1. Chapter 12 The Recession of 2007-2009: Causes and Policy Responses Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 12-2 Chapter Outline The Economy Before 2007 Housing –How Much Is a House Really Worth? –Mortgages –How to Make a Bubble –Pop Goes the Bubble! The Effect on the Overall Economy The Response to the Recession Summary

3. 12-3 The Overall Economy Prior to the Recession

4. 12-4 Gas Prices

5. 12-5 Case Shiller Index of Housing

6. 12-6 Housing Starts

7. 12-7 Debt

8. 12-8 Fed-Funds Rate

9. 12-9 How to Make a Bubble Fundamental Determinants of Housing Value –Location –Amenities –Interest rate Non-Fundamental Determinants –Expectations that prices will rise in the future causing increased demand now. This is a prescription for a bubble.

10. 12-10 Vocabulary of 2008 Securitization: The process by which mortgages are bundled into groups and sold as investment instruments. –Done by Fannie Mae and Freddie Mac –Geographically diversity Credit Default Swap –Insurance against the loss of principal –Unregulated –ING AIG were large purveyors as were many investment banks Goldman Sachs Lehman Bros

11. 12-11 Fed Funds Rate

12. 12-12 GDP Drops

13. 12-13 Unemployment Rises

14. 12-14 Job Losses

15. 12-15 AS-AD Model AS PI RGDP AD 1 RGDP* PI* AD 2 Shock

16. 12-16 Obama Stimulus Plan

17. 12-17 AS-AD Model: Assist Nondiscretionary Fiscal Policy Through States AS PI RGDP AD 1 RGDP* PI* AD 2 Shock AD 3 NDFP

18. 12-18 AS-AD Model: Discretionary Fiscal Policy AS PI RGDP AD 1 RGDP* PI* AD 2 Shock AD 3 DFP NDFP

19. 12-19 Plan Elements: Tax Cuts

20. 12-20 Plan Elements: Medicaid, Unemployment Extensions, Health Insurance

21. 12-21 Plan Elements: Spending on Projects