The Government’s Response

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Presentation transcript:

The Government’s Response 2008-09 Recession The Government’s Response

The Path to the Financial Crisis 2000 Peak Banks won’t lend Today! 2006/07 Peak 2008/09

Government continues to put money into the 700 Billion Dollar Bailout Banking System 700 Billion Dollar Bailout (TARP) TARP = Troubled Asset Relief Program and is a 700 billion dollar Government program to “fix” the U.S. banking system. Banks are technically “bankrupt” and are not lending money. (credit crunch). This is a major crisis and free markets cannot work without a functional banking system. While banks appear to be in better shape today than a month ago, they still are reluctant to lend and the Government plans to take additional steps to increase bank lending.

President Obama’s Plan In addition to TARP, President Obama has planned a 850 billion dollar fiscal stimulus package. This will include a combination of: ↑ Government Spending Tax Cuts Infrastructure Spending on roads, bridges, tunnels, etc… Incentives to business to invest in green technology

The Federal Reserve The Federal Reserve has responded to the financial crisis by lowering interest rates from 5.25% to 0.0%! They hope this will lead more people to borrow money to buy homes and cars Ben Bernanke Chairmen of Fed Internet Bubble Collapse Housing Bubble Collapse

GDP = C + I + G + (X-M) Fighting the 2008-09 Recession The hope is that by: Fixing the banking system Raising Government Spending 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!