2008/2009 Recession

Zhanna Karapetyan

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 Table of Content
• What is a recession?
• What is 2008/2009 recession?
• What are the causes of 2008/2009 recession?
a. Housing Bubble
b. Derivatives
c. No Regulation
d. Low Interest Rates
• CNN Bailout Tracker
• Government intervention (Fiscal & Monitory policies)
• Quantitative Easing
• FRED Graphs
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 What is a recession?
• A period of temporary economic decline

• Trade and industrial activity are reduced

• Identified by a fall in GDP in two successive quarters

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 What is 2008/2009 recession?
• Major worldwide economic downturn

• Began in December 2007 and continued into June 2009

• Five million of the 8 million jobs lost

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What are the causes of 2008/2009 recession?
• Housing Bubble
Run-up in housing prices
• Derivatives
A security with a price that is dependent upon one or more underlying assets
• No Regulation
No government intervention
• Low Interest rates
The risk-free rate of interest that is lower than the historic average for a
prolonged period of time

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 Housing Bubble

• Housing prices peaked in early 2006, started to decline in

2006 and 2007, and reached new lows in 2012.

• The credit crisis resulting from the bursting of the housing

bubble is—according to general consensus—an important
cause of the 2007-2009 recession in in United States.

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 Derivatives
• The securitization of the mortgages was built on top of the plain
vanilla mortgages and this coupled with excessive risk taking by
derivative trading resulted in the crash of 2008. 

• Some financial institutions have experienced large losses from the

use of derivatives and other forms of leverage. For example, Barings
Bank lost $1.4 billion in 1994 and Société Générale lost $7 billion in
2008.

• Nonetheless, losses would likely be greater if businesses did not

use derivatives for hedging.

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 No Regulation
• Regulatory responses to the subprime crisis addresses various actions
taken by governments around the world to address the effects of
the subprime mortgage crisis.

• Regulations or guidelines can also influence the nature, transparency

and regulatory reporting required for the complex legal entities and
securities involved in these transactions.

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 Low Interest rates
• The United States Federal Reserve uses its financial tools to nudge the rates
down

• One tool used to drop the interest rate is the Federal Funds Target Rate. When
the committee wants to increase spending and stimulate the economy, it
lowers this rate. 

• Another tool the Fed uses to drop interest rates is the buying of United States
Treasury Securities, such as bonds. By increasing its purchases of bonds and
other securities, it drives up the demand for these products and pushes up
the price.

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 Monetary Policy by Federal Reserve

• Federal Fund Rate

The interest rate banks charge each other for overnight loans
to meet their reserve requirements
• Discount Rate
The interest rate that the Fed charges for overnight loans
• QE
Quantitative Easing

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 Federal Fund Rate
• A low federal funds rate implies expansionary monetary policy by the
Federal Reserve; a low interest rate environment for businesses and
consumers; and relatively high inflation. Low interest rate
environments stimulate aggregate demand and employment.

• A low federal funds rate indicates expansionary monetary policy and

occurs in a relatively high inflation period. 

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 Discount Rate
• The discount rate allows the federal reserve to control the supply of
money and is used to assure stability in the financial markets.

• A decrease in the discount rate makes it cheaper for commercial

banks to borrow money, which results in an increase in available
credit and lending activity throughout the economy. 

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 QE (Quantitative easing)
Is an unconventional form of monetary policy where a Central Bank creates new money to
buy financial assets, like government bonds and increase money supply.

QE1 (the Fed purchased agency securities and mortgage-backed securities)

• December 2008– June 2010
• Total of $2.1 trillion
QE2 (the Fed purchased Treasury securities)
• November 2010 – June 2011
• Total of $600 billion
QE3 (Fed chose to have a monthly approach for purchases instead of buying it in bulk, exceptional
low levels for the federal funds rate for an extended period)
• September 2012 – October 2014
• Total of $1.6 trillion
Total of $4.3 trillion

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 Fiscal Policy by Federal Government
• Nationalize companies
Nationalization refers to the process of a government taking control of a company (AIG, Fannie
Mae, Freddie Mac, etc.) Bailed out General Motors.
• Bailout Tracker
An act of giving financial assistance to a failing business or economy to save it from collapse
• Capital Injections
Capital injection is an investment of capital into a company or institution, generally in the form of
cash, equity or debt. During financial crisis of 2008, the U.S. government, as well as a number of
other governments around the world, injected hundreds of billions of dollars into their financial
sectors in an attempt to halt the conflagration that was threatening to swallow the global economy.
• Buy Toxic Assets
Most of the money to fund buying toxic assets came from the Troubled Asset Relief Program.
• Increased number of months somebody is unemployed (18 months)
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Bailout Tracker

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 Real GDP

• During 2009, Real GDP was at its lowest point

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 Unemployment Rate

• Sharp increase in unemployment rate during recession, but its not at its peak point
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 Number of weekly unemployment claims

• During 2009, number of weekly unemployment claims were at their highest point
• After recession it starts to decline
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 IPI (Industrial Production Index)

• At its highest point during 2008, and sudden decrease during 2009
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 Discount Rate

• Continuous decrease in discount rate during recession

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 Prime Rate

• Continuous decrease in prime rate during recession

• Constant rate until 2016 21
 Federal Fund Rate

• Continuous decrease in federal fund rate during recession

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 Retail Sales

• Decline in Retail Sales during 2008

• At its lowest point during 2009 23
 CPI (Consumer Price Index)

• Increase in CPI Index, then decrease during 2008

• Slight increase during 2009 24
 PPI (Producer Price Index)

• Increase during 2008, then sharp decrease during 2009

• Minimum point 25