Macroeconomic Issues

The Great Recession: GDP begins to drop Shaded area = recession

Employment falls

Unemployment Rises

The Stock Market Plummets

The Deficit Explodes

National Debt Grows

The Federal Reserve Prints Money

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 Nearly 5 million homeowners lost 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 Issues Deficit reduction & “Fiscal Cliff” Debt ceiling will be reached in Feb 2013 Taxes vs spending Entitlement program reform Monetary policy, interest rates and inflation. Slow growth in U.S. economy Unemployment has been stubborn Structural change Policies to improve growth in economy