Macroeconomic Issues2007-2009

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

• 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.

Government attempts to stimulate the economy

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?