U.S. Government takes over mortgage giants, adding a $5 trillion mortgage liability to U.S. taxpayer dollars.Lehman Brothers files Chapter-11, the largest bankruptcy filing in U.S. history.Government announces $85 billion rescue loan to AIG in exchange for 80% equity stake in the company.WaMu becomes largest thrift failure with $307 billion in assets. JP Morgan pays $1.9 billion for WaMu banking operation.Bank of America buys Merrill Lynch for $50 billion, at $29 per share.Barclays purchases North American Banking Division of Lehman for $250 million plus trading options.Goldman Sachs and Morgan Stanley become bank holding companies. Government increases company oversight and allows them access to Fed’s discount window.
The day after Lehman filed Chapter-11 Wall Street saw it’s worst day in seven-years since the opening after September 11, 2001.By contrast, as Libor had its highest jump this past week (3.77%) since 1999, Dow Jones continued to rise at the hopes of the government bailout plan reaching a conclusion.
Government spending has increased over the past few years, but will not make a significant enough impact to rise GDP.
GDP will be down (what percent)Consumption and investments will decrease Unemployment will increase to 7%The stock market, housing market, and corporate taxes will all be downConsumer confidence will remain low but is steadying thanks to a new President and hopes of economic change.Fed will lower interest rates – target 1.75%T-Bill interest rates will be down.Dollar will be up, slightly.
Consumers may also be inclined to purchase international products due to strengthening dollar.
Increased government spending will not outweigh the decrease in consumption and decrease in investments during quarter-one, therefore GDP will fall and shift the IS curve to the left. The IS curve will also rotate and become steeper as swelling unemployment coupled with diminishing household income will make consumption behavior less sensitive to interest rates. As foreclosures continue to rise banks will tighten lending practices to reduce borrower risk. To avert a potential credit freeze, the Fed will drop interest rates in the first quarter of 2009, thus the LM curve will shift to the right. The LM curve will also rotate and become flatter as “h” decreases and individuals are more inclined to use more credit cards. People will be less responsive to income, thus flattening the LM slope.
Blakeyovich Enterprises - Iron MBA Economic Analysis
Iron MBA Economic Consulting DepartmentChristopher Serio, Velvet Voelz, Net Vittawat, Tiffany Lu<br />Blakleyovich Enterprises – Fine Chalk Purveyors<br />Current Economic Conditions and Business Implications<br />
Current Financial Crisis<br />Who’s Failed?<br />Sept. 7: Fannie Mae and Freddie Mac<br />Sept. 15: Lehman Brothers<br />Sept. 16: AIG<br />Sept. 26: WaMu<br />Who’s Changed?<br />Sept. 15: Bank of America buys Merrill Lynch<br />Sept. 17: Barclays purchases North American Banking Division of Lehman<br />Sept. 21: Goldman Sachs and Morgan Stanley become bank holding companies<br />
Lions and Tigers and Stocks, Oh My!<br />Dow Jones Industrial Average – 1 Year<br />Wall Street has seen its share of ups and downs over the past 30-days with an overall decrease in the past year.<br />
Fiscal Policy - The Bailout <br /><ul><li>Despite the government proposal of $700 billion, we are told that the bailout won’t have an effect on the 2009 deficit.
This will not increase government spending, therefore it will not bolster GDP.
The bailout will be a band aid, but bank failures are likely to continue.</li></li></ul><li>Self-Reinforcing Loop<br />Bank Failures<br />Tightened Lending Practices – Higher Interest Rates for Credit<br />Low Consumer Confidence<br />Increased Foreclosures<br />Businesses Decrease Production<br />Higher Unemployment<br />
Monetary Policy<br /><ul><li> In an effort to flood the markets with liquidity and avoid a credit freeze, the Fed will take steps to lower interest rates by .25%.
Fear of another bubble will keep the Fed from reducing rates too low. </li></li></ul><li>Foreign Exchange Implications<br />
Loan Implications:<br />As the T-bill rates remain under 1%, the Blakeyovich loan will incur a low interest expense<br />Sales will only decrease slightly:<br />Chalk sales are not overly sensitive to increases or decreases in income.<br />The Blakeyovich Effect<br />
Recommendations<br /><ul><li> Concentrate sales efforts within school systems
Consider selling internationally</li></li></ul><li>Question? (only one allowed)<br />