The Economy: View from February 2009

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Presentation transcript:

The Economy: View from February 2009 Recap of where we are, How we got here, And where we’re likely to go

Predicting the Future is Hard! "But a destabilizing contraction in nationwide house prices does not seem the most probable outcome. Indeed, nominal house prices in the aggregate have rarely fallen and certainly not by very much." Alan Greenspan, May 6, 2004 http://www.federalreserve.gov/boarddocs/speeches/2004/200405062

Leading Economic Indicators—Selected Countries Country November December YOY% Change USA -8.7 -9.5 Japan -5.5 -7.3 France -5.7 -5.9 Germany -10.7 -11.8 Italy -5.0 -5.6 UK -6.7 -6.8 Korea -4.4 Czech Republic -10.4 -12.5 Poland -7.2 -7.7 Spain -7.4 Turkey -10.5 -13.4 Brazil -2.9 -5.4 China -12.9 -14.0 India -7.5 Russia -13.8 -17.7

Where We’re At—Newest Data

Imports & Exports Follow Production

More Data

How Does this Compare Historically?

Employment—Historical Comparison

States Feeling the Pinch

Effect on Budgets?

Consumers are Saving

Does Detroit Need a Bailout?

Estimated Impact of Spending a Dollar by Sector of the Economy Economic multipliers—by economic sector Highest: Motor vehicle manufacturing 2.87 Food and tobacco manufacturing 2.61 Farms 2.33 Residential construction 2.27 Local government enterprises 2.22 Lowest: Legal services and real estate 1.49 Warehousing and storage 1.43 Fed banks, credit intermediation, etc. 1.39 Rankings estimated based on 2006 data

Deflation?

The Banks

Evolution of a Crisis—Financial “Innovation” The S&L collapse of the 1980s Diversification of risk Consolidation of institutions (Glass Steagall) Mortgage backed securities Selling an interest in a pool of mortgages rather than selling the mortgages themselves If profitable, where do you get more mortgages? Diversification vs. multiplication of risk—did the bankers understand this tradeoff? Credit default swaps (CDSs) Who regulated this market? What are the incentives to “work out” problem loans? What assets can the government buy? The goal of helping borrowers Fear factor—it appears to be much worse in Europe

Taxes and Deficits

Predicting the Future Deflation or inflation? Where will growth come from? Social Security—can we afford it? Medicare and the health care system Taxes The role of government International relations Trade Conflict

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