US & Spain: how the ECB and FED responded to the financial crisis Maggie Duthaler Juliet Zawedde

Before the Crisis: USA long period of growth before the recession real GDP started to fall consumer spending began to decrease changes occurred in the housing market

Before the Crisis: Spain long period of growth before the recession encountered situations the economy was unprepared for o ie. a mounting debt and hedge funds banks needed to discriminate between good and bad debtors

During the Crisis: USA home prices fell and homeowners began to default on their loans growth of the job market slowed from 1.6% to.8%- in 1 yr. a total of 32,143 jobs were lost consumption and investment components of GDP decreased

During the Crisis: Spain systemic shortage of liquidity Increased credit risk Between 2008 and 2009, GDP declined by about 3.6% Decrease in trade demand contraction in investment and rapid unemployment rate Public debt crossed the threshold of 50% of GDP

Reactions by the FRB FEDs main response was also open market operations o QE and QE2 plan  Bought $600 billion treasuries FED lowered the interest rate to 0% with hopes of increased investment the government implemented a $800 billion stimulus plan

Reactions by the ECB SPAIN: ECB adjusted the distribution of liquidity over the reserve maintenance period, providing liquidity earlier used open market operations to steer their interest rate adopted a fixed rate tender procedure with full allotment for all of its weekly main refinancing operations and its longer-term refinancing operations with maturities of up to six months increased the number and frequency of longer-term refinancing operations increased cooperation between international central banks

Improvements as of 2011: USA GDP has increased consistently, averaging $14,575 billion consumer spending has increased by 2.8%, the highest rate since before the recession unemployment has decreased with the creation of jobs from the stimulus package, from 9.4% to 9.0% in the last quarter of 2010 however, larger political problems have made resolving the large public debt difficult

Improvements as of 2011: Spain in the beginning of 2010, GDP began to increase gradually, after 3 quarters of decreasing the spanish government implemented a plan to decrease its debt however, the unemployment rate still remains at a very high level