Economic Outlook 2009 R
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Transcript of Economic Outlook 2009 R
![Page 1: Economic Outlook 2009 R](https://reader035.fdocuments.net/reader035/viewer/2022062419/557eb178d8b42a48588b4733/html5/thumbnails/1.jpg)
A Precarious Balance:Outlook for the U.S. Economy
Dr. John CaldwellDirector of Economics
Edison Electric Institute
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What Constitutes a Recession?
Source: Federal Reserve Board
Interruptions in Long-Run
Growth
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The Business Cycle Since WWII
Note: Average annual real GDP growth during this period has been 3.4%.
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Causes of RecessionsWhich Was Responsible for This One?
___ Speculative “Bubble”
___ Sudden and/or Extreme Rise in Energy Prices
___ Failure of Regulators/Auditors to Identify Systemic Problems in Business/Accounting Practices
___ Tightening of Money Supply by Central Bank
___ Credit Crisis – Insolvency of Financial Institutions
___ Excessive Reliance on Foreign Sources of Funding
√
√
√
√
√
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The Economic Crisis: Timeline
2000 20051995
1990’s U.S. Stock Market Boom
Asian Financial Crisis
Start of Housing Bubble
“Dot-Com” Recession; Collapse of
Stock Bubble
Energy/Commodity Prices Soar
Start of Current
Recession
Housing Prices Peak
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The Financial Meltdown: Timeline of Events
Oil tops $100/bbl
S&P’s/Moody’s downgrade
several hundred subprime bonds &
securities
Fitch downgrades Countrywide to
BBB+Bank of America
buys Countrywide
Bush signs Economic Stimulus
Act of 2008
Northern Rock nationalized
Housing and Economic Recovery
Act of 2008
• Fannie May / Freddie Mack seized by government
• Lehman Brothers files bankruptcy• House rejects bailout plan
Congress approves bailout plan – Bush signs
Barack Obama elected President
Obama signs
stimulus bill
Subprime lender New Century files for bankruptcy
Diminished liquidity in interbank lending markets
JP Morgan buys Bear Stearns
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Causes of the Financial Crisis• Abundance of Low-Cost Sources of Money
• Housing Boom Encouraged Consumers to Over-Extend in Borrowing
• Faulty Lending Practices
– Government policy aggressively encouraged expansion of homeownership
– Reward structure in lending based on fees rather than interest income
– Risky loans repackaged into complex investments
– “Capture theory” – Ratings agencies had incentive to give these investments positive evaluations
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America’s Growing Reliance Upon Debt
Source: Federal Reserve Board
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Recent Trends Indicate A Rise in Both Poverty and Debt
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State of the EconomySome Disturbing “Vital Signs”
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How Serious is This One? Comparison with Past Recessions
Length (Months)
05101520
Loss of Output
-4%
-3%
-2%
-1%
0%
1%
1929 = 42 months 1929 = 25%
1929 = 27% 1929 = 89%
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The National Debt• Currently at $10.8 trillion (78% of GDP, $35,000 per person)
• Why is the National Debt a Problem?– Leads to inflationary pressures / high interest rates
– 25% of it is owed to foreign countries
– Interest expense on debt becomes significant share of government budget
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Social Security / MedicareA Huge Bill Looming Ahead
• “Pay as you go” entitlement programs are underfunded:
• Social Security needs an additional $13.6 trillion to meet future needs . . .
• But Medicare needs an additional $85.6 trillion!!!
• How bad is this? Consider some alternative “fixes”:• Bill every American today $330,000 (or $840,000 per household).
• Raise income taxes by 68%.
• Cut government discretionary spending (e.g., national defense, education, the environment) by 97%.
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National Debt Will Continue to Grow
Source: Congressional Budget Office
Will reach 85% of GDP in 2010
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“Follow the Money”Why Government Spending Is
Not a Long-Term Solution
Private Sector Investment
Government Spending
Private Savings
Taxes
Foreign Investment(from Trade Deficit)
$
$
$
$
$$
$
$
$
$
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Prognosis for the EconomyWhen Can We Expect a Recovery?
• Necessary Preconditions for Recovery:• Housing Prices Bottom Out• Borrowing / Spending Resumed• Consumer Confidence Restored• Banks’ “Toxic” Assets Eliminated/Managed
• Potential Roadblocks to Recovery:• Second Banking Crisis • Stimulus Program Has No Effect
• Too Little, Too Late, or Channeled into Wrong Areas• Trade Wars Due to Protectionist Elements in Plan(s)
• Financial Sector Restructuring Ineffective
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The Road to RecoveryThe Long View
• Borrowing and Lending
• Consumer Spending
• Full Employment
• Remove “Toxic Assets”
• New Regulation of Financial System
• Rein in Deficit Spending
• Reduce National Debt
Businesses / Consumers Banking / Financial Sector Federal Government
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Thank You!