to Stimulate Quality Job and Salary Growth Rather than a tax cut that only leads to increased spending on imported goods


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and thereby sending the benefits offshore, the government could have used that money to incentivize the creation of high quality jobs with higher wages. One of the major issues during the recession was unemployment of recent college graduates. Among the recent college graduates, unemployment was stubbornly high, up to 20% during the peak of the recession ("The Job Market for Recent College Graduates in the United States."). Even for those graduates who were fortunate to find a job, the quality and the wages were much less than the previous years. In fact, the real average wages for college graduates have not seen any major growth in decades and data indicates that the real wage growth for college graduates is pretty much flat to declining (Fairbanks).

To alleviate this issue of quality job and salary growth, the government could have passed a “Jobs Act” that would have provided incentives in the form of tax cuts and tax credits for businesses creating high quality jobs or high income jobs or both. The Federal Jobs Act program that would create a 10% flat corporate tax rate to employers who provided brought jobs back and provided job training for skilled technology and manufacturing jobs. This policy would increase investment without increasing government expenditure, and would actually increase government revenue as more businesses would come back to do business in America. This approach would also avoid an increase in debt and the potential for crowding out.

Government Infrastructure Bank Rather than the bond buy-back program and low interest rates that led to

crowding out in the investments marketplace, the government could have created an infrastructure investment bank to fund the country’s current and future infrastructure investment needs.

The United States used to be the world leader in public infrastructure, such as transportation, water, energy, environment and quality facilities. However, the quality of the country’s infrastructure has continually declined to the standards of developing nations, while what used to be the developing nations are modernizing their infrastructure to become more sophisticated and urban. Added to this is the problem of nation’s dependency on imports for its consumption, such as consumer goods and oil. With the first class intellectual capital and the most productive labor resources in the world, the country still struggles to implement innovative solutions in sustainability and secure its energy future while still preserving its environment.

The financial resources to fund these infrastructure development projects are dwindling and the government does not have adequate capital to fund major projects such as the “California High Speed Rail.” Even if the government had adequate capital, the efficiency of execution, the regulatory environment to support such projects and the ability of the government to complete the project expeditiously under budget are


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questionable based on the past experiences. With increasing deficits and record debt levels, the government cannot afford to spend by itself for all the needed infrastructure improvements. Therefore, the revenue source model for capital project investments requires an overhaul either ways.

The government could have established an Infrastructure Investment Bank to help finance such innovative capital improvements, energy and sustainability projects. Rather than government trying to get directly involved in building the infrastructure, which has proved to be inefficient, it could have offered low interest loans at 2% to interested private project developers. The project developers would then have delivered the project in an expeditious and efficient manner using a mechanism, such as Public-Private Partnership, and also repaid the funds to the government with interest.

While the ARRA allocated less than 1% of ARRA funds to education and job training, this bank should approach investment in education and job training as building the infrastructure of the workforce. By offering student loans at 2% for higher education and specialized job training, such as renewable energy technical skills, it would increase the amount of discretionary funds available to new graduates. Since consumption is the “800 pound gorilla in the GDP equation” having more discretionary funds, would allow more consumer spending as people would have more funds to spend on consumer goods (Navarro).

Concluding Thoughts When the United States’ economy entered and lingered in a recession, the

federal government attempted to stimulate the economy by enacting various policies. The intended effects did not occur, and the United States suffered the most severe recession since the Great Depression. The American Recovery & Reinvestment Act and the Economic Stimulus Act did not stimulate the economy and push the United States out of the recession yet. Upon examination, it is clear that there were more viable alternatives to priming the economic pump. The federal government could have created a Jobs Act and a Government Infrastructure Bank to more effectively assist the economy. While the US economy suffered greatly, it is the hope of this author that the federal government will carefully analyze the response and effectiveness of policies to ensure that future recessions are dealt with more efficiently.


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APPENDIX 1

EVENTS DESCRIBEDDATE EVENT DESCRIPTION Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8Jan-70 FNMA & FHLMC Begin Securitization Fannie Mae and Freddie Mac began bundling loans from originators and selling them as assets

Jan-73 Gold Standard Abandoned Allowed Treasury to circulate more USD without having the fractional reserve in Gold

May-74 NIEO for Developing Countries New International Economic Order Developing Countries begin to borrow immense amounts from developed countries

Jan-80 Global Debt Crisis Begins Emerging Countries are unable to pay escalating debt incurred during the 1970's

Mar-86 Trade Liberalization IMF & World Bank make structural adjustments for developing countries

Jan-95 WTO Established World Trade Organization established to supervise global capital trade

Oct-99 Glass-Steagall act Repealed Financial Services Modernization Act passes enabling investment banks to conduct commercial & insurance activity

Dec-00 Derivatives Deregulated Commodity Futures Modernization Act deregulated derivatives and created a flurry of CDOs and CDS

Jun-06 U.S. Housing Prices Peaks Prices peaks stopping borrowers from being able to borrow against the equity value of their homes

Jun-07 Subprime mortgages crash Subprime market lending market collapses creating panic for shorts and leading to a systemic global financial exposure

Sep-08 Lehman Brothers Crashes Recession is now in full effect as other banks insurance underwriters begin to plummet on news of liquidity crash

Nov-08 TARP $800B Bailout Timothy Geitner negotiates bailouts of Banks/ AIG for exchange of preferred cost given to the government as collateral

Jun-09 U.S. Housing Prices Crash Prices crash leading to many foreclosures of ARM mortgages and forcing FEDS to keep rates low for market stimulus

Sep-10 IMF: Unemployment Cuts Needed IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending

Nov-10 Federal Reserve QE2 Fed announced that it would purchase $600 billion of longer dated treasuries, at a rate of $75 billion per month

Nov-11 Feds purchase bonds Feds purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years

Sep-12 QE3 & QE4 Commitment to continue purchase $85B agency Mortgage Backed Securities / month until labor market improves "substantially"

THE GLOBAL FINANCIAL AND U.S. MORTGAGE CRISIS (1970 - 2012)

FNMA & FHLMC BEGIN SECURITIZATION

GOLD STANDARD ABANDONED

NIEO FOR DEVELOPING COUNTRIES

GLOBAL DEBT CRISIS BEGINS

TRADE LIBERALIZATION

WTO ESTABLISHED

GLASS-STEAGALL ACT REPEALED

DERIVATIVES DEREGULATED

U.S. HOUSING PRICES PEAKS

SUBPRIME MORTGAGES CRASH

LEHMAN BROTHERS CRASHES

TARP $800B BAILOUT

U.S. HOUSING PRICES CRASH

IMF: UNEMPLOYMENT CUTS NEEDED

FEDERAL RESERVE QE2

FEDS PURCHASE BONDS

QE3 & QE4

Jan-70 Jan-73 May-74 Jan-80 Mar-86 Jan-95 Oct-99 Dec-00 Jun-06 Jun-07 Sep-08 Nov-08 Jun-09 Sep-10 Nov-10 Nov-11 Sep-12

The Federal Response to The 2008 Financial Crisis

Economy & Finance

Transcript of The Federal Response to The 2008 Financial Crisis