Spring Thaw?

Before Looking At The Near Term Situation, Let’s Take A Longer Term Perspective

The U.S. Has A Good Record The Pessimists are Usually Wrong Real Gross Domestic Product, % Change Recession years

The U.S. Has A Good Record The Pessimists are Usually Wrong Real Gross Domestic Product, % Change Recession years Longest expansion in history Mild recession Longest peace time expansion in history

The U.S. Has A Good Record The Pessimists are Usually Wrong Real Gross Domestic Product, % Change Recession years Mild recession What about the economy now? Longest peace time expansion in history 17 years of growth in real GDP

Things Look Pretty Bad Right Now, But The election delayed policy to aid the economy for months Only recently has a tax and spending stimulus plan been passed, let along had time to affect the economy The new financial stability plan has just been developed and not yet implemented Except for ½ of the TARP, the policy response has been limited to monetary policy –Liquidity has increased –Credit markets have improved

Things Look Pretty Bad Right Now, But The election delayed policy to aid the economy for months Only recently has a tax and spending stimulus plan been passed, let along had time to affect the economy The new financial stability plan has just been developed and not yet implemented Except for ½ of the TARP, the policy response has been limited to monetary policy –Liquidity has increased –Credit markets have improved Let’s look at the numbers

Two Consecutive Declines in Real GDP

ISM Manufacturing Index Drops To Very Low Levels Some hope?

Real Consumer Spending Drops To Very Low Levels Some hope?

Employment Decline Worse Than 1982

Unemployment Rate Still Below 1982 Levels As long as we’re talking about employment

Unemployment Claims Exaggerated Initial Claims Also Continuing Claims DateClaimsWorkers% Apr 4, , ,500, % Oct 2, ,000 88,894, %

Unemployment Claims Exaggerated Continuing Claims Anything positive? Date Continuing ClaimsWorkers% Mar 28, ,840, ,019,0004.4% Nov 6, ,713,000 88,770,0005.3%

Yes! Productivity Growth Remains Strong

Anything else positive?

Oil/Gasoline Prices Are Down Sharply Higher oil prices in 2008 were like a $170 billion tax increase and lower prices in 2009 are like a $355 billion tax cut = $525 billion positive swing

Oil/Gasoline Prices Are Down Sharply It’s not just energy Higher oil prices in 2008 were like a $170 billion tax increase and lower prices in 2009 are like a $355 billion tax cut = $525 billion positive swing

Commodity Prices Are Down Sharply CRB Indexes

Then why are things bad?

What Happened Very low interest rates to prevent deflation Government pressure to increase home ownership Excess global savings created demand for assets Securitization created supply of complex securities backed by subprime adjustable rate mortgages Complex securities rated too high leading to excess leverage Easy mortgages drove up house prices and construction Houses became unaffordable Interest rates increased Remaining buyers couldn’t afford houses House prices dropped and construction tanked

House Prices & Starts Soar Case Schiller House Price Index & Housing Starts What stopped the party?

House Affordability Collapses Median Household Income/Median New House Price There was nobody that could afford the houses being built

Interest Rates

House Prices & Starts Collapse Case Schiller House Price Index & Housing Starts

Foreclosures Subprime - Adjustable

Results Home foreclosures Mortgage backed securities declined in value and were down-rated Holders, including most major financial institutions, were forced to mark them down sharply (recently modified) Capital problems for financial institutions Uncertainty about future capital positions created a general tightening of credit to all borrowers Without access to credit overall spending collapsed

All Home Mortgages Suffer as Banks Tighten Net % Senior Loan Officers Reporting Tighter Lending Standards

Business Loans Also Suffer As Banks Tighten Net % Senior Loan Officers Reporting Tighter Lending Standards

Consumer Loans Also Harder to Get Net % Senior Loan Officers Reporting Tighter Lending Standards Doesn’t sound good, what’s being done?

Past Fed/Treasury Actions Lowered interest rates Increased lending to major financial institutions Provided liquidity directly to credit markets Supported money market funds Supported commercial paper market Injected capital directly into banks How did it work?

Fed cuts not working Short-Term Interest Rates

Long-Term Interest Rates Fed actions will bring mortgage rates down from 6.5% to about 4.5%, equivalent to a 20% reduction in mortgage principal

Further Help Is On The Way Economic Recovery & Reinvestment Plan $500 billion government spending $287 billion of tax cuts Largest fiscal stimulus since World War II (bigger than Great Depression stimulus)

Federal Budget Deficit % of GDP That’s a lot of stimulus Recession That’s a lot of stimulus

Further Help Is On The Way Financial Stability Plan + Fed Major expansion of support for consumer, auto, floorplan, student, commercial real estate, and small business loan securitization (up to $1 trillion) Mortgage/home owner support program Expanded support for mortgage market ($1.25 trillion) Program to reduce the negative impact of troubled assets on the banking system (up to $1 trillion) Fed purchase of long term Treasury securities ($300 billion in next 6-months)

Further Help Is On The Way Financial Stability Plan + Fed Major expansion of support for consumer, auto, floorplan, student, commercial real estate, and small business loan securitization (up to $1 trillion) Mortgage/home owner support program Expanded support for mortgage market ($1.25 trillion) Program to reduce the negative impact of troubled assets on the banking system (up to $1 trillion) Fed purchase of long term Treasury securities ($300 billion in next 6-months) How many $

Total Commitment $12.1 trillion Total Spent $2.5 trillion business/ bailout-totals-graphic.html As Of April 1, 2009

Total Commitment $12.1 trillion Total Spent $2.5 trillion business/ bailout-totals-graphic.html As Of April 1, 2009

What Will Happen? It hasn’t happened before Unprecedented global financial crisis Unprecedented global response Net result – serious recession 2.0% decline in 2009 real GDP and peak unemployment rate of about 10% May or may not be the worst recession since World II, but not a depression!

What Will Prevent A Depression And Make The Decline Stop? Automatic stabilizers that did not exist at the beginning of the depression –Social Security –Unemployment compensation –Welfare, Medicare, Medicaid –Large federal government Massive fiscal stimulus Extremely aggressive Federal Reserve and Treasury actions Lower energy prices Higher housing affordability Pent-up auto demand Inventory swing &

Policy Makers Are Determined But we will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity. This is a challenge more complex than any our financial system has ever faced, requiring new programs and persistent attention to solve. But the President, the Treasury and the entire Administration are committed to see it through because we know how directly the future of our economy depends on it. “… we must move forward, quickly and aggressively, with a middle-class rescue plan that will create jobs, provide relief to families, help homeowners and restore our financial system,"

%Change Real GDP Consumer Price Index Core Consumer Price Index * Federal Funds Rate Year Treasury Bond Unemployment Rate (%) Summary in Numbers * Excluding food and energy

Take Aways