Macroeconomic Issues

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?