Bear sterns went bankrupt; and federally sponsered mortageg insurers were taken over by the treasurery and bailed out by the government

Emergency Economic Stabilization of 2008

Financial Crisis and Non Incremental Policy Change

GM Bankruptcy; biggest American caretaker, recieved billions in loans and guarentees, CEO forced to leave and governement took majority ownership

-fedral response was to push 1/25 trillion into the nation’s financial system, lowered the discount rate to less than one percent

Fannie Mae

-government sponsered corporation

-founded during the great depression in 1938

-to purchase mortagages from lenders

-reinvest assets and expand mortgage market

-to increase homeowner ship

Freddie Mac

-government sponsered corporation

-created in 1970

-began selling mortagages competing with Fannie Mae

The Economic Stimulus Package

FISCAL POLICY

Spending Priorities

-two thirds spending and one third tax rebates

-packages to increase spending on lots of domestic programs

-republicans opposed to the increase in domestic spending not directly related to the economy

Making Work Pay

-middle class tax cutes

Dodd Frank Act

-reversed years of regulation, obama and dems passed sweeping financial regulation

-created a financial stability oversight council, set up a process for liquadating institutions

-created a bureau of consumer financial protection

-some critics said it was to easy and some said it went to far and the regulations would slow down growth in the areas

The Fed at Work

Most advanced democracies have central banks where control is removed from elected politcians

-the federal reserve system: regulates the money supply; the try to avoid excessive inflation and unemployment.

-they issue the nation’s currency and determines the reserve requirements(how much many local banks have to have in their reserve)

-they also lend money to banks at discount rates buys and sells us government treasury bonds assures regulatory compliance by private banks

Independence: decisions are made independently and need not to be ratified by congress, president, courts, or anyone else;

-response to recession; tried to simiulate economy

Growth of Government:

Crisis challange incrementalism: recession in 2008 drove dramatic increases in spending

Entitlement spending growth is more incremental(biggest part of the budget)

Federal Net Outlays as % of GDP

Federal Surplus or deficit as % of GDP

Gross Federal Debt as % of GDP

Since 2016 the focus on deficit spending has been abandon

Do currents debts and deficits mean anything?

Many government programs create future expensis if they are not explicityl in law

Implicit obligation, financial obligations that the government has in the future are not recognized in the annual budgetary process

Ex: Social security payments are promised in the future

Secular Stagnantion

Secular Stagnation refers to the situation of permanently low interest rates in industrialized countries

-real intrest rates have declined despite increased in government spending, government are able to borrow moneys at low interest rates

What are potential causes

-global saving glut: longer retirement periods, increased inequality, and rising uncertainty

-lower demand of captial: slower labor force growth, increased market power of tech firms, less labor to use the capital(from lower fertilatly rates)

Policy implications

-larger governments deficits may not crowd our private investment

-suggests that we pay less attention to the notion that we need to worry about the level of debt per se

-any productive government investments that have a rate of return in excess of exonomy’s long run growth rate should be made, even if they only repay themselves many years later