Help Is On The Way: The Outlook 2009-2010

1. Help Is On The WayThe Outlook 2009-2010 Dr. Ira Silver April 15, 2009

2. Spring Thaw?

4. Before Looking At The Near Term Situation, Let’s Take A Longer Term Perspective

5. The U.S. Has A Good RecordThe Pessimists are Usually WrongReal Gross Domestic Product, % Change Recession years

6. Mild recession The U.S. Has A Good RecordThe Pessimists are Usually WrongReal Gross Domestic Product, % Change Recession years Longest expansion in history Longest peace time expansion in history

7. Mild recession The U.S. Has A Good RecordThe Pessimists are Usually WrongReal Gross Domestic Product, % Change 17 years of growth in real GDP Recession years Longest peace time expansion in history What about the economy now?

8. Things Look Pretty Bad Right Now, But • The election delayed policy to aid the economy for months • Only recently has a tax and spending stimulus plan been passed, let along had time to affect the economy • The new financial stability plan has just been developed and not yet implemented • Except for ½ of the TARP, the policy response has been limited to monetary policy • Liquidity has increased • Credit markets have improved

9. Things Look Pretty Bad Right Now, But • The election delayed policy to aid the economy for months • Only recently has a tax and spending stimulus plan been passed, let along had time to affect the economy • The new financial stability plan has just been developed and not yet implemented • Except for ½ of the TARP, the policy response has been limited to monetary policy • Liquidity has increased • Credit markets have improved Let’s look at the numbers

10. Two Consecutive Declines in Real GDP

11. ISM Manufacturing Index Drops To Very Low Levels Some hope?

12. Real Consumer SpendingDrops To Very Low Levels Some hope?

13. Employment Decline Worse Than 1982

14. Unemployment Rate Still Below 1982 Levels As long as we’re talking about employment

15. Unemployment Claims ExaggeratedInitial Claims Also Continuing Claims

16. Unemployment Claims ExaggeratedContinuing Claims Anything positive?

17. Yes! Productivity Growth Remains Strong

18. Yes! Productivity Growth Remains Strong Anything else positive?

19. Oil/Gasoline Prices Are Down Sharply Higher oil prices in 2008 were like a $170 billion tax increase and lower prices in 2009 are like a $355 billion tax cut = $525 billion positive swing

20. Oil/Gasoline Prices Are Down Sharply Higher oil prices in 2008 were like a $170 billion tax increase and lower prices in 2009 are like a $355 billion tax cut = $525 billion positive swing It’s not just energy

21. Commodity Prices Are Down SharplyCRB Indexes

22. Commodity Prices Are Down SharplyCRB Indexes Then why are things bad?

23. What Happened • Very low interest rates to prevent deflation • Government pressure to increase home ownership • Excess global savings created demand for assets • Securitization created supply of complex securities backed by subprime adjustable rate mortgages • Complex securities rated too high leading to excess leverage • Easy mortgages drove up house prices and construction • Houses became unaffordable • Interest rates increased • Remaining buyers couldn’t afford houses • House prices dropped and construction tanked

24. House Prices & Starts SoarCase Schiller House Price Index & Housing Starts What stopped the party?

25. House Affordability CollapsesMedian Household Income/Median New House Price There was nobody that could afford the houses being built

26. Interest Rates

27. Interest Rates

28. House Prices & Starts CollapseCase Schiller House Price Index & Housing Starts

29. Foreclosures Subprime - Adjustable

30. Results • Home foreclosures • Mortgage backed securities declined in value and were down-rated • Holders, including most major financial institutions, were forced to mark them down sharply (recently modified) • Capital problems for financial institutions • Uncertainty about future capital positions created a general tightening of credit to all borrowers • Without access to credit overall spending collapsed

31. All Home Mortgages Suffer as Banks TightenNet % Senior Loan Officers Reporting Tighter Lending Standards

32. Business Loans Also Suffer As Banks TightenNet % Senior Loan Officers Reporting Tighter Lending Standards

33. Consumer Loans Also Harder to GetNet % Senior Loan Officers Reporting Tighter Lending Standards Doesn’t sound good, what’s being done?

34. Past Fed/Treasury Actions • Lowered interest rates • Increased lending to major financial institutions • Provided liquidity directly to credit markets • Supported money market funds • Supported commercial paper market • Injected capital directly into banks How did it work?

35. Short-Term Interest Rates Fed cuts not working

36. Long-Term Interest Rates Fed actions will bring mortgage rates down from 6.5% to about 4.5%, equivalent to a 20% reduction in mortgage principal

37. Further Help Is On The WayEconomic Recovery & Reinvestment Plan • $500 billion government spending • $287 billion of tax cuts • Largest fiscal stimulus since World War II (bigger than Great Depression stimulus)

38. That’s a lot of stimulus Federal Budget Deficit% of GDP Recession That’s a lot of stimulus

39. Further Help Is On The Way Financial Stability Plan + Fed • Major expansion of support for consumer, auto, floorplan, student, commercial real estate, and small business loan securitization (up to $1 trillion) • Mortgage/home owner support program • Expanded support for mortgage market ($1.25 trillion) • Program to reduce the negative impact of troubled assets on the banking system (up to $1 trillion) • Fed purchase of long term Treasury securities ($300 billion in next 6-months)

40. Further Help Is On The Way Financial Stability Plan + Fed • Major expansion of support for consumer, auto, floorplan, student, commercial real estate, and small business loan securitization (up to $1 trillion) • Mortgage/home owner support program • Expanded support for mortgage market ($1.25 trillion) • Program to reduce the negative impact of troubled assets on the banking system (up to $1 trillion) • Fed purchase of long term Treasury securities ($300 billion in next 6-months) How many $

41. As Of April 1, 2009 Total Commitment $12.1 trillion Total Spent $2.5 trillion http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html

42. As Of April 1, 2009 Total Commitment $12.1 trillion Total Spent $2.5 trillion http://www.nytimes.com/interactive/2009/02/04/business/20090205-bailout-totals-graphic.html

43. What Will Happen? • It hasn’t happened before • Unprecedented global financial crisis • Unprecedented global response Net result – serious recession • 2.0% decline in 2009 real GDP and peak unemployment rate of about 10% • May or may not be the worst recession since World II, but not a depression!

44. What Will Prevent A Depression And Make The Decline Stop? • Automatic stabilizers that did not exist at the beginning of the depression • Social Security • Unemployment compensation • Welfare, Medicare, Medicaid • Large federal government • Massive fiscal stimulus • Extremely aggressive Federal Reserve and Treasury actions • Lower energy prices • Higher housing affordability • Pent-up auto demand • Inventory swing • &

45. Policy Makers Are Determined “… we must move forward, quickly and aggressively, with a middle-class rescue plan that will create jobs, provide relief to families, help homeowners and restore our financial system," This is a challenge more complex than any our financial system has ever faced, requiring new programs and persistent attention to solve. But the President, the Treasury and the entire Administration are committed to see it through because we know how directly the future of our economy depends on it. But we will not stand down until we have achieved our goals of repairing and reforming our financial system and restoring prosperity.

46. Summary in Numbers * Excluding food and energy

47. Take Aways • Growth in the second half of 2009 • Lower inflation • Lower energy costs • Lower interest rates • No Depression!!!!!

48. Help Is On The WayThe Outlook 2009-2010 Dr. Ira Silver April 15, 2009