How did we get where we are

1
(No Transcript)
2
How did we get where we are?

• Beginning of the decade international economic
  growth fuels a massive increase in world wealth
  and savings.
• Total value of fixed income securities rose from
  36 trillion in 2000 to 70 trillion in 2006.
• Federal Reserve policy reduces Fed funds rates
  during recession of 2001 and after 9/11.
• 6.5 in May 2000
• 1 in June 2003
• Worldwide wealth increase and Fed actions drive
  substantial increase in demand for
  Mortgage-Backed Securities (MBS). The relatively
  high rates of return and apparent low risk are
  very attractive to investors looking for high
  return/low risk investment vehicles.
• Past data indicated mortgages were very safe.

3
(No Transcript)
4
(No Transcript)
5
How did we get where we are?

• Home price bubble from 2000-2005, fueled by easy,
  available credit.
• Sub-prime borrowing begins in earnest after 2003.
• The bursting of the bubble in 2005-2007 led to a
  major increase in mortgage delinquencies,
  particularly in sub-prime loans.
• Holders of these mortgages or the securitized
  debt (mortgage-backed securities) based on these
  mortgages experience substantial losses.
• Fannie Mae, Freddie Mac, IndyMac, WAMU
• Investment Banks that issued MBSs were also at
  risk as they held the most risky MBS tranches.
• Bear Stearns, Lehman Brothers, Merrill Lynch,
  Morgan Stanley, Goldman-Sachs.

6
The Meltdown

• Sept. 14th, 2008 Merrill Lynch acquired by Bank
  of America
• Sept. 15th, 2008 Lehman Bros declares
  bankruptcy.
• Sept 16th, 2008 American International Group
  (AIG), 18th largest public company in world
  almost fails, bailed out by Federal Reserve for
  85 billion (Fed gets 80 equity stake in
  company).
• Sept 16th, 2008 Reserve Primary Fund breaks the
  buck due to losses on Lehman-backed paper.
• run on American money market mutual funds
• Credit markets freeze.
• Without credit to shore up costs of their
  dramatic loses and to finance existing
  obligations, affected institutions turn to the
  government for help the bailout

7
Credit Crisis Fallout

• A credit freeze like this has not happened since
  the Great Depression in the United States.
• Credit conditions continue to be very tight. The
  TED Spread continues to be 5 times normal level.
  
• Business failures increase as liquidity and
  credit dries up.
• Credit crisis has caused a massive deleveraging
  of assets across the world.
• Dow has fallen 35 Sept. 12 to Nov. 20th, its
  lowest level in 6 years.
• Wall St problems have now affected Main St.
  reducing consumer, investor confidence.

8
(No Transcript)
9
(No Transcript)
10
Job losses in current recession have now given
back all job gains since June 2006.
11
(No Transcript)
12
Credit Crisis Fallout

• NBER determined that the US economy has been in
  recession since Dec. 2007.
• Real output declines for first time since 2001 in
  2007-Q4, and 2008-Q3.
• Employment has fallen by 2 million since Dec.
  2007.
• The economy has given back all job gains made
  since June 2006.
• Job losses are accelerating and widespread with
  533,000 lost in November and 1.25 million in
  2008-Q3 alone.
• Since Nov. 2007 unemployment rate has risen from
  4.7 to 6.7.

13
This Recession will get worse before it gets
better

• The longest recession since WWII was 16 months
  (1973-1975 and 1981-1982).
• The current recession is approaching 12 months.
• To end, economic activity will have to begin
  expanding.
• Because personal consumption expenditures make up
  70 of total output, will PCE rise in the near
  term?

14
(No Transcript)
15
(No Transcript)
16
Consumption changes determine Economic Output

• In 2008 Q3 Personal Consumption Expenditures
  (PCE) fell 0.95
• The last time PCE fell was 1991.
• There have been five quarterly decreases in PCE
  of 0.9 or more since WWII
• 1980 Q2 -2.23
• 1974 Q4 -1.44
• 1958 Q1 -1.40
• 1951 Q3 -2.77
• 1951 Q1 -2.94
• All of these events coincide with significant
  recessions.
• High probability PCE will fall by more than 0.9
  in two consecutive quarters.

17
(No Transcript)
18
(No Transcript)
19
(No Transcript)
20
Consumers under Pressure

• Consumer confidence has never been lower
• High energy prices and commodity price inflation
  combined with stagnant income growth through
  summer 2007 initially reduced confidence.
• Recent employment losses are only worsening
  confidence.
• Stock market losses have eliminated 20-40 of
  consumers wealth.
• Home prices fueled a consumption binge, as credit
  increased and savings fell since 1993.
• Nationally, home prices have now fallen to levels
  last seen in 2003.

21
Predictions

• The national economy will not rebound any time
  soon.
• Current recession is likely to last another 6-9
  months at least (this will be the longest
  recession since WWII).
• Unemployment could reach 9 or more (10.8 is the
  post-war high in 1982).
• Unemployment will continue to increase even after
  the economy begins turnaround.
• The national housing market needs to stabilize
  before recovery can begin.
• Credit markets must thaw to allow business
  turnaround.
• Additionally, consumer confidence would improve
  with a financial market turnaround.

22
(No Transcript)
23
Thank you!

• Rob Godby
• Chair, Department of Economics and Finance
• College of Business
• University of Wyoming

24
(No Transcript)
25
(No Transcript)
26
(No Transcript)