1. U.S. Macroeconomic Outlook 2009-10 & Beyond Dr. Edward J. Deak Professor of Economics Fairfield University, and ABA Graduate Banking School Edwardjdeak.com ABA’ Seminar For Presidents March 2, 2009

2. U.S. Macro Overview Where we are today? The forces that brought us to the brink The issue of financial structural change A look at the current-historical data Federal fiscal actions – TARP + Obama Monetary policy actions The prospects for 2009-10 There is no Plan B What about 2011-15?

3. Where Are We Today? Worst Economic Decline Since 1930’s Not a Traditional Downturn Structural Change in Financial Sector Massive in Size + Asset Value Loss Less Responsive to Traditional Monetary + Fiscal Policy Actions Global in Scope

4. The Forces that Brought US to the Brink of Economic Abyss The events of 9/11 -> Fed  (i) – Too much, Too Long Excessive stimulus to U.S. housing BOP deficits - Excess global supply of $ Excessive Securitization - Housing assets + others Rating agencies + Credit default swaps Excessive Capital Leverage – Not 12:1 but 34:1 Unsound Lending Practices – Lax underwriting Exotic Mtgages – NINJA, Exploding + Option ARMs Lax Supervision - Allowed Wall St greed Alphabet soup credit instruments – ABS, CDOs, etc Phased collapse of housing 2006-09 Speculators, resets, under water, recession

5. Financial Structural Change The Pre-2008 Financial System is Gone –The death of traditional investment banking –The squeeze on insurance companies –The weakening of nationwide + regional commercial banks A list of likely survivors –Community banks –Boutique investment banks: ex: Raymond James –Private equity + hedge funds Intensified federal regulation –Likely to be excessively restrictive Rebirth of financial structure –Financing is a service – Channel $ to opportunity –Requires a new wave of real technological change Entrepreneurship  financial intermediation

6. Current-Historical Data: Housing + Financial Existing Home Sales Median Sale Price Existing Homes Median Sale Price Case-Shiller Index Housing Affordability Index Loan Delinquency Rates Loan Charge-off Rates Consumer Credit Outstanding Dow Industrial Average

7. Existing Home Sales: Single Family + Condo

8. Median Sale Price $: Existing Home

9. Median Existing Sale Price $: Constant Home – Case/Shiller

10. Housing Affordability Index

11. U.S. Housing Permits Th: Single family & Condos

12. Delinquency Rates %: All Comm Bks (FR: sa)

13. Charge-off Rates %: All Comm Bks (FR: sa)

14. Consumer Credit: (% Chg - FR: sa)

15. Dow Industrial Average: Monthly Range/Close 1/07-1/09

16. Current-Historical Data: Main St Economy Initial Claims Unemployment Insurance Net Change in Non-farm Payrolls Unemployment Rate Real Gross Domestic Product Consumer Price Index

17. Initial New Claims UE Insurance: U.S. DOL 1 st Week of Month 08-09

18. U.S. Net Chg Total Nonfarm Employ: 12:07-12:08 U.S. DOL

19. U.S. Unemployment Rate %: 12/07-12/08 U.S. DOL

20. U.S. Real GDP: Quarterly % Chg (saar)

21. Consumer Price Index: Quarterly % Chg (saar)

22. Federal Fiscal Action -1 TARP - $700 Bil. –Original plan – Bank stabilization: Bad assets –Bank capital infusion - $350 Bil. –Housing stabilization - $350 Bil.? Obama Recovery Plan - $825 Bil.+? –Twin goals Macro stabilization Self-sustaining recovery –Social goals? –Plan structure

23. Federal Fiscal Action-2 Critique: Recovery Plan Focus (Deak) –Quick aid to distressed households + bus –Short-run & intermediate stimulus - Infrastructure –Long-run support for self-sustaining growth Recovery Plan Problems (Deak) –Too small - $1.2Tril+ needed –Too little for housing market stabilization –Too short – Needed 4 year focus –Too much for tax cuts – Limited bang for buck –Too little for growth stimulus

24. Federal Fiscal Action -3 Financial Market Action “Bad Bank” – Distressed asset aggregator –FDIC RTC model from 1980’s –Problem: Pricing of assets from banks Implicit taxpayer subsidy vs. Mark-to-market Asset acquisition method Nationalization – Takeover failing banks –Problems: The $ size of the banks Interim management Ultimate asset disposition Ring fencing bad assets – Federal insurance

25. Federal Reserve Policy Actions Traditional Monetary Policy –Federal funds rate – Cut to ZERO –OMO – Infuse reserves =  money supply Non-traditional Monetary Actions –Direct loans to investment banks (IB) –Convert IB + insurance co to comm banks –Extend credit directly to bus + households –Purchase agency + mgt backed securities Result – Boost FR bal sheet +$1.25 Tril.

26. Economic Outlook 08:Q4-10:Q1 Real Gross Domestic Product Change in Non-farm Payrolls Unemployment Rate Consumer Price Index Average Oil Price (nymex) Housing Starts, Existing home sales, Prices Consumer Spending Business Investment Fed Funds Rate Target 10-year T-Note

27. Real GDP % Change: Quarterly (saar)

28. Non-farm Payroll Jobs: Ave Monthly Chg (000’s) (sa)

29. U.S. Unemployment Rate %: Quarterly 08:4-10:1

30. Consumer Price Index: % Chg Quarterly 08:4-10:1

31. Average Oil Price Per BL: 08:Q1-10:Q1(nymex)

32. Housing Starts (saar)

33. Existing Home Sales (mil)

34. Existing Home Sale Price: Nominal $

35. Real Consumer Spending: % Chg (saar)

36. Real Business Investment: % Chg (saar)

37. Fed Funds Rate Target %

38. 10-Year T-Note Yield %

39. There is No Plan B The risk of fiscal + monetary failure –Short-run stimulus v. self-sustaining recovery Plan needs domestic cooperation Recovery needs global coordination –Multi-national government action –Global business buy-in –Global financial buy-in There is no going back for round-2

40. What About 2011-2015? Real risk of massive global inflation Crush of medicare + social security Financing U.S. budget deficits Correcting U.S. Balance of Payments Constructing a U.S. energy policy Constructing a global environmental policy