The Federal Response to The 2008 Financial Crisis

The Federal Government's
Response to the 2008 Financial
Crisis
Analysis & Recommendations

The Federal Government's Response to the 2008 Financial Crisis
Table of Contents
Background and History ........................................................................................................................ 1
Government Response and Criticism of Those Programs .................................................................... 3
Policy Outcomes ................................................................................................................................... 8
Recommendations ................................................................................................................................ 9
Concluding Thoughts .......................................................................................................................... 11
References .......................................................................................................................................... 12

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Background and History
Governmental response to recession is a primary area of macroeconomics research.
When the United States encountered a severe financial crisis in 2008, the federal
government implemented a variety of policies designed to shorten the ensuing
recession. These included the Economic Stimulus Act and the American Recovery &
Reinvestment Act, which are reviewed in this paper. We offer recommendations based
on an analysis of the effectiveness of these programs.
Many pundits and politicians attempt to trivialize and simplify the reasons why the
United States’ financial and housing sectors crashed in 2008, leading up to the worst
recession since the Great Depression of the 1930s. However, looking back to more than
just the few years that led up to the crash of 2008, it is observable that there are several
factors that contributed to the financial and housing crash (see Appendix 1
“Globalization Timeline Infographic.”) We believe some of the most crucial contributing
factors leading up to the financial crash include:
Fixed Income Investments
Driven by growth in the developing world, global fixed income investments
doubled from 2000 to 2007, reaching approximately $70 trillion. Higher yields attracted
investors discouraged by the low return on U.S. Treasuries. The U.S., unlike other
countries, does not restrict foreign entities from purchasing and owning unlimited
amounts of residential and commercial real estate. As the housing market boomed and
grew rapidly, a ready pool of investors wanting to invest in the housing market led to
creative but risky options, such as Mortgage-backed Securities and Collateralized debt
obligations, which were complex investment structures that were not necessarily
understood by all parties involved.
Subprime Lending
A sophisticated market for investment options developed and a large and
continually growing number of mortgages became necessary, so lenders started to
relax their criteria for lending to individuals to meet this demand. Lenders also believed
in the myth that home prices would continue to rise. As a result, they issued loans to
consumers that would otherwise never qualify. At a point, the terms of lending became
so lax that they became known as a “No income No Job No Asset loan” (NINJA Loan),
which meant that anyone could get a mortgage. Competition in the lending markets was
high, so as a few lenders started to reduce their lending criteria, others inevitably
followed suit ("Mortgage Crisis Timeline"). Fannie Mae and Freddie Mac bear some
blame here as well, as they underwrote and purchased these loans from the originators

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without due diligence and strict criteria.
Consumer Behavior
Coming out of the dotcom burst, Alan Greenspan attempted to revive the
economy by keeping the federal interest rates low. This had a direct impact on the
mortgage interest rates, which suddenly made homeownership appear more affordable,
creating an environment in which the demand for homes was greater than the supply,
thereby driving up home prices. This in part due to a world in which lenders were
issuing subprime mortgages, and qualification criteria were not an issue. Anyone could
get a loan, regardless of whether they could pay back the loan, causing the median
home prices to increase to 4.6 times the median household income at its peak in 2006
(Smith). The trend of increasing home prices also led to the belief that the prices would
continue to rise, thereby creating a spiraling effect of more people getting into the
market without consideration for the risky mortgage terms. Consumers took on more
debt and saved less. Home ownership in US increased to an all-time high of 69.2% in
2004 (Smith). However, this crashed in 2010 when homes lost value and in some
places, it became cheaper to own a home than rent (Smith).
Credit Rating Agencies
A major structural problem is three so-called independent rating agencies, which
are sponsored by the same companies that ask the agencies to rate their financial
products. Investment bankers invested in financial instruments that were rated highly by
the agencies. In many cases, tranches of bundled toxic mortgages were issued high
ratings. Rating agencies did not have historical precedence on this market, and thus
relied on data that did not fit with the current financial models. Since investment
decisions were made based on bad data, the inevitable bubble could not be avoided.
Government Regulations, or lack of, on the Banking and Mortgage Industry
During the years leading up to the crisis, regulations on banking institutions were
massively reduced and relaxed (see attached Appendix 1 for a 40-year timeline of the
chain of events leading up to the crash of 2008). For instance, the AMTPA act of 1982
increased flexibility for mortgage lenders to write adjustable rate mortgages to make
homeownership more affordable. This assumed that the buyer’s income would increase
before the adjustable mortgage matured. Similarly, the Commodity Futures
Modernization Act of 2000 formally exempted derivatives from regulation for major
players. One of the major contributors to the debacle was credit default swaps, which
was a derivative that fell under this act. Approximately 90% of subprime mortgages
issued in 2006 were adjustable rate mortgages. These subprime mortgages were

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bundled and sold to large investors, but when housing prices peaked, these mortgage
backed securities (MBS) became junk. The revenue source for MBS, mainly
homeowners, could no longer pay the mortgage, because they could not borrow against
the equity, their incomes did not grow prior to the maturation of the adjustable rate
mortgage, or they merely lost their jobs because of the frantic layoffs and downsizing
that occurred in response to the crash.
Government Response and Criticism of Those Programs
In response to the financial crisis, the federal government enacted several
policies to stimulate the economy out of the recession, including the Economic Stimulus
Act and the American Recovery & Reinvestment Act.
Economic Stimulus Act
In February of 2008, President Bush signed into law the Economic Stimulus Act.
The United States (US) federal government moved quickly to stop the coming recession
by approving a three-part Economic Stimulus Act (Kopecki). Created to provide a tax
rebate for US individuals, the Act targeted those who had low to medium income and
were taxpayers. Second, the stimulus plan provided tax incentives to stimulate business
investment through provisions for companies to accelerate depreciation for capital
investments, therefore encouraging companies to invest in property, plant and
equipment. Lastly, the Economic Stimulus Act increased the limits imposed on
mortgages eligible for purchase by government run agencies such as Fannie Mae and
Freddie Mac (Economic Stimulus Act).
Part One: Tax Incentives for the Individual Taxpayer
The Economic Stimulus Act’s tax rebates were issued in denominations of $300
per person or $600 for married US taxpayers filing jointly. In addition, individuals
received $300 per dependent under the age of 17. The tax rebate payment could not
exceed $600 for an individual taxpayer or $1,200 for married taxpayers ("House Follows
Senate in Approving Economic Stimulus Plan.").
Part Two: Increased Government Agency Limits Imposed on Mortgages
The Economic Stimulus Act raised the limit on mortgage amounts available for
governmental protection through government backed mortgage insurance. Increased
limits and protections encouraged lenders to lend to US consumers to help monetary
liquidity in the US market. In addition, governmental agencies, such as Fannie Mae and
Freddie Mac, tried to halt or reduce the rapid decrease of home values, which
threatened US homeowners’ equity lines of credit and therefore their ability to consume
products and services. ("Economic Stimulus: What Is the Economic Stimulus Act of
2008?")

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Part Three: Tax Incentives to Stimulate Business Investment
Corporations, business entities and sole proprietors typically decrease large or all
real capital investments when determining a recession is coming (Hungerford).
Therefore, the Economic Stimulus Act provided generous tax credits or deductions to
corporations, business entities and sole proprietors to increase spending on
investments in property, plant and equipment to help the US economy through business
consumption. The capital purchases had to meet four requirements to receive the tax
incentive. The purchase had to be for capital assets, which were not classified as
regular business expense. The expenditure had to be necessary for the continued
success of the business or corporate entity. The purchase needed to be solely used for
the business and not for personal use. Lastly, the business needed proof of payment for
the capital purchase ("Business Deductions Are Critical for Tax Savings.").
American Recovery & Reinvestment Act
In February 2009, President Obama signed into law the American Recovery and
Reinvestment Act, also known as the “Stimulus.” The goal of the act was to create and
save jobs and to increase economic activity and investment, while keeping the
government spending transparent and accountable. The Obama Administration set
aside $787 billion (increased to $840 billion in 2012) to implement the Recovery Act
("The Recovery Act."). The goals set forth by the stimulus were tax cuts and benefits,
funding for entitlement programs and federal contracts, and grants and loans ("The
Recovery Act."). The ARRA is considered both a jobs bill and an economy-boosting bill,
with the following funding caps: $288 billion in tax cuts; $244 billion for education, health
care and entitlements; and $275 billion in contracts, grants and loans ("Stimulus
Funding: Who Gets It and How?").
Tax Cuts & Benefits
Many of the tax cuts and benefits were targeted towards individuals, while others
focused on businesses. These individual cuts and benefits covered a large scope of
topics including education, income tax, and child tax credits. The American Opportunity
Tax Credit helped students and their families with the burden of higher education. The
individual EITC (Earned Income Tax Credit) increased in 2009, and more families
qualified for additional child tax credits. In terms of transportation, people who bought
new vehicles were able to deduct local and state taxes on new car purchases.
Homeowners were also rewarded with incentives to increase energy efficiency of their
houses, while homebuyers were eligible for up to an $8,000 credit if they purchased
between Sept. 1, 2008 and May 31, 2010. Other parts of the tax cuts and benefits
included reduced Cobra premiums for workers who lost their jobs, an increase from
65% to 80% in health care coverage tax credits for health insurance premiums, and the
Making Work Pay Tax Credit, which allowed Americans increased take-home pay in

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2009 and 2010. Lastly, $250 was paid to Social Security Recipients, Veterans and
Railroad Retirees, which exempted the taxation of the first $2,400 of unemployment
benefits received in 2009 ("The American Recovery and Reinvestment Act of 2009.").
Business could receive credits by hiring returning veterans and “disconnected
youth” and increasing energy efficiency, and they could receive subsidies from their
COBRA plans. However, some of the credits and cuts only applied to specific industries.
For example, schools and energy and public projects could use municipal bond
programs to finance projects, and the Net Operating Loss Carry-back program allowed
“small businesses [to] offset losses by getting refunds on taxes paid up to five years ago
("The American Recovery and Reinvestment Act of 2009."). From March 2009 to June
2012, the Office of Tax Analysis estimated that $290.7 billion in tax benefits have been
made available ("$290.7B in Recovery Act Tax Relief.").
Funding for Education, Healthcare and Entitlement Programs
Programs that fall under the category of Entitlement include Medicaid/Medicare,
Unemployment, Family Services, Energy, Economic Recovery Payments, and Housing
and Agricultures. Within these seven categories, there has been a total of $264B paid
out above the categories as follows: 40% to Medicaid/Medicare, 23% Unemployment,
21% to Family Services, 8% to Energy, 5% to Economic Recovery Payments, 2% to
Housing and 0.3% to Agriculture (“Entitlement Programs.”).
Approximately 89% of the nearly $106B allotted to the Medicaid/Medicare funds
were given to Health and Human Services to help states fund Centers for Medicare and
Medicaid Services. The rest of 11% went mostly to the Medicare HITECH program,
while about 0.4% went to the general management of the Medicare and Medicaid
programs. The Medicare HITECH program was developed to assist healthcare
institutions with the implementation of certified Electronic Health Records (EHRs)
(“Entitlement Programs.”). Unemployment, the next big benefactor of the American
Recovery and Reinvestment Act, only received about a 23% share of the entitlement
program but equated about $61B in funds “Entitlement Programs.”). The next major
beneficiary of the ARRA entitlement program was family services, which includes the
Food Stamp Program, Temporary Assistance to Needy Families, Child Support
Enforcement and Foster Care and Adoption Services. A total of $55B was paid into the
Family Services programs, with about $48B of this amount going directly to food stamps
(“Entitlement Programs.”).
The Energy sector was allotted about $21B in funds of which 92% were used as
grants for “specified energy property” (“Entitlement Programs.”). This means that the
government would reimburse applicants for a portion of the expense of the property on
which projects that produced energy through specific sustainable means like large wind,

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solar, geothermal ("Payments for Specified Energy Property in Lieu of Tax Credits.").
Economic Recovery Payments covers Social Security and Veteran’s Affairs
Compensation and Pensions, with 96% of the almost $14B paid into this entitlement
program went to the Social Security Administration’s Economic Recovery Payments,
Recovery Act. The Recovery Act is split into 3 parts, with the first being to hire more
staff to more effectively process Disability and Retirement claims, second to help build
the National Support Center, which is the computer system that houses all the Social
Security Data, and third to pay for administrative costs associated with the Economic
Recovery Payments being given to Veterans ("Social Security Administration (SSA)
Agency-wide Recovery Act Plan.").
All of the funds for the Housing Entitlement program were given as Grants to
States for Low-Income Housing Projects in Lieu of Low-Income Tax Credits. This $5.6B
sum was used to spur the development of affordable housing, create, and retain jobs
(“initiative”). Last and least is the Agriculture Entitlement program, with $964M given for
Agricultural Disaster Relief (86%), Trade Adjustment (10%) and Agriculture Assistance
(4%). While Agriculture Disaster Relief and Aquaculture Assistance are self-
explanatory, Trade Adjustment for Farmers is a program that assists farmers who want
to adjust their product production. This program gives participants the tools to raise
certain approved commodities ("Approved TAA Commodities.").
Funding for Federal Contract and Grants & Loans
Through the American Reinvestment and Recovery Act, the government paid out
$261B in contracts, grants and loans to different categories. The major beneficiary of
these contracts, grants, and loans was the Education Sector with about $94B (36%) in
funds paid out. The other sectors were paid out as follows: transportation (15%),
Infrastructure (13%), Energy/Environment (12%), Research and Development/Science
(6%), Housing (5%), Health (5%), Public Safety (2%), Family (2%), Job
Training/Unemployment (2%) and other such programs. (“Contract, Grant, and Loan
Programs.”)
Nearly half of the $94B in education funds was given to Elementary and
Secondary education to help states stabilize education during the recession. The other
50% of the funds were used towards programs such as financial aid, special education,
school improvement and education for the disadvantaged. The over $26B given in
grants, loans and contracts to the transportation sector was used to improve highway
infrastructure. The other nearly 33% was used towards the development of high-speed
rail corridors, airports and public transit. (“Contract, Grant, and Loan Programs.”)
The $33B allotted to infrastructure was paid out to diverse programs. Under this
category is the Tribal Assistance Grant, which was given over $6B, Federal Buildings

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Funds, which was given about $5B and the Broadband Tech Opportunities program,
which was given $3.5B. The rest of the parties that benefitted from these contracts,
grants and loans were the US Army Corps of Engineers, the Army, Telemedicine, the
Air Force, Rural Water and Waste Disposal, the Navy, National Guard, US Fish and
Wild Life and the Marine Corps. (“Contract, Grant, and Loan Programs.”)
The $30B in Energy and Environment grants, loans and contracts were mostly
used to fund Energy Efficient and Renewable Energy Projects, while the remaining 49%
of funds were used for a variety of projects. These Energy and Environment Projects
included Environmental cleanup projects, Uranium Enrichment Decontamination, the
procurement of energy efficient government vehicles, geological surveys and historic
preservation of national parks to mention a majority of the activities. (“Contract, Grant,
and Loan Programs.”)
The $15.9B given out for Research & Development/Science was used for a
breadth of topics. The top six beneficiaries of the funds include The National Science
Foundation, the Department of Energy, the National Institute of Health, Fossil Energy
Research and Development, National Cancer Institute and the National Institute of
Allergy and Infectious Disease. These six institutions account for 55% of the funding.
The remaining 45% of the loans, grants and contracts are spread over a diverse
number of programs, including other National Institutes such as Diabetes, Lung and
Blood and Neurological Disorders. This segment also includes NASA funding,
Department of Defense, Prosthetics Research and the Environmental Protection
Agency. (“Contract, Grant, and Loan Programs.”)
Only $14B in funds was doled out for Housing loans, grants and contracts. A
majority, 90%, of these funds were distributed between Indian Public Housing,
Community Development, Rental Assistance and Homelessness Prevention. The
balances of the funds were used for Department of Defense Homeowners Assistance
Fund, Housing Insurance, Army Family housing and Air Force Family Housing.
(“Contract, Grant, and Loan Programs.”)
The Health Sector received about $12B in funds of which they used over a third
to give to states as savings on state contributions for prescription drug costs. The
remaining two thirds of the grants, loans and contracts were distributed to the Veterans
Health Administration, Indian Health Services, nutrition programs for Women, Infants
and Children, Prevention and wellness programs, substance abuse and mental health
programs, the CDC for Disease Control Research and the construction of state
extended care facilities. (“Contract, Grant, and Loan Programs.”)
Public Safety grants, loans and contracts were used for Aviation security,
Violence against Women projects, US Customs and Border Patrol, Emergency food and

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Shelter, Wildfire Management and the Bureau of Alcohol, Tobacco, Firearms and
Explosives. However, about 47%, of the $5.7B in funds were used by the Department of
Justice. (“Contract, Grant, and Loan Programs.”)
A total of 60% of the $5B given to Families was used for Children and Family
services, while the other 40% was given as grants to states for childcare and
development. Meanwhile, $3.8M of the $4.8M paid out to Unemployment and Training
was given for the Training and Employment services, while the other 20% of the funds
was used towards Rehabilitation and Disability services, Community Service
Employment for the Elderly, the Job Corps and Maritime operations and training.
(“Contract, Grant, and Loan Programs.”)
Policy Outcomes
The stimulus and the ARRA caused the federal debt and outlays to dive deeper
into the red, exceeding a trillion dollars in 2012. In 2013, the US government stated that
the official unemployment rate rose to 7%, while the SGS Alternate Unemployment Rate
indicated that the national unemployment rate was 23% (Williams). Using Shadow
Government Statistics’ published figure, it is clear that “President Obama’s $862 billion
‘stimulus’ plan, promising to bring the unemployment rate down to 5.3%,” did not work
(Woodhill). Conley and Dupor argued that the Stimulus did not actually save jobs,
stating that it “created and/or saved an estimated 450,000 government jobs and
destroyed or prevented an estimated 1 million private sector jobs” (Conley and Dupor).
Critics of both plans mention that “if the Government could spend America into
prosperity, good times would have arrived long ago” (Bandow). The CBO estimated that
ARRA would increase the budget deficit to over $833B over a period of 2009-2019
(USA). The ARRA only raised real GDP between 0.1% and 0.8% and lowered
unemployment between 0.1% and 0.6% (USA). Government spending, such as the
spending enacted through ARRA and the Stimulus, can cause a shift away from
production in private business sectors to government projects, causing a crowding out
effect. It can be argued that ARRA and the Stimulus were necessary to create some
short-term benefits, however, after these benefits dissipated, the American public were
left with the fiscal deficits created by these programs, which include a huge debt to GDP
ratio along with persistently low economic growth. Now, the American people are stuck
financing ever-higher interest charges that the Government pays by issuing even more
debt to cover the interest owed on the stimulus debt (USA). Economist Valerie Ramey
said, “For the most part, it appears that a rise in government spending does not
stimulate private spending; most estimates suggests that is significantly lowers private

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investment” (Bandow).
One reason why the ARRA was not as effective is that one-time cash payments
were given to individuals and had less of an impact than a change in disposable
income. Moreover, tax transfer provisions do not lead to any significant increase in
consumption, because “households largely saved the transfers and tax rebates” and
“state and local governments used the stimulus grants to reduce their net borrowing
(largely by acquiring more financial assets) rather than to increase expenditures, and
they shifted expenditures away from purchases toward transfers” (Taylor).
Recommendations
The macroeconomic issues in the 2000s are due to the underlying structural
changes to the economy rather than the regular cyclical changes of expansion and
contraction. However, the response by the government to the macro-economic issues in
2000s, such as the recessions in 2001 and 2007, has been similar to earlier decades,
wherein the government tried to adopt a Keynesian or Monetarist cure for recession by
applying fiscal and monetary measures to navigate the economy out of recession.
The government tried to bring the US economy out of recession by various fiscal
stimulus measures, such as tax cuts and government spending, in addition to monetary
stimulus programs, such as the bond purchase program. However, these measures
have failed to stimulate the economy to the level it was at before due to various
underlying structural issues. Some of the structural issues elaborated in the course that
could have led to reduced effectiveness of the stimulus include too much leakage
resulting from foreign imports outpacing exports, driving an increasing trade deficit and
easy money policies leading to crowding out of investments, and consequential
reduction in domestic investments. When the deficit caused by expansionary fiscal
policy is funded by borrowed money, through sales of government bonds and securities,
there is a potential for increase in interest rates causing reduction in private investments
(owing to high cost of capital). This is referred to as a direct “crowding out: effect.
However, to keep the interest rates down, the Fed adopted easy money policies, such
as the “bond buy-back” program. However, such easy money policies can lead to
inflation driving up the interest rates and driving down the investment thus causing
indirect “crowding-out.”
The following policies, if pursued diligently, will restore unemployment to its
normal levels, lift the country out of recession, and place it on a growth trajectory.
Jobs Act to Stimulate Quality Job and Salary Growth
Rather than a tax cut that only leads to increased spending on imported goods

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and thereby sending the benefits offshore, the government could have used that money
to incentivize the creation of high quality jobs with higher wages. One of the major
issues during the recession was unemployment of recent college graduates. Among the
recent college graduates, unemployment was stubbornly high, up to 20% during the
peak of the recession ("The Job Market for Recent College Graduates in the United
States."). Even for those graduates who were fortunate to find a job, the quality and the
wages were much less than the previous years. In fact, the real average wages for
college graduates have not seen any major growth in decades and data indicates that
the real wage growth for college graduates is pretty much flat to declining (Fairbanks).
To alleviate this issue of quality job and salary growth, the government could
have passed a “Jobs Act” that would have provided incentives in the form of tax cuts
and tax credits for businesses creating high quality jobs or high income jobs or both.
The Federal Jobs Act program that would create a 10% flat corporate tax rate to
employers who provided brought jobs back and provided job training for skilled
technology and manufacturing jobs. This policy would increase investment without
increasing government expenditure, and would actually increase government revenue
as more businesses would come back to do business in America. This approach would
also avoid an increase in debt and the potential for crowding out.
Government Infrastructure Bank
Rather than the bond buy-back program and low interest rates that led to
crowding out in the investments marketplace, the government could have created an
infrastructure investment bank to fund the country’s current and future infrastructure
investment needs.
The United States used to be the world leader in public infrastructure, such as
transportation, water, energy, environment and quality facilities. However, the quality of
the country’s infrastructure has continually declined to the standards of developing
nations, while what used to be the developing nations are modernizing their
infrastructure to become more sophisticated and urban. Added to this is the problem of
nation’s dependency on imports for its consumption, such as consumer goods and oil.
With the first class intellectual capital and the most productive labor resources in the
world, the country still struggles to implement innovative solutions in sustainability and
secure its energy future while still preserving its environment.
The financial resources to fund these infrastructure development projects are
dwindling and the government does not have adequate capital to fund major projects
such as the “California High Speed Rail.” Even if the government had adequate capital,
the efficiency of execution, the regulatory environment to support such projects and the
ability of the government to complete the project expeditiously under budget are

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questionable based on the past experiences. With increasing deficits and record debt
levels, the government cannot afford to spend by itself for all the needed infrastructure
improvements. Therefore, the revenue source model for capital project investments
requires an overhaul either ways.
The government could have established an Infrastructure Investment Bank to
help finance such innovative capital improvements, energy and sustainability projects.
Rather than government trying to get directly involved in building the infrastructure,
which has proved to be inefficient, it could have offered low interest loans at 2% to
interested private project developers. The project developers would then have delivered
the project in an expeditious and efficient manner using a mechanism, such as Public-
Private Partnership, and also repaid the funds to the government with interest.
While the ARRA allocated less than 1% of ARRA funds to education and job
training, this bank should approach investment in education and job training as building
the infrastructure of the workforce. By offering student loans at 2% for higher education
and specialized job training, such as renewable energy technical skills, it would increase
the amount of discretionary funds available to new graduates. Since consumption is the
“800 pound gorilla in the GDP equation” having more discretionary funds, would allow
more consumer spending as people would have more funds to spend on consumer
goods (Navarro).
Concluding Thoughts
When the United States’ economy entered and lingered in a recession, the
federal government attempted to stimulate the economy by enacting various policies.
The intended effects did not occur, and the United States suffered the most severe
recession since the Great Depression. The American Recovery & Reinvestment Act and
the Economic Stimulus Act did not stimulate the economy and push the United States
out of the recession yet. Upon examination, it is clear that there were more viable
alternatives to priming the economic pump. The federal government could have created
a Jobs Act and a Government Infrastructure Bank to more effectively assist the
economy. While the US economy suffered greatly, it is the hope of this author that the
federal government will carefully analyze the response and effectiveness of policies to
ensure that future recessions are dealt with more efficiently.

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APPENDIX 1
EVENTS DESCRIBED
DATE EVENT DESCRIPTION Column1 Column2 Column3 Column4 Column5 Column6 Column7 Column8
Jan-70 FNMA & FHLMC Begin Securitization Fannie Mae and Freddie Mac began bundling loans from originators and selling them as assets
Jan-73 Gold Standard Abandoned Allowed Treasury to circulate more USD without having the fractional reserve in Gold
May-74 NIEO for Developing Countries New International Economic Order Developing Countries begin to borrow immense amounts from developed countries
Jan-80 Global Debt Crisis Begins Emerging Countries are unable to pay escalating debt incurred during the 1970's
Mar-86 Trade Liberalization IMF & World Bank make structural adjustments for developing countries
Jan-95 WTO Established World Trade Organization established to supervise global capital trade
Oct-99 Glass-Steagall act Repealed Financial Services Modernization Act passes enabling investment banks to conduct commercial & insurance activity
Dec-00 Derivatives Deregulated Commodity Futures Modernization Act deregulated derivatives and created a flurry of CDOs and CDS
Jun-06 U.S. Housing Prices Peaks Prices peaks stopping borrowers from being able to borrow against the equity value of their homes
Jun-07 Subprime mortgages crash Subprime market lending market collapses creating panic for shorts and leading to a systemic global financial exposure
Sep-08 Lehman Brothers Crashes Recession is now in full effect as other banks insurance underwriters begin to plummet on news of liquidity crash
Nov-08 TARP $800B Bailout Timothy Geitner negotiates bailouts of Banks/ AIG for exchange of preferred cost given to the government as collateral
Jun-09 U.S. Housing Prices Crash Prices crash leading to many foreclosures of ARM mortgages and forcing FEDS to keep rates low for market stimulus
Sep-10 IMF: Unemployment Cuts Needed IMF urged governments to expand social safety nets and to generate job creation even as they are under pressure to cut spending
Nov-10 Federal Reserve QE2 Fed announced that it would purchase $600 billion of longer dated treasuries, at a rate of $75 billion per month
Nov-11 Feds purchase bonds Feds purchase $400 billion of bonds with maturities of 6 to 30 years and to sell bonds with maturities less than 3 years
Sep-12 QE3 & QE4 Commitment to continue purchase $85B agency Mortgage Backed Securities / month until labor market improves "substantially"
THE GLOBAL FINANCIAL AND U.S. MORTGAGE CRISIS (1970 - 2012)
FNMA & FHLMC BEGIN SECURITIZATION
GOLD STANDARD ABANDONED
NIEO FOR DEVELOPING COUNTRIES
GLOBAL DEBT CRISIS BEGINS
TRADE LIBERALIZATION
WTO ESTABLISHED
GLASS-STEAGALL ACT REPEALED
DERIVATIVES DEREGULATED
U.S. HOUSING PRICES PEAKS
SUBPRIME MORTGAGES CRASH
LEHMAN BROTHERS CRASHES
TARP $800B BAILOUT
U.S. HOUSING PRICES CRASH
IMF: UNEMPLOYMENT CUTS NEEDED
FEDERAL RESERVE QE2
FEDS PURCHASE BONDS
QE3 & QE4
Jan-70 Jan-73 May-74 Jan-80 Mar-86 Jan-95 Oct-99 Dec-00 Jun-06 Jun-07 Sep-08 Nov-08 Jun-09 Sep-10 Nov-10 Nov-11 Sep-12

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