The “Great Recession”: The Government’s Response

#1: The collapse of what company triggered the popping of the housing bubble? Housing Bubble Review Lehman Brothers

#2: What is the general term for removing government restrictions on what businesses can do? Housing Bubble Review Deregulation

Housing Bubble Review #3: What did the Glass-Steagall Act do? It put up a wall between investment banks and personal savings banks.

#4: The selling of what type of derivative at first earned AIG a lot of money, but ultimately led to its collapse? Housing Bubble Review Credit default swaps

#5: What is another name for a Collateralized Debt Obligation (CDO) that is based on home mortgages? Housing Bubble Review A mortgage-backed security

House of Cards Caused by Credit Bubble Led to

Banks were technically “bankrupt” and were not been lending money (credit crunch). This is a major crisis and free markets cannot work without a functional banking system. Credit Crunch

FNMA (Fannie Mae) & FHLMC (Freddie Mac) Government takeover AIG Insurance Company Government Takeover Wall Street Firms Bankrupt or Bought Bear Stearns Merrill Lynch Lehman Brothers Mergers Crash of the Titans— Paulsen/Lehman BAILOUTS OF COMPANIES Bailout of General Motors

TARP = Troubled Asset Relief Program passed by Congress, okayed by Pres. Bush in October 2008 a $700 BILLION Government program to “fix” the BANKING SYSTEM J.Stewart interview re: use of TARP money J.Stewart clip— 700 b.bailout G.S. Propped up

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

President Obama’s Plan President Obama and the Congress passed a $787 BILLION fiscal stimulus package in January This included a combination of: Tax Cuts Infrastructure Spending on roads, bridges, tunnels, etc… Incentives to business to invest in green technology AND A WHOLE LOT MORE Stimulus package discussion starts 1:34 in

GDP = C + I + G + (X-M) Fighting the Recession The hope has been that by: 1.Fixing the banking system 2.Raising Government Spending 3.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! Even rappers hurt

2010 Economy Stock Market- good year ( SP %) Unemployment fell from 10.0% to 9.8% GDP growth +2.5% to +3.0% Fed Funds Rate 0.00  0.00%