U.S. Macroeconomic Outlook 2009-10 & Beyond

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 1st 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 -3Financial 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