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Team USA

Team USA. Lauren Frank Tricia Murphy-Kennelly Natalia Ivanytsky Connor Scogin Kristina Whitcomb. The Current Crisis. President Obama:

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Team USA

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  1. Team USA Lauren Frank Tricia Murphy-Kennelly Natalia Ivanytsky Connor Scogin Kristina Whitcomb

  2. The Current Crisis • President Obama: • “We start 2009 in the midst of a crisis unlike any we have seen in our lifetime – a crisis that has only deepened over the last few weeks. Nearly two million jobs have now been lost, and on Friday we are likely to learn that we lost more jobs last year than at any time since World War II. Just in the past year, another 2.8 million Americans who want and need full-time work have had to settle for part-time jobs. Manufacturing has hit a twenty-eight year low. Many businesses cannot borrow or make payroll. Many families cannot pay their bills or their mortgage. Many workers are watching their life savings disappear. And many, many Americans are both anxious and uncertain of what the future will hold.”

  3. Theorized Roots of the Crisis The International Financial Crisis Started with Losses in the US Housing Market: 1. Root Cause #1 (Macro-Economic): Excessive Lending Led to Losses (Sub-prime Mortgage Crisis) 2. Root Cause #2 (Micro-Economic): Excessive Land Use Regulation Exacerbated Losses

  4. EMERGENCY ECONOMIC STABILIZATION ACT OF 2008 • Stabilizing the Economy The Emergency Economic Stabilization Act of 2008 (EESA) • Provides up to $700 billion to the Secretary of the Treasury. • In order to: buy mortgages and other assets that are clogging the balance sheets of financial institutions and making it difficult for working families, small businesses, and other companies to access credit, which is vital to a strong and stable economy. • EESA also establishes a program that would allow companies to insure their troubled assets.

  5. Economic Emergency Stabilization Act:Troubled Asset Relief Program (TARP) • Troubled assets definition: • Residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages that in each case were originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and • Any other financial instrument that the Secretary (after consultation with the Chairman of the Board of Governors of the Federal Reserve System) determines the purchase of which is necessary to promote financial market stability (but only upon transmittal of such determination, in writing, to the appropriate committees of Congress).

  6. TARP… • The goal of the Act is to: • Restore liquidity and stability to the financial system of the United States.  • However, the broad authority granted to the Secretary under the Act must be exercised in a manner that: • Protects home values, college funds, retirement accounts and life savings; preserves homeownership; promotes jobs and economic growth; maximizes overall returns to the taxpayers of the United States and provides public accountability for the exercise of such authority. • The Secretary has broad power to take the actions he deems necessary to purchase troubled assets from any financial institution. • These powers include: designating financial institutions as financial agents of the Federal Government and establishing vehicles that purchase, hold, and sell troubled assets and issue obligations. • The Secretary, however, must consider several specified factors when deciding to purchase troubled assets, including:  protecting the interests of taxpayers, providing stability to the financial markets, preserving homeownership, the long-term viability of the financial institution, ensuring participation of all financial institutions regardless of size or other characteristics, assisting retirement plans that hold troubled assets and the needs of local communities.

  7. American Recovery and Reinvestment Act: (2009)“an unprecedented effort to jumpstart our economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century” • Create or save more than 3.5 million jobs over the next two years; • Take a big step toward computerizing Americans’ health records, reducing medical errors, and saving billions in health care costs; • Revive the renewable energy industry and provide the capital over the next three years to eventually double domestic renewable energy capacity; • Undertake the largest weatherization program in history by modernizing 75 percent of federal building space and more than one million homes; • Increase college affordability for seven million students by funding the shortfall in Pell Grants, increasing the maximum award level by $500, and providing a new higher education tax cut to nearly four million students; • As part of the $150 billion investment in new infrastructure, enact the largest increase in funding of our nation’s roads, bridges, and mass transit systems since the creation of the national highway system in the 1950s; • Provide an $800 Making Work Pay tax credit for 129 million working households, and cut taxes for the families of millions of children through an expansion of the Child Tax Credit; • Require unprecedented levels of transparency, oversight, and accountability.

  8. Expected Appropriation of the Budget-- • Education • Health

  9. Expected Unemployment Rate with the Stimulus Plan

  10. Federal Open Market Committee:March 17, 2009 meeting • The Federal Open Market Committee has an important influence in monetary policy of the Fed. It is in charge of overseeing open market operations. • Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilise financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth. • Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability • Decided that it will maintain the target range for the federal funds rate at 0 to 1/4 percent

  11. Federal Open Market Committee, cont… • To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve's balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. • Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. • The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. • The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

  12. Recently… “Public private investment program”March 23, 2009 • The Treasury unveiled on Monday, March 23rd, its most recent plan to combat the crisis, “one of the biggest efforts by the U.S. government yet” • “Public-Private Investment Program”: plan to address two of the biggest problems in the banking sector: toxic assets keeping banks from lending and the shortage of capital at major institutions. • The plan’s goal is to free up the capital of banks and institutions and stimulate the extension of credit. It helps to ensure that credit is available to large and small households and businesses. This is really important before banks can restore their capital ratios and lend again. • Using taxpayers ´money, private investors will buy up so-called toxic assets backed by mortgages and other loans. Goal: buy up at least $500 billion of bad assets (ex. sub-prime mortgages which are now in danger of default). • This would help cleanse the balance sheets of many of the nation's largest banks, which continue to suffer major losses • The government will then run auctions between the banks selling the assets and the investors buying them, hoping to effectively create a market for these assets. • The administration said it will commit $75 billion to $100 billion in order to start the program off • Much more of a proactive plan. Better than the alternatives--hoping that banks gradually work off these bad assets or wait for the government to purchase the assets directly.

  13. Public Private Investment Program--Will This Work? • Stock futures were higher Monday morning, indicating this is seen as a positive step by Wall Street. • The government has gotten some positive feedback from private investors and banks. Concerns: • Will government involvement actually spur banks and private investor groups, such as hedge funds and private equity groups, to participate? • Given the fact that the government has retroactively changed some of the terms of many of the government rescue programs, will investors be willing to participate?

  14. Stock Market (DOW) Leaps 497 Points after Plan Announced March 23, 2009

  15. Spending vs. Regulation • Group of 20 Nations: White House official Larry Summers, economic advisor to Obama, had said that the top prioirty of the G20 meetings would be to boost world demand by stimulating their economies through tax and spending policies—something that Mr. Obama can assert that he has already accomplished. But, the European Countries do not want to do this. • The major European nations: divided among themselves over the wisdom of taking on more debt to combat the global downturn, remain more interested in focusing on a new approach to financial regulation, the issue that they say sits at the heart of the crisis. • At its simplest, this is a philosophical divide about the European preference for more control over markets, even to the point of creating international regulators who can reach across national borders, and an American fear of gradually diminishing sovereignty over its own institutions. • The mood in Germany: Chancellor Angela Merkel talks about using the moment to enact what she calls “crucial” reforms. At the same time the Germans say their modest stimulus package, about 50 billion euros, or $63 billion, less than a tenth of what Congress passed last month to help the United States economy, is quite enough for now.

  16. Spending vs. Regulation ctd. • The French: seem to be siding with the Germans, and so do the Japanese, who are so debt-laden that they do not want to run up even bigger deficits. • Gordon Brown, the British Prime Minister: appears to be leaning toward President Obama’s position that governments ought to spend first and regulate later. • Yes, officials concede, they have been overwhelmed by the succession of crises that have hit at once: The rapid disintegration of banks that required more capital injections, an auto industry bailout that many inside the administration suspect may be too late to save General Motors, and the accelerating market downturn. • They insist that after: • urging coordinated spending sprees, • Coming up with a plan for Eastern Europe and other vulnerable economies • And beating down protectionist-sounding legislation that has cropped up around Europe, reforming the global regulatory system is next on the to-do list.

  17. Obama on executive compensationExample: AIG • Speech by President Obama in February 2009: • Imposing salary caps on executive compensation. • “But in order to restore our financial system, we've got to restore trust. And in order to restore trust, we've got to make certain that taxpayer funds are not subsidizing excessive compensation packages on Wall Street.” • “For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis is not only in bad taste - it's a bad strategy - and I will not tolerate it as President. We're going to be demanding some restraint in exchange for federal aid - so that when firms seek new federal dollars, we won't find them up to the same old tricks.”

  18. Obama on executive compensationExample: AIG, ctd. • -“As part of the reforms we are announcing today, top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000 - a fraction of the salaries that have been reported recently. And if these executives receive any additional compensation, it will come in the form of stock that can't be paid up until taxpayers are paid back for their assistance.” • -“Companies receiving federal aid are going to have to disclose publicly all the perks and luxuries bestowed upon senior executives and provide an explanation to the taxpayers and to shareholders as to why these expenses are justified. And we're putting a stop to these kinds of massive severance packages we've all read about with disgust; we're taking the air out of the golden parachute.” • Attorney General Andrew M. Cuomo of New York announced late Monday afternoon that 9 of the top 10 bonus recipients at the American International Group had given back their bonuses. He also said 15 of the top 20 bonus recipients in A.I.G.’s financial products division had given the money back, for a total that he estimated at about $30 million.

  19. Risks • Risks of Obama’s Plan • Always the risk that the stimulus plan will not work. • Spending must be timely, targeted, and temporary. • Potential for a short-term stimulus to become a long-term budgetary strain. • The US already has a huge budget and deficit.. • Projected to be $1.2 trillion this year, the highest since WWII • Having to borrow internationally. • The possibility of defaulting on that debt • If the stimulus works too quickly.

  20. Dissenting Opinions • Dissenting Opinions: Problems with the Plan • Many of the tax breaks go to those who already pay little to no taxes. • Just a redistribution of welfare spending • Not much to help small businesses • No major long-term tax cut • Do not encourage savings, investment, or entrepreneurship • Redistributive policies result in “progressive” tax rates, which reduce entrepreneurial activity. • Stimulus is consumption based.

  21. Dissenting Opinions: Other Options to Revive the Economy • Really, it comes down to how you stimulate private savings, spending, and investment. • Tax cuts, particularly for businesses. • Stimulates increased employment. • Eliminate capital gains and dividend taxes. • Allows business to produce the stimulus • Avoids the expansion of government • Avoids the “lock-in effect”

  22. References • http://www.treasury.gov/initiatives/eesa/ • http://www.nytimes.com/2009/01/25/us/politics/25regulate.html?fta=y • http://www.economist.com/printedition/displayStory.cfm?story_id=12305746 • http://www.reuters.com/article/idUKTRE48R48220080928?virtualBrandChannel=10112 • http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h1enr.pdf • http://www.dol.gov/opa/media/press/eta/ETA20090293.htm • http://www.whitehouse.gov/agenda/economy/ • http://www.nytimes.com/cfr/world/slot3_20090126.html?_r=1 • http://money.cnn.com/2009/03/23/news/companies/treasury_plan/index.htm • http://www.thompsonhine.com/publications/publication1543.html • http://www.newgeography.com/content/00369-root-causes-financial-crisis-a-primer • www.nytimes.com/cfr/world/slot3_20090126.html?_r=1 • http://www.heritage.org/Research/Economy/wm2261.cfm#_ftn1 • ttp://www.nytimes.com/2009/03/24/business/24markets.html?hp • ttp://www.heritage.org/Research/Economy/wm2263.cfm#_ftn2 • http://online.wsj.com/public/page/stimulus-package.html • http://otrans.3cdn.net/ee40602f9a7d8172b8_ozm6bt5oi.pdf • http://dealbook.blogs.nytimes.com/2009/03/23/cuomo-says-many-big-aig-bonuses-were-returned/?hp • http://www.federalreserve.gov/monetarypolicy/fomc.htm

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