Economic Outlook 2009 R


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  • Economic Outlook 2009 R

    1. 1. A Precarious Balance: Outlook for the U.S. Economy Dr. John Caldwell Director of Economics Edison Electric Institute
    2. 2. What Constitutes a Recession? Source: Federal Reserve Board Interruptions in Long-Run Growth
    3. 3. The Business Cycle Since WWII Note: Average annual real GDP growth during this period has been 3.4%.
    4. 4. Causes of Recessions Which Was Responsible for This One? <ul><li>___ Speculative “Bubble” </li></ul><ul><li>___ Sudden and/or Extreme Rise in Energy Prices </li></ul><ul><li>___ Failure of Regulators/Auditors to Identify Systemic Problems in Business/Accounting Practices </li></ul><ul><li>___ Tightening of Money Supply by Central Bank </li></ul><ul><li>___ Credit Crisis – Insolvency of Financial Institutions </li></ul><ul><li>___ Excessive Reliance on Foreign Sources of Funding </li></ul>√ √ √ √ √ √
    5. 5. The Economic Crisis: Timeline 2000 2005 1995 1990’s U.S. Stock Market Boom Asian Financial Crisis Start of Housing Bubble “ Dot-Com” Recession; Collapse of Stock Bubble Energy/Commodity Prices Soar Start of Current Recession Housing Prices Peak
    6. 6. The Financial Meltdown: Timeline of Events Oil tops $100/bbl S&P’s/Moody’s downgrade several hundred subprime bonds & securities Fitch downgrades Countrywide to BBB+ Bank of America buys Countrywide Bush signs Economic Stimulus Act of 2008 Northern Rock nationalized Housing and Economic Recovery Act of 2008 <ul><li>Fannie May / Freddie Mack seized by government </li></ul><ul><li>Lehman Brothers files bankruptcy </li></ul><ul><li>House rejects bailout plan </li></ul>Congress approves bailout plan – Bush signs Barack Obama elected President Obama signs stimulus bill Subprime lender New Century files for bankruptcy Diminished liquidity in interbank lending markets JP Morgan buys Bear Stearns
    7. 7. Causes of the Financial Crisis <ul><li>Abundance of Low-Cost Sources of Money </li></ul><ul><li>Housing Boom Encouraged Consumers to Over-Extend in Borrowing </li></ul><ul><li>Faulty Lending Practices </li></ul><ul><ul><li>Government policy aggressively encouraged expansion of homeownership </li></ul></ul><ul><ul><li>Reward structure in lending based on fees rather than interest income </li></ul></ul><ul><ul><li>Risky loans repackaged into complex investments </li></ul></ul><ul><ul><li>“ Capture theory” – Ratings agencies had incentive to give these investments positive evaluations </li></ul></ul>
    8. 8. America’s Growing Reliance Upon Debt Source: Federal Reserve Board
    9. 9. Recent Trends Indicate A Rise in Both Poverty and Debt
    10. 10. State of the Economy Some Disturbing “Vital Signs”
    11. 11. How Serious is This One? Comparison with Past Recessions 1929 = 42 months 1929 = 25% 1929 = 27% 1929 = 89%
    12. 12. The National Debt <ul><li>Currently at $10.8 trillion (78% of GDP, $35,000 per person) </li></ul><ul><li>Why is the National Debt a Problem? </li></ul><ul><ul><li>Leads to inflationary pressures / high interest rates </li></ul></ul><ul><ul><li>25% of it is owed to foreign countries </li></ul></ul><ul><ul><li>Interest expense on debt becomes significant share of government budget </li></ul></ul>
    13. 13. Social Security / Medicare A Huge Bill Looming Ahead <ul><li>“ Pay as you go” entitlement programs are underfunded: </li></ul><ul><li>Social Security needs an additional $13.6 trillion to meet future needs . . . </li></ul><ul><li>But Medicare needs an additional $85.6 trillion !!! </li></ul><ul><li>How bad is this? Consider some alternative “fixes”: </li></ul><ul><ul><li>Bill every American today $330,000 (or $840,000 per household). </li></ul></ul><ul><ul><li>Raise income taxes by 68%. </li></ul></ul><ul><ul><li>Cut government discretionary spending (e.g., national defense, education, the environment) by 97%. </li></ul></ul>
    14. 14. National Debt Will Continue to Grow Source: Congressional Budget Office Will reach 85% of GDP in 2010
    15. 15. “ Follow the Money” Why Government Spending Is Not a Long-Term Solution Private Sector Investment Government Spending Private Savings Taxes Foreign Investment (from Trade Deficit) $ $ $ $ $ $ $ $ $ $
    16. 16. Prognosis for the Economy When Can We Expect a Recovery? <ul><li>Necessary Preconditions for Recovery : </li></ul><ul><ul><li>Housing Prices Bottom Out </li></ul></ul><ul><ul><li>Borrowing / Spending Resumed </li></ul></ul><ul><ul><li>Consumer Confidence Restored </li></ul></ul><ul><ul><li>Banks’ “Toxic” Assets Eliminated/Managed </li></ul></ul><ul><li>Potential Roadblocks to Recovery: </li></ul><ul><ul><li>Second Banking Crisis </li></ul></ul><ul><ul><li>Stimulus Program Has No Effect </li></ul></ul><ul><ul><ul><li>Too Little, Too Late, or Channeled into Wrong Areas </li></ul></ul></ul><ul><ul><ul><li>Trade Wars Due to Protectionist Elements in Plan(s) </li></ul></ul></ul><ul><ul><li>Financial Sector Restructuring Ineffective </li></ul></ul>
    17. 17. The Road to Recovery The Long View <ul><li>Borrowing and Lending </li></ul><ul><li>Consumer Spending </li></ul><ul><li>Full Employment </li></ul><ul><li>Remove “Toxic Assets” </li></ul><ul><li>New Regulation of Financial System </li></ul><ul><li>Rein in Deficit Spending </li></ul><ul><li>Reduce National Debt </li></ul>Businesses / Consumers Banking / Financial Sector Federal Government
    18. 18. Thank You!