The Great Recession

Contraction/Recession Two consecutive quarters of slower economic

activity The Great Recession lasted from December

2007 to June 2009 Total of 18 months

Causes of the Great Recession 1. Housing bubble burst—housing prices fell dramatically

2. Defaults on subprime mortgages--$1 trillion outstanding

3. Exposure to bad mortgages caused financial failures Bear Stearns rescued Lehman Brothers—largest bankruptcy in history

Causes of the Great Recession Other conditions: Easy credit—low interest rates and easy

money policy Lack of regulation—can’t keep up with new

financial instruments (CDS, CDO) Credit rating agencies Lack of transparency of banks TOO MUCH RISK “moral hazard” Shadow banking

Causes of the Great Recession What Does Moral Hazard Mean?

The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a

desperate attempt to earn a profit before the contract settles (investopedia)

Real GDP

Unemployment Rate

Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov DecAnnua

l

2007 4.6 4.5 4.4 4.5 4.4 4.6 4.7 4.6 4.7 4.7 4.7 5.0

2008 5.0 4.8 5.1 4.9 5.4 5.6 5.8 6.1 6.2 6.6 6.8 7.3

2009 7.8 8.2 8.6 8.9 9.4 9.5 9.5 9.7 9.8 10.1 9.9 9.9

Bureau of Labor Statistics http://data.bls.gov/pdq/SurveyOutputServlet

Monthly job loss

Money Supply

Money Supply

Interest Rates

Interest Rates

Interest Rates

Inflation and price level

Inflation and price level

Interest rates

Housing starts

Mortgages gone bad

Consumer confidence

Why was this “Great” Correlations when things changed Full employment Government involvement

bailouts—GM=$50 B, AIG=$85 Bstimulus--$787 B Recovery.govunemployment benefit extension

Now what? What should we learn? Banking Consumers Government’s role?

What will you tell your grandchildren about the Great Recession of 2007-2009?

Include the business cycle description in your story. Use some statistics to support your story. You can include your opinion about banks, consumers, and the government! If you do any outside research besides the slides, you must cite the source (in the story, i.e. According to the Wall Street Journal on June 10, 2008,…….)

Formative grade—10 points.

Point distribution: 1-3 --you did tell a story, but it was short and

sweet without much information 4-6 –your story had 2 statistics and some

information on the conditions of the recession 7-8 –nice story including 3 statistics and

information on conditions and causes 9-10 –great story including 3 statistics, info on

conditions, causes and opinions