1. The Government’s Response
Recession
The Government’s Response

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

3. 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.

4. 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

5. 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

6. 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!