1. Read the information presented on the two pages linked below

2. Make a journal entry comparing and contrasting the two recessions

• include:
  • short summaries of each recession
  • ways that the two recessions were similar
  • ways that the two recessions were different
  • similarities and differences in the policy responses to the two recessions

Reference:

8 The Great Recession The Great Recession 2008 - 2009 Overview There was a large contractionary shift in AD real GDP fell sharply o between the 4th quarter of 2007 and the second quarter of 2009, it fell 4.2% employment fell sharply o from May 2007 to October 2009, unemployment rose from 4.4% to 10% Lead Up to the Recession Main cause: the housing market From 2002 - 2006 low interest rates on housing prevailed it was easy for subprime borrowers to get credit + people who normally wouldn't qualify for loans received them government policies were enacted to increase homeownership lenders sold the mortgages to investment banks + investment banks then created securities that were backed by the mortgages + these were sold to other banks, insurance companies, and other investors these securities were viewed as being safe the belief was that housing prices "never fall" The Crash Between 2006 and 2009, the housing market crashed interest rates on houses rose = homeowners were in contracts with variable rates rather than fixed rates millions of homeowners now owed more on the houses than they were worth millions of mortgages went into default and were foreclosed on o banks sold off the foreclosures, which created a surplus of housing surpluses push prices down! new construction slowed and the construction industry was hit unemployment was 9.6% overall, but 20.6% in the construction industry the mortgage backed securities now became "toxic" investments o there were heavy losses this led to widespread failures of banks and other financial institutions FRED - Private Nonresidential Fixed Investment Gross Domestic Product*100 - Private Residential Fixed InvestmentiGross Domestic Product 100 15.0 12 5 10.0 BIL of S/Bil. or $*1 00 50 1990 1992 1984 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Shaded areas indicate U.S. recessions Source: U.S. Bureau of Economic Analysis fred.stlouisfed.org As you can see in the diagram above, residential investment (housing) started to crash around 2006 and the rest of investment was brought down once the recession officially started in 2008 Growth of U.S. Private Debt 275 Percentage of GDP 1970 1975 1980 1985 1990 1995 2000 2005 2010 Household . Non-Financial Business . Financial Business Source Dutu: Federal Reserve Economic Database (FRED) This diagram shows a comparison in debt being held by households, businesses, and financial institutions. Notice the sharp increase in financial debt as the mortgages failed and they lost money on their investments. Policy Response . the federal funds rate target was lowered to around 0% the Federal Reserve purchased the mortgage-backed securities and other private loans . essentially bailed out the banks the US Treasury injected capital into the banking system to increase liquidity and keep credit flowing policymakers increased government spending and reduced taxesThe Covid Recession The Covid Recession 2020 Three Unusual Features 1. The Cause: large segments of the economy closed due to the Covid-19 pandemic 2. The Speed and the Depth . February - April 2020: employment fell from 61.1% to 51.3% . this is the largest two month drop ever . Unemployment rate in April 2020 hit 14.8% 3. Intentional - it was a recession by design . Circumstances lent themselves to a large, temporary decline in activity . Considered to be the best possible outcome at the time What happened, economically? AD shifts left . shopping centers closed by government decree . people avoided businesses that were open to reduce risk of infection AS shifted left . businesses temporarily shut down . sudden, massive reductions in quantity of goods/services supplied Simultaneous shifts both curves decreased . led to a sharp reduction in production and employment Employees on Payrolls FRED - All Employees, Total Nonfarm 156,060 152,000 144 060 140,000 136,000 132,000 125,060 2006 2010 2012 2014 2016 2010 2020 2022 shaded areas indicate U.S. recessions Source: U.S. Bureau of Labor Statistics fred sliouisfed org The above diagram shows both the recession of 2008-2009 and the Covid recession. Note the sharp decline in employees on payrolls in 2020Variable Feb Mar Apr May June July August Jobs, level (000s)19 152,463 151,090 130,303 133,002 137,802 139,582 140,914 Jobs, monthly change (000s)[9] 251 -1,373 -20,787 2,699 4.800 1.780 1,371 Unemployment rate %[10] 3.5% 4.4% 14.7% 13.3% 11.1% 10.2% 8.4% Number unemployed (millions )(11 5.8 7.1 23.1 21.0 17.8 16.3 13.6 Employment to population 80.5% 79.6% 69.7% 71.4% 73.5% 73.8% ratio %, age 25-54[12] 75.3% Inflation rate % (CPI-All)[13] 2.3% 1.5% 0.4% 0.2% 0.7% 1.0% TBD Stock market S&P 500 (avg. 3,277 2,652 2,920 3,208 3,392 level)(14] 2,762 3,105 Debt held by public ($ trillion) [15] 7.4 17.7 19.1 19.9 20.5 20.6 20.8 In October 2021, however, annual consumer price inflation reached 6.2%, the biggest rise in 31 years. [16] The above graphic shows the various indicators from Feb - August of 2020 U.S. motor gasoline product supplied (2015-2020) million barrels per day cia 12 10 8 . previous five-year 2020 four-week range and average average 6 2020 weekly values 4 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: U.S. Energy Information Administration, Weekly Petroleum Status Report This one is interesting, as it shows the demand for gasolineUS Policy Responses CARES Act - Coronavirus Aid, Relief, and Economic Security (March 27, 2020) + Spending increases and tax reductions of approximately $2 trillion + this amounts to about 10% of GDP Largest fiscal response to a recession in history + Goals of CARES Act