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					The Perfect Economic and Financial Storm:
    Causes, Consequences, Solutions


            California State University East Bay
                        April 17, 2009




                      Michael J. Boskin

          T. M. Friedman Professor of Economics
              Senior Fellow, Hoover Institution
                     Stanford University
                                                   1
                                                                                        B lu e C h ip C o n s e n s u s F o r e c a s t : Q u a r t e r ly 2 0 0 8 - 2 0 1 0

                                                                        5 .0

                                                                                                                                                                                                                                  2 .9       3 .1
                                                                                                                                                                                                                       2 .7
                                                                                                                  2 .8                                                                                      2 .3
                                                                                                                                                                                                1 .6
                                                                        3 .0
a n n u a liz e d % c h a n g e f r o m p r e v io u s q u a r t e r




                                                                                       0 .9                                                                                           0 .4

                                                                        1 .0




                                                                       - 1 .0                                            - 0 .5




                                                                                                                                                                         - 2 .1

                                                                       - 3 .0




                                                                       - 5 .0

                                                                                                                                                            - 5 .1
                                                                                                                                     - 6 .3



                                                                       - 7 .0
                                                                                2008 Q 1         2008 Q 2          2008 Q 3            2008 Q 4         2009 Q 1     2009 Q 2     2009 Q 3   2009 Q 4   2010 Q 1   2010 Q 2   2010 Q 3   2010 Q 4
                                                                                ( a c t u a l)   ( a c t u a l)     ( a c t u a l)     ( a c t u a l)




                                                                                                                                                                                                                                                    2
                       1 9 6 0 Q -1

                       1 9 6 1 Q -3

                       1 9 6 3 Q -1

                       1 9 6 4 Q -3

                       1 9 6 6 Q -1

                       1 9 6 7 Q -3

                       1 9 6 9 Q -1

                       1 9 7 0 Q -3

                       1 9 7 2 Q -1

                       1 9 7 3 Q -3

                       1 9 7 5 Q -1

                       1 9 7 6 Q -3

                       1 9 7 8 Q -1

                       1 9 7 9 Q -3

                       1 9 8 1 Q -1

                       1 9 8 2 Q -3

                       1 9 8 4 Q -1




    r e c e s s io n
                         1 9 8 5 - III

                           1 9 8 7 -I

                         1 9 8 8 - III

                           1 9 9 0 -I




    R eal G D P %
                         1 9 9 1 - III

                           1 9 9 3 -I

                         1 9 9 4 - III

                           1 9 9 6 -I

                         1 9 9 7 - III

                           1 9 9 9 -I
                                                                                                     U .S . G r o s s D o m e s t ic P r o d u c t G r o w t h




                         2 0 0 0 - III

                           2 0 0 2 -I

                         2 0 0 3 - III

                           2 0 0 5 -I

                         2 0 0 6 - III

                           2 0 0 8 -I
                                                     0
                                                                  5




                                                -5
                                                                                   10
                                                                                           15
                                                                                                20




                                         -1 0




3




                                                         a n n u a liz e d % c h a n g e
                                                                                     W o r ld G D P G r o w t h

                                                     5 .0
a n n u a liz e d p e r c e n t a g e c h a n g e




                                                     4 .0




                                                     3 .0




                                                     2 .0




                                                     1 .0




                                                     0 .0




                                                    - 1 .0

                                                             1 9 8 0 -8 9   1 9 9 0 -9 9    2 0 0 0 -0 7   2008   2009*         2010*
                                                                                                                          * IM F f o r e c a s t




                                                                                                                                                   4
                       L a t e s t R e a l G D P G r o w t h R a t e s f o r S e le c t e d C o u n t r ie s
                                                                      L a s t 1 2 M o n th s to 4 th Q u a rte r, 2 0 0 8

                                                                                                                                              6 .8
                                                                                                                                                                5 .3                                                    4 .9


                                                                                                                                                                                                         1 .3



- 0 .8                                - 0 .7                                     -1                                                                                                                                        - 1 .2
                                                         - 1 .6                                                                                                                                                                                   - 1 .6
                        - 1 .8                                                                     - 2 .6
                                                                                                                                                                            - 3 .4
                                                - 3 .4                                - 4 .6                          - 4 .6
              - 6 .3             - 5 .9
                                                                                                                - 7 .1
                                                                        - 8 .2

                                                                                                                                                                                                                                                                - 1 0 .3
                                                                                                                                   - 1 2 .7
                                                                                                                                                                                                          - 1 3 .6




                                                                                                                                                                                         - 2 0 .8




                                                                                                                                                                                                           B r a z il
                                                                                                            It a ly
                                                              G e rm a n y




                                                                                                                                                                                                                               A r g e n t in a
                                               C anada




                                                                                                                                                     C h in a
                                                                                      F ra n c e




                                                                                                                                                                  In d ia


                                                                                                                                                                                     S o u th K o re a
                                                                                                                               Japan
         US




                                 UK




                                                                                                                                                                                                                                                           M e x ic o
                                                                                                                                                 la s t 1 2 m o n t h s t o Q 4 , 2 0 0 8                                 Q 4, 2008



                                                                                                                                                                                                                                                                           5
                            Some Relevant Data

1.   U.S. leverage frenzy
      1) Credit market debt went from 2xGDP to 3 1/2XGDP 1990-2007
      2) Subprime loans went from 8% in 2002 to 20% by 2006, from $200 to $600 billion
      3) Private equity leveraged loan volume went from $50b to $100b 1997-2003 to $427b
           in 2007 (by then with no MACs and no covenants)
      4) Median home price index went from 1.0X owner’s rent index to 1.45X 1996-2006
2.   IMF loss estimates in U.S credit instruments (approx)
      Oct. 2007           $240 billion
      Apr. 2008           $945 billion
      Oct. 2008          $1,400 billion
      Jan. 2009          $2,200 billion
3.   Real U.S. household net worth (2000 $)
      1988               $26 trillion
      1998               $39
      2002               $39
      2006               $53
      2007               $52
      2008               $41


                                                                                           6
             Public, Politicians and Media Blame:

1. Mortgage lenders              10. Government social engineering of

2. Subprime borrowers               homeownership

3. Investment banks              11. Deregulation

4. Financial engineers           12. Leverage

5. Rating agencies               13. Derivatives

6. Regulators                    14. Compensation schemes

7. Short sellers and the media   15. Capitalism

8. The FED                       16. The Seven Deadly Sins, especially

9. Presidents and Congresses        greed




                                                                         7
                            Two Big Questions

1. Short/medium term:
    •   How soon and how strongly will the economy recover?
    •   Some scenarios:
         a. Deep recession, slow recovery 2nd half of 2009 or early 2010,
            picking up 2011
         b. Modest recession, solid recovery 2nd half of 2009 or early 2010,
            strengthening 2011 (Obama forecast)
         c. “lost decade” a la Japan
         d. Depression
2. Long-term:
    •   FED and inflation
    •   How much will government grow permanently?
         Some scenarios:
         a. Round off rough edges of Reagan revolution/capitalism
         b. Permanent expansion of temporary programs
         c. European style social welfare state


                                                                               8
                                                                     H o u s in g S t a r t s a n d P e r m it s
                   1 ,8 0 0




                   1 ,6 0 0




                   1 ,4 0 0




                   1 ,2 0 0
th o u s a n d s




                   1 ,0 0 0




                     800




                     600


                                                                                                                 h o u s in g s t a r t s          p e r m it s

                     400
                              A u g -0 6




                                                                                       A u g -0 7




                                                                                                                                                       A u g -0 8
                                           N o v -0 6




                                                                          M a y -0 7




                                                                                                    N o v -0 7




                                                                                                                                      M a y -0 8




                                                                                                                                                                    N o v -0 8
                                                        F e b -0 7




                                                                                                                    F e b -0 8




                                                                                                                                                                                 F e b -0 9
                                                                                                                                                                                              9
                                           $ /b a r r e l




                         $30
                               $50
                                     $70
                                                $90
                                                            $110
                                                                   $130
                                                                          $150
        1 /3 /2 0 0 7


      2 /1 2 /2 0 0 7


      3 /2 4 /2 0 0 7


        5 /3 /2 0 0 7


      6 /1 2 /2 0 0 7


      7 /2 2 /2 0 0 7


      8 /3 1 /2 0 0 7


     1 0 /1 0 /2 0 0 7


     1 1 /1 9 /2 0 0 7


     1 2 /2 9 /2 0 0 7


        2 /7 /2 0 0 8


      3 /1 8 /2 0 0 8


      4 /2 7 /2 0 0 8


        6 /6 /2 0 0 8
                                                                                 N Y M E X C r u d e O il F u t u r e s




      7 /1 6 /2 0 0 8


      8 /2 5 /2 0 0 8


      1 0 /4 /2 0 0 8


     1 1 /1 3 /2 0 0 8


     1 2 /2 3 /2 0 0 8


        2 /1 /2 0 0 9


      3 /1 3 /2 0 0 9
10
                                                            S & P /C a s e - S h ille r , % c h a n g e f r o m 1 2 - m o n t h e a r lie r




                      - 2 0 .0 %
                                               - 1 5 .0 %
                                                                         - 1 0 .0 %
                                                                                                - 5 .0 %
                                                                                                                                                   0 .0 %
                                                                                                                                                            5 .0 %
                                                                                                                                                                     1 0 .0 %
                                                                                                                                                                                1 5 .0 %
                                                                                                                                                                                           2 0 .0 %
       1 9 8 8 -I

     1 9 8 8 - IV

     1 9 8 9 - III

      1 9 9 0 - II

       1 9 9 1 -I

     1 9 9 1 - IV

     1 9 9 2 - III

      1 9 9 3 - II

       1 9 9 4 -I

     1 9 9 4 - IV

     1 9 9 5 - III

      1 9 9 6 - II

       1 9 9 7 -I

     1 9 9 7 - IV

     1 9 9 8 - III

      1 9 9 9 - II
                                                                                                           0 .0 %




                                   -2 0 .0 %
                                                            -1 5 .0 %
                                                                        -1 0 .0 %
                                                                                      -5 .0 %




       2 0 0 0 -I                                                                                                   D -0 7

                                                                                                                    J -0 8

     2 0 0 0 - IV                                                                                                   F -0 8

                                                                                                                    M -0 8


     2 0 0 1 - III                                                                                                  A -0 8

                                                                                                                    M -0 8


      2 0 0 2 - II                                                                                                  J -0 8

                                                                                                                    J -0 8

                                                                                                                    A -0 8
       2 0 0 3 -I
                                                                                                                             P a s t F e w M o n th s
                                                                                                                                                                                                      P e r c e n t C h a n g e in H o m e P r ic e In d e x




                                                                                                                    S -0 8

                                                                                                                    O -0 8
     2 0 0 3 - IV
                                                                                                                    N -0 8

                                                                                                                    D -0 8
     2 0 0 4 - III

      2 0 0 5 - II

       2 0 0 6 -I

     2 0 0 6 - IV

     2 0 0 7 - III

       2 0 0 8 - II
11
                                                                                 H o u s e h o ld d e b t p a y m e n t a s % o f d is p o s a b le p e r s o n a l in c o m e




                                                                                             10
                                                                                                              12
                                                                                                                              14
                                                                                                                                              16
                                                                                                                                                               18
                                                                                                                                                                                 20




                                                                             8
                                                               1 9 8 0 -I

                                                               1 9 8 1 -I

                                                               1 9 8 2 -I

                                                               1 9 8 3 -I

                                                               1 9 8 4 -I

                                                               1 9 8 5 -I

                                                               1 9 8 6 -I

                                                               1 9 8 7 -I




     r e c e s s io n
                                                               1 9 8 8 -I

                                                               1 9 8 9 -I

                                                               1 9 9 0 -I

                                                               1 9 9 1 -I

                                                               1 9 9 2 -I

                                                               1 9 9 3 -I

                                                               1 9 9 4 -I

                                                               1 9 9 5 -I

                                                               1 9 9 6 -I




     D S R ( h o u s e h o ld d e b t s e r v ic e r a tio )
                                                               1 9 9 7 -I

                                                               1 9 9 8 -I

                                                               1 9 9 9 -I

                                                               2 0 0 0 -I
                                                                                                                                                                                      H o u s e h o ld D e b t S e r v ic e R a t io




                                                               2 0 0 1 -I

                                                               2 0 0 2 -I

                                                               2 0 0 3 -I

                                                               2 0 0 4 -I

                                                               2 0 0 5 -I
     F O R ( f in a n c ia l o b lig a tio n s r a tio )




                                                               2 0 0 6 -I

                                                               2 0 0 7 -I

                                                                2 0 0 8 -I
12
                       S a v in g a s a P e r c e n t a g e o f D is p o s a b le In c o m e

 %
1 2 .0

                                                                                                                                                                    la s t 6 q u a r t e r s

                                                                                                                                       3 .5

1 0 .0
                                                                                                                                       3 .0



                                                                                                                                       2 .5


                                                                                                                                       2 .0

 8 .0                                                                                                                                  1 .5


                                                                                                                                       1 .0



                                                                                                                                       0 .5


 6 .0                                                                                                                                  0 .0
                                                                                                                                              2 0 0 7 - III   2 0 0 7 - IV    2 0 0 8 -I     2 0 0 8 - II      2 0 0 8 - III   2 0 0 8 - IV




 4 .0




 2 .0




 0 .0
         1982

                1983

                       1984

                              1985

                                     1986

                                            1987

                                                   1988

                                                          1989

                                                                 1990

                                                                        1991

                                                                               1992

                                                                                      1993

                                                                                             1994

                                                                                                    1995

                                                                                                           1996

                                                                                                                  1997

                                                                                                                         1998

                                                                                                                                1999

                                                                                                                                       2000

                                                                                                                                                  2001

                                                                                                                                                               2002

                                                                                                                                                                             2003

                                                                                                                                                                                           2004

                                                                                                                                                                                                        2005

                                                                                                                                                                                                                        2006

                                                                                                                                                                                                                                    2007

                                                                                                                                                                                                                                              2008
                                                                                                                                                                                                                                                     13
                                                  P r iv a t e N o n r e s id e n t ia l F ix e d In v e s t m e n t

                20




                15




                10




                 5
p e rc e n t




                 0




                -5




               -1 0




               -1 5




               -2 0




                                                                                                                                                                                                                                   2009*

                                                                                                                                                                                                                                           2010*
                      1980

                             1981

                                    1982

                                           1983

                                                   1984

                                                          1985

                                                                 1986

                                                                        1987

                                                                               1988

                                                                                      1989

                                                                                             1990

                                                                                                    1991

                                                                                                           1992

                                                                                                                  1993

                                                                                                                         1994

                                                                                                                                1995

                                                                                                                                       1996

                                                                                                                                              1997

                                                                                                                                                     1998

                                                                                                                                                            1999

                                                                                                                                                                   2000

                                                                                                                                                                          2001

                                                                                                                                                                                 2002

                                                                                                                                                                                         2003

                                                                                                                                                                                                2004

                                                                                                                                                                                                       2005

                                                                                                                                                                                                              2006

                                                                                                                                                                                                                     2007

                                                                                                                                                                                                                            2008
                                                                                                                                                                                    ( * 2 0 0 9 , 2 0 1 0 d a ta b lu e c h ip f o r e c a s t)




                                                                                                                                                                                                                                           14
                                        % c h a n g e o v e r p r e v io u s m o n t h




                  - 0 .6 %
                             - 0 .4 %
                                            - 0 .2 %
                                                             0 .0 %
                                                                               0 .2 %
                                                                                         0 .4 %
                                                                                                  0 .6 %
     J a n -8 5

     S e p -8 5

     M a y -8 6

     J a n -8 7

     S e p -8 7

     M a y -8 8

     J a n -8 9

     S e p -8 9

     M a y -9 0

     J a n -9 1

     S e p -9 1

     M a y -9 2

     J a n -9 3

     S e p -9 3

     M a y -9 4

     J a n -9 5

     S e p -9 5

     M a y -9 6

     J a n -9 7

     S e p -9 7

     M a y -9 8

     J a n -9 9

     S e p -9 9

     M a y -0 0

     J a n -0 1

     S e p -0 1

     M a y -0 2

     J a n -0 3
                                                                                                           C h a n g e s in N o n - F a r m E m p lo y m e n t




     S e p -0 3

     M a y -0 4

     J a n -0 5

     S e p -0 5

     M a y -0 6

     J a n -0 7

     S e p -0 7

     M a y -0 8
15




     J a n -0 9
                                       3 - m o n t h lib o r a n d t r e a s u r y




                   - 1 .0 0
                              0 .0 0
                                         1 .0 0
                                                           2 .0 0
                                                                             3 .0 0
                                                                                      4 .0 0
                                                                                               5 .0 0
      7 /2 /0 7


      8 /2 /0 7


      9 /2 /0 7


     1 0 /2 /0 7


     1 1 /2 /0 7


     1 2 /2 /0 7


      1 /2 /0 8


      2 /2 /0 8


      3 /2 /0 8


      4 /2 /0 8


      5 /2 /0 8


      6 /2 /0 8


      7 /2 /0 8
                                                                                                                                                                                           F in a n c ia l S t r e s s :




      8 /2 /0 8


      9 /2 /0 8


     1 0 /2 /0 8


     1 1 /2 /0 8


     1 2 /2 /0 8
                                                                                                        S p r e a d B e t w e e n 3 - M o n t h L ib o r a n d T r e a s u r y Y ie ld s




      1 /2 /0 9


      2 /2 /0 9


      3 /2 /0 9
16
                                                             C r e d it D e f a u lt S w a p s ( b p , 1 - y e a r )




                                             0
                                                 100
                                                       200
                                                                  300
                                                                            400
                                                                                       500
                                                                                                  600
                                                                                                            700
                                                                                                                       800
                                                                                                                             900
                                                                                                                                   1000
                          7 /2 3 /2 0 0 7


                          8 /2 3 /2 0 0 7


                          9 /2 3 /2 0 0 7


                         1 0 /2 3 /2 0 0 7


                         1 1 /2 3 /2 0 0 7


                         1 2 /2 3 /2 0 0 7


                          1 /2 3 /2 0 0 8


                          2 /2 3 /2 0 0 8


                          3 /2 3 /2 0 0 8




     jp m o r g a n
                          4 /2 3 /2 0 0 8


                          5 /2 3 /2 0 0 8




     B of A
                          6 /2 3 /2 0 0 8


                          7 /2 3 /2 0 0 8




     w e lls f a r g o
                          8 /2 3 /2 0 0 8


     c iti                9 /2 3 /2 0 0 8


                         1 0 /2 3 /2 0 0 8


                         1 1 /2 3 /2 0 0 8
                                                                                                                                          F in a n c ia l S t r e s s : M a jo r B a n k C D S R a t e s




                         1 2 /2 3 /2 0 0 8


                          1 /2 3 /2 0 0 9


                          2 /2 3 /2 0 0 9


                          3 /2 3 /2 0 0 9
17
                              Anatomy of Last Few Recessions (1)

                              1974-75      1980       1981-82         1990-91         2001          current

Issues:

            credit crunch                 severe                       S&Ls                          severe

                                                                     commercial
          housing bubble                                                                            extreme
                                                                     real estate

                oil shock       large      large      residual         sizable                      sizable

                                                                      1987; 89
            stock bubble                                                           tech stocks
                                                                      crashes

   inflation high/rising       serious    severe     high; falling    modest         modest          slight

          current account       small      app.        app.             small                       large,
                                                                                   large deficit
                  balance      surplus    balance     balance          surplus                     declining

             fiscal deficit    modest     modest        large           large        surplus         large

                              wage and                                                              shadow
                                           credit                     defense
                    other       price                                                  9/11         banking;
                                          controls                   drawdown
                               controls                                                            derivatives


                                                                                                                 18
                              Anatomy of Last Few Recessions (2)

                               1974-75      1980        1981-82      1990-91         2001        current

policy responses:
                                         aggressive   aggressive      gradual      aggressive   aggressive
           monetary policy tightening
                                         tightening   tightening      easing         easing       easing
                                                                                                 sizable;
            fiscal stimulus    sizable      small       sizable        small         large
                                                                                                temporary
    FED and Treasury as
     lender of last resort,
                                                                       RTC                      immense
       insurer, guarantor,
                  investor
results:

   length of the recession: 16 months     6 months     16 months     8 months      8 months     15 months
 peak unemployment rate        9+%           7+%         10+%           7+%           6+%          and
         real GDP decline     -3.4%         -2.2%        -2.8%         -1.5%         -0.6%      continuing

                 recovery       strong      weak         strong        slow          slow           ?

                                short;                                              modest;
                expansion                brief; strong long; strong long; strong                    ?
                                strong                                              modest
                               modest       small        large        modest         small
                  inflation                                                                         ?
                               decline     decline      decline       decline       decline

                                                                                                             19
               Major Components of “Stimulus” Bill
$787 billion in spending and tax cuts
    • 75 categories of programs
    • Example:
                 1. Tax rebate                                $116 billion
                 2. Aid to states: Medicaid                     87
                 3. AMT patch                                   70
                 4. Aid to states: education                    36
                 5. Transportation                              28
                 6. Cobra extension                             25
                 7. Food stamp increase                         21
                 8. Health IT                                   17
                 9. Increase Pell grants                        16
                 10. Energy: subsidies for renewables           14
                              Modernize electric grid           11
                 11. Rail and public transit                    18
                      + many smaller subsidies in
                        alternative energy, education, etc.

How much is G vs. tax cuts or transfers to people and states?
How much is going to be spent quickly?

                                                                             20
                                                                                                                                         P e rc e n t




                   - 6 .0
                                                                                 - 4 .0
                                                                                                                  - 2 .0
                                                                                                                           0 .0
                                                                                                                                  2 .0
                                                                                                                                          4 .0
                                                                                                                                                        6 .0
                                                                                                                                                               8 .0
                                                                                                                                                                      1 0 .0
                                                                                                                                                                               1 2 .0
     J a n -8 6

     N o v -8 6

     S e p -8 7

      J u l- 8 8

     M a y -8 9

     M a r-9 0

     J a n -9 1

     N o v -9 1

     S e p -9 2

      J u l- 9 3

     M a y -9 4

     M a r-9 5

     J a n -9 6

     N o v -9 6

     S e p -9 7

      J u l- 9 8

     M a y -9 9

     M a r-0 0

     J a n -0 1

     N o v -0 1

     S e p -0 2

      J u l- 0 3
                                                                               fe d fu n d s
                                                                                               r e c e s s io n




     M a y -0 4
                                                                                                                                                                                        M o n t h ly In t e r e s t R a t e s f o r F e d e r a l F u n d s




     M a r-0 5

     J a n -0 6

     N o v -0 6
                            r e a l f e d f u n d s r a t e ( c o r e c p i)




     S e p -0 7

      J u l- 0 8
21
           The Government’s Bailout Commitments ($billions, as of 03/31/2009)
                           (FED, FDIC, Treasury, HUD, etc.)

                                                                          lim it       c u rre n t                                                                         lim it       c u rre n t

T o ta l                                                       $ 1 2 ,7 9 8 .1 4   $ 4 ,1 6 9 .7 1

F e d e ra l R e s e rv e T o ta l                              $ 7 ,7 6 5 .6 4    $ 1 ,6 7 8 .7 1   F D IC T o ta l                                              $ 2 ,0 3 8 .5 0     $ 3 5 7 .5 0
       P r im a r y C r e d it D is c o u n t                      $ 1 1 0 .7 4        $ 6 1 .3 1         P u b lic - P r iv a t e I n v e s t m e n t *            $ 5 0 0 .0 0                  0
       S e c o n d a r y C r e d it                                    $ 0 .1 9          $ 1 .0 0         F D I C L iq u id it y G u a r a n t e e s              $ 1 ,4 0 0 .0 0     $ 3 1 6 .5 0
       P r im a r y d e a le r a n d o t h e r s                   $ 1 4 7 .0 0        $ 2 0 .1 8         GE                                                        $ 1 2 6 .0 0        $ 4 1 .0 0
       A B C P L iq u id it y                                      $ 1 5 2 .1 1          $ 6 .8 5         C it ig r o u p B a ilo u t F D I C                         $ 1 0 .0 0          $ 0 .0 0
       A I G C r e d it                                              $ 6 0 .0 0        $ 4 3 .1 9         B a n k o f A m e r ic a B a ilo u t F D I C                  $ 2 .5 0          $ 0 .0 0
       N e t P o r t f o lio C P F u n d in g                   $ 1 ,8 0 0 .0 0      $ 2 4 1 .3 1
       M a id e n L a n e ( B e a r S t e a r n s )                  $ 2 9 .5 0        $ 2 8 .8 2
       M a id e n L a n e I I ( A I G )                              $ 2 2 .5 0        $ 1 8 .5 4
       M a id e n L a n e I I I ( A I G )                            $ 3 0 .0 0        $ 2 4 .0 4    T re a s u ry T o ta l                                       $ 2 ,6 9 4 .0 0   $ 1 ,8 3 3 .5 0
       T e r m S e c u r it ie s L e n d in g                      $ 2 5 0 .0 0        $ 8 8 .5 5         TARP                                                      $ 7 0 0 .0 0      $ 5 9 9 .5 0
       T e r m A u c t io n F a c ilit y                           $ 9 0 0 .0 0      $ 4 6 8 .5 9         T a x B re a k fo r B a n k s                               $ 2 9 .0 0        $ 2 9 .0 0
       S e c u r it ie s le n d in g o v e r n ig h t                $ 1 0 .0 0          $ 4 .4 1         S t im u lu s P a c k a g e ( B u s h )                   $ 1 6 8 .0 0      $ 1 6 8 .0 0
       T e r m A s s e t - B a c k e d L o a n F a c ilit y        $ 9 0 0 .0 0          $ 4 .7 1         S t im u lu s I I ( O b a m a )                           $ 7 8 7 .0 0      $ 7 8 7 .0 0
       C u rre n c y S w a p s /O th e r A s s e ts                $ 6 0 6 .0 0      $ 3 7 7 .8 7         T r e a s u r y E x c h a n g e S t a b iliz a t io n       $ 5 0 .0 0        $ 5 0 .0 0
       M M IF F                                                    $ 5 4 0 .0 0          $ 0 .0 0         S tu d e n t L o a n P u rc h a s e s                       $ 6 0 .0 0          $ 0 .0 0
       G S E D e b t P u rc h a s e s                              $ 6 0 0 .0 0        $ 5 0 .3 9         S u p p o r t f o r F a n n ie / F r e d d ie             $ 4 0 0 .0 0      $ 2 0 0 .0 0
       G S E M o r t g a g e - B a c k e d S e c u r it ie s    $ 1 ,0 0 0 .0 0      $ 2 3 6 .1 6         L in e o f C r e d it f o r F D I C *                     $ 5 0 0 .0 0          $ 0 .0 0
       C it ig r o u p B a ilo u t F e d P o r t io n              $ 2 2 0 .4 0          $ 0 .0 0
       B a n k o f A m e r ic a B a ilo u t                          $ 8 7 .2 0          $ 0 .0 0    H U D T o ta l                                                 $ 3 0 0 .0 0      $ 3 0 0 .0 0
       C o m m it m e n t t o B u y T r e a s u r ie s             $ 3 0 0 .0 0          $ 7 .5 0           H o p e fo r H o m e o w n e rs F H A                   $ 3 0 0 .0 0      $ 3 0 0 .0 0




                                                                                                                                                                                            22
                                            IM F : L o s s E s t im a t e s o n U .S . C r e d it In s t r u m e n t s

                                     2 .5




                                     2 .0
t r illio n s o f U .S d o lla r s




                                     1 .5




                                     1 .0




                                     0 .5




                                     0 .0
                                              O c t. 2 0 0 7         A p r. 2 0 0 8         O c t. 2 0 0 8         Jan. 2009




                                                                                                                               23
Key Features of “Geithner” Plan for Financial Stability

1. Stress test for banks receiving funds and all banks with over
   $100 billion in assets
2. Greater transparency, disclosures
3. Executive compensation and dividend limits, other restrictions
4. Public – private investment fund (up to $500 billion each) –
   government capital and financing – to buy toxic MBS
5. Treasury seed funds and guarantees losses on up to $1 trillion
   to expand the FED’s not yet implemented Consumer and
   Business lending facility to buy up small business, consumer,
   auto, student, credit card securitized loans and commercial
   mortgages




                                                                    24
               Obama Foreclosure Relief Plan
                   (up to $275 billion)

1. Financial incentives for borrowers who stay current and lenders who
   modify mortgages to government guidelines (31% of income)
     • Funded from TARP
2. Allow borrowers making timely payments to refinance into cheaper
   fixed rate mortgages – if loans are held or securitized by Fannie Mae or
   Freddie Mac (new mortgages up to 105% of current market value)
     • About 14 of the 55 million mortgages in America are “underwater”
3. Double the Treasury lifeline to Fannie and Freddie
     • Absorb up to $200 billion in losses at each
     • Continue purchases of MBS from Fannie and Freddie
4. “Cram down” – allow judges to modify mortgages in bankruptcy




                                                                              25
                                    Obamanomics
1.   Taxes:
        a. Raise rates on the “rich” (1.0=39.6% top rate on wages and dividends; 2.0=28% on
             capital gains and dividends; 4.0=20% on capital gains and dividends)
        b. Partially phase-out itemized deductions for the “rich”
        c. Uncap Social Security taxes (1.0=12.4% above $102K; 4.0=2-4% above $250K)
        d. Many specific taxes, subsides for favored/disfavored, e.g. alternative energy
        e. Tax rebates (now part of stimulus bill)
        f.   New and expanded refundable credits
2.   Trade:
        a. Renegotiate NAFTA (or not)
        b. Against pending FTAs
3.   New regulation, from finance to health to energy
4.   Increase spending on transfers, infrastructure, alternative energy, health; decrease
     spending on defense
5.   Cap and trade carbon emissions  $120 billion/year energy tax
6.   Healthcare: pay or play ( 7% payroll tax mandate)
7.   Social Security and Medicare?

     Deficits and future taxes: national debt will double by 2013 (additional $5 trillion); medium
     term consequences for interest rates, crowding out of private and state and local debt,
     ROW borrowing


                                                                                                     26
    President Obama’s Debt and Taxes

D e b t ( c u m u la t iv e d e f ic it 2 0 1 0 - 2 0 1 9 )                                                      $ b illio n s

      1 . C B O b a s e lin e c u m u la t iv e d e f ic it                                                          $ 9 ,2 7 0

      2 . C B O P r e s id e n t 's b u d g e t d o - n o t h in g d if f e r e n c e , 2 0 1 0 - 2 0 1 9              4 ,8 2 9

      3 . C B O P r e s id e n t 's b u d g e t d if f e r e n c e 2 0 0 9                                             + 177

      4 . L e g is la t iv e a d d - o n 2 0 0 9 + 2 0 1 0 - 2 0 1 9 b u d g e t                                    + 1 ,4 6 2

      t o t a l n e w d e b t v s . d o - n o t h in g ( 2 + 3 + 4 )                                                   6 ,4 6 8


2 0 1 3 d e f ic it                                                                                              $ b illio n s

      1 . C B O b a s e lin e                                                                                           $300

      2 . C B O P r e s id e n t 's d if f e r e n c e                                                                    373

      3 . le g is la t iv e a d d - o n                                                                                    86

      4 . t o t a l a d d e d d e f ic it v s . d o - n o t h in g                                                        459
          a s a s h a re o f G D P                                                                                      2 .8 %

      t o t a l d e f ic it ( 1 + 4 )                                                                                     759


f u t u r e in c o m e t a x in c r e a s e

      p e r in c o m e t a x - p a y in g f a m ily o f 4                                                        $ 1 6 3 ,1 7 8

      b y in c o m e g r o u p :
                                           $100k                                                            $ 5 0 ,0 0 0 p lu s

                                           $150k                                                            1 0 0 ,0 0 0 p lu s



                                                                                                                                  27
                          Two Big Questions

1. Short/medium term:
    •   How soon and how strongly will the economy recover?
    •   Some scenarios:
         a. Deep recession, slow recovery 2nd half of 2009 or early 2010,
            picking up 2011
         b. Modest recession, solid recovery 2nd half of 2009 or early 2010,
            strengthening 2011 (Obama forecast)
         c. “lost decade” a la Japan
         d. Depression
2. Long-term:
    •   How much will government grow permanently?
         Some scenarios:
         a. Round off rough edges of Reagan revolution/capitalism
         b. Permanent expansion of temporary programs, perhaps serious
            inflation
         c. European style social welfare state



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