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Chapter 12 The Recession of 2007-2009: Causes and Policy Responses Copyright © 2010 by The...
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Transcript of Chapter 12 The Recession of 2007-2009: Causes and Policy Responses Copyright © 2010 by The...
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
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
12-3
The Overall Economy Prior to the Recession
10,800.010,900.011,000.011,100.011,200.011,300.011,400.011,500.011,600.011,700.0
GD
P (
Bill
ion
s, 2
000)
GDP in billions of chained 2000 dollars RGDP at Long Run Expected Growth
12-4
Gas Prices
150170190210230250270290310330350
1/3
/20
05
3/3
/20
05
5/3
/20
05
7/3
/20
05
9/3
/20
05
11
/3/2
00
5
1/3
/20
06
3/3
/20
06
5/3
/20
06
7/3
/20
06
9/3
/20
06
11
/3/2
00
6
1/3
/20
07
3/3
/20
07
5/3
/20
07
7/3
/20
07
9/3
/20
07
Pri
ce
of
Ga
so
line
in C
en
ts
12-5
100.00
120.00
140.00
160.00
180.00
200.00
220.00
240.00
Jan
-00
Jul-
00
Jan
-01
Jul-
01
Jan
-02
Jul-
02
Jan
-03
Jul-
03
Jan
-04
Jul-
04
Jan
-05
Jul-
05
Jan
-06
Jul-
06
Jan
-07
Jul-
07
Case Shiller Index of Housing
12-6
250
300
350
400
450
500
Year.Quarter
Ho
us
ing
Sta
rts
in T
ho
us
an
ds
Housing Starts
12-7
600000
800000
1000000
1200000
1400000
1600000
1800000
2000
.01
2000
.07
2001
.01
2001
.07
2002
.01
2002
.07
2003
.01
2003
.07
2004
.01
2004
.07
2005
.01
2005
.07
2006
.01
2006
.07
2007
.01
2007
.07
Deb
t in
Mil
lio
ns
Revolving Credit Non-Revolving Credit
Debt
12-8
0
1
2
3
4
5
6Ju
n-03
Sep
-03
Dec
-03
Mar
-04
Jun-
04
Sep
-04
Dec
-04
Mar
-05
Jun-
05
Sep
-05
Dec
-05
Mar
-06
Jun-
06
Sep
-06
Dec
-06
Mar
-07
Jun-
07
Date
Rat
e
Fed-Funds Rate
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.
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
12-11
0
1
2
3
4
5
6
9/3
/20
07
10
/3/2
00
7
11
/3/2
00
7
12
/3/2
00
7
1/3
/20
08
2/3
/20
08
3/3
/20
08
4/3
/20
08
5/3
/20
08
6/3
/20
08
7/3
/20
08
8/3
/20
08
9/3
/20
08
10
/3/2
00
8
11
/3/2
00
8
12
/3/2
00
8
1/3
/20
09
Fed Funds Rate
12-12
GDP Drops
11,400.0
11,450.0
11,500.0
11,550.0
11,600.0
11,650.0
11,700.0
11,750.0
2007.3 2007.4 2008.1 2008.2 2008.3 2008.4
Year
RG
DP
$b
illi
on
s (
20
00
)
12-13
Unemployment Rises
4
6
8
10
12
14
16
20
06
.01
20
06
.03
20
06
.05
20
06
.07
20
06
.09
20
06
.11
20
07
.01
20
07
.03
20
07
.05
20
07
.07
20
07
.09
20
07
.11
20
08
.01
20
08
.03
20
08
.05
20
08
.07
20
08
.09
20
08
.11
20
09
.01
Unemployment Rate UR+DW UR+DW+Under
12-14
Job Losses
-800
-600
-400
-200
0
200
400
Year.Month
Ne
t C
ha
ng
e in
Jo
bs
(0
00
)
12-15
AS-AD ModelAS
PI
RGDP
AD1
RGDP*
PI*
AD2
Shock
12-16
Obama Stimulus Plan
12-17
AS-AD Model:Assist Nondiscretionary Fiscal
Policy Through StatesAS
PI
RGDP
AD1
RGDP*
PI*
AD2
Shock
AD3
NDFP
12-18
AS-AD Model:Discretionary Fiscal Policy
ASPI
RGDP
AD1
RGDP*
PI*
AD2
Shock
AD3 DFP
NDFP
12-19
Plan Elements: Tax Cuts
12-20
Plan Elements: Medicaid, Unemployment Extensions, Health
Insurance
12-21
Plan Elements: Spending on Projects