The “Great Recession”: The Government’s Response.
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Transcript of 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
•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%