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- Republican attempts to invalidate state-ordered congressional districting schemes in North Carolina and Pennsylvania were rejected by the Supreme Court. For this year’s elections, justices are permitting maps chosen by each state’s Supreme Court to be used. Those maps are more Democratic-friendly than those drawn by state legislatures.
- The Israeli military says it has demolished the homes of two Palestinians accused of killing a Jewish seminary student and wounded others in a fatal shooting attack in the occupied West Bank last year.
- For betting on games, Atlanta Falcons wide receiver Calvin Ridley has been suspended for at least the upcoming NFL season. He placed bets last season after declaring his departure from the team to focus on his mental health, according to an NFL inquiry.
The US economy is still recovering from the COVID-19-induced slump. Although a healthy job market is helping it catch up, analysts are also predicting an oncoming recession. Experts warn that it might happen this year, according to Economic Reporter Paul Davidson.
It’s unlikely that a recession will occur. Really, economists are looking out a year or a little over a year, and late 2022 is probably within that area. The odds aren’t in your favor, but aren’t these all differences in odds? I instance, a few of economists told me that the chances of ad recession were 15%, and now one says it’s 30%, and another says it’s 25%. However, any time the odds improve, it’s worth noting. It’s possible that there will be, especially if sanctions against Russia’s oil exports are imposed and oil and gas prices skyrocket. Energy prices, after all, are a major consideration. When consumers have to pay that much out of pocket for gas and have to fill up every couple of weeks, they cut back on other purchases. As a result, inflation rises, prompting the Federal Reserve to boost interest rates even higher, posing new problems.
Joe LaVorgna, an economist, observed that, since 1970, whenever oil prices increased by 90% in a year, we were either in or about to enter a recession. So it’s back to what I was saying earlier, that it’s just a burden on the consumer. 70% of the economy is made up of consumer expenditure. So, if consumers spend more of their income on petrol and less on other items, you’re affecting 70% of the economy. That is one way, or channel, by which a recession might occur. The Fed, on the other hand, must react to inflation. And if the Fed has to raise interest rates too quickly, it can lead to inflation, as the home you buy, your credit card payments, and your auto loan all become more costly, which isn’t good for the stock market. As a result, Fed rate hikes by themselves can trigger a recession.
Arguments over whether Russia is committed war crimes in its ongoing invasion of Ukraine were heard before The Hague yesterday. Officials petitioned the International Court of Justice to halt the invasion. Russia declined to attend the session, while Anton Korynevych, the Ukrainian representative, urged action.
The fact that Russia’s chairs are empty is a powerful statement. They aren’t present in this courtroom. They are fighting an aggressive war against my country on a battlefield. Let us settle our conflict like civilized nations, is my appeal to Russia. Place your arms on the table and present your proof.
Russia’s tactics, according to Jonathan Gimblett, a member of Ukraine’s legal team, are reminiscent of medieval siege warfare. A truce in portions of Ukraine, including the city of Kyiv, is expected to begin this morning, according to Russia. However, Russia and Ukraine are debating which evacuation routes civilians will be allowed to utilize. A prior Russian plan indicated that routes should be taken through Russia or Belarus, a Russian ally. Instead, Ukraine has offered routes to the country’s western areas, where shelling is minimal compared to Eastern Ukraine. Cities in that region, such as Mariupol’s port, are running out of food and medicine. Around half of the city’s residents want to evacuate, but are waiting for safer evacuation routes. Cell phone networks are also down, in addition to supply problems.
Heavy Russian shelling continues to batter residential complexes in Kharkiv, Ukraine’s second largest city. Russian soldiers have mostly been unable to infiltrate Kyiv’s capital, while much of Russia’s attention has remained on smaller, easier-to-capture cities. Hundreds of checkpoints have been established to protect Kyiv by military and volunteers. Some are two stories high and made of thick concrete and sandbags, while others are more chaotic, with stacks of books holding down tires.
Despite the lack of evacuation routes, Ukrainians continue to flee the country in droves. A total of 1.7 million people are thought to have left, with the vast majority (more than a million) settling in Poland. Some hotels are putting people up in Romania, where approximately 100,000 Ukrainian refugees have landed. Nellya Nahorna, an 85-year-old grandmother at a hotel in Suceava, Romania, described the scenario like way. She had previously evacuated after fleeing the Nazi German invasion of Ukraine in 1941.
“This conflict is unique in that we had adversaries, the fascists. The Russians, on the other hand, were brothers here.”
The national average price of petrol has surpassed $4 per gallon, as we’ve been discussing on 5 Things. It’s the first time this has happened in almost a decade, with gas prices skyrocketing in the aftermath of Russia’s invasion of Ukraine. Is there, however, any hope in sight? Jordan Mendoza, a reporter, provides additional context.
The national average is currently $4.06, which is a significant increase from a week ago. It was $3.61 last week, according to AAA, and it’s now $4.06. In addition, the national average cost a typical gallon of gas is $4.11, which was set in 2008. And it appears to indicate that the record will be broken very soon, most likely this week. It could happen as soon as Tuesday, but it’ll most likely happen this week.
California has long been considered as the most costly state for gas; right now, the average cost of a gallon of gas in California is $5.34. The costs in California and Southern California are insane, but it’s the same story everywhere around the state. And we noticed that the states around us were going through the same thing. They aren’t as pricey as California, but Nevada, Oregon, Washington, Hawaii, and Alaska are all experiencing the same problems.
I understand that a lot of it has to do with what’s going on in Ukraine right now, as well as Russia’s impact on oil prices, but it’s going to continue. People can report what prices are at the pump using the mobile app GasBuddy, which allows them to check how much gas is like where they are. They’re predicting that this will take a long time to resolve. They predict that the average cost of gas in the United States will be $4.25 in May. That’s 14 cents more than the previous high. As a result, it’ll most likely continue to rise for some time. Because gas prices normally rise in the summer, they’re speculating. Not only that, but a lot of COVID limits are being lifted as well. As a result, people desire to… They are able to go out more frequently. As a result of all of these factors, gas prices are likely to rise for the foreseeable future. According to GasBuddy, the average price of a gallon of gas will be over $4 until November. As a result, 2017 will be one of the most expensive gas years in US history.
Today, Apple will have an online event to announce some new items. One of them is an improved version of the iPhone SE, Apple’s more affordable smartphone. Brett Molina, the tech editor, has more.
A new generation of Apple’s budget-friendly smartphone, the iPhone SE, is one of the big reports we’ve seen as far as what Apple is likely to announce at this event. According to Bloomberg, Apple is expected to unveil not only a new SE, but also an improved iPad Air. During this event, we may also see a new Mac model. So, obviously, there’s a lot of interesting stuff that can come here. The last time we heard from Apple was in the fall, when the iPhone 13 was released. And, of course, that was a huge hit. Apple reported iPhone sales of 71.6 billion on their most recent quarterly call, which comes as no surprise, but the iPhone makes a lot of money for Apple.
However, for a few of reasons, the iPhone SE on a budget will be something to keep an eye on. First and foremost, we are seeing a greater number of cheap phones on the market, as I recently discussed, where you don’t have to pay a lot of money to have a smartphone that is really nice, extremely useful, and really functional. Of course, the iPhone SE is currently available; they have a replica of this. It’s also a good phone. I believe it costs between $450 and $500. You get a lot of the benefits of being part of the Apple ecosystem. Obviously, there are certain flaws in the hardware itself. On the back, there is simply one camera. It still works rapidly, but not as swiftly as before. As I previously stated, the camera isn’t as excellent as newer versions, and the battery life isn’t likely to be as good either. But, then again, it’s a good way to come into the Apple ecosystem, and it’s a good phone.
What will happen with the display is one of the things I’ll be looking at. Are we going to stick with the reduced display size, or will they upgrade it to match the rest of their models? One of the iPhone SE’s distinguishing features has been its reduced screen size. Are they going to keep it up? How much of a difference will we see in the cameras? What kind of camera will we get this time, and what kind of processing will we use? Those are the two things that pique my curiosity.
Of course, all of these stories indicate that this will be a 5G phone. It’s also intriguing since it’s a pretty simple method to get into 5G. Of course, there will be other phones around this price point, but getting an iPhone with 5G at what is projected to be an affordable price might be a very excellent alternative for a lot of people.
In 2021, will the United States be in a recession?
Last year, the US economy increased at its quickest rate since Ronald Reagan’s administration, coming back with tenacity from the coronavirus recession of 2020.
What is the state of the US economy in 2021?
Indeed, the year is starting with little signs of progress, as the late-year spread of omicron, along with the fading tailwind of fiscal stimulus, has experts across Wall Street lowering their GDP projections.
When you add in a Federal Reserve that has shifted from its most accommodative policy in history to hawkish inflation-fighters, the picture changes dramatically. The Atlanta Fed’s GDPNow indicator currently shows a 0.1 percent increase in first-quarter GDP.
“The economy is slowing and downshifting,” said Joseph LaVorgna, Natixis’ head economist for the Americas and former chief economist for President Donald Trump’s National Economic Council. “It isn’t a recession now, but it will be if the Fed becomes overly aggressive.”
GDP climbed by 6.9% in the fourth quarter of 2021, capping a year in which the total value of all goods and services produced in the United States increased by 5.7 percent on an annualized basis. That followed a 3.4 percent drop in 2020, the steepest but shortest recession in US history, caused by a pandemic.
Will the US economy enter a downturn?
“There was nothing about the pandemic’s nature that would have precluded it from being the catalyst for a faster downturn.” The quick turnaround we saw was not unavoidable.”
Moody’s believes that without strong federal action, GDP would have fallen three times as much in 2020, and the US would have had a double-dip recession in 2021. The country would not have recovered all of its lost jobs until 2026, and unemployment would have remained in double digits for the majority of 2021. Wage growth would have slowed to a halt. Poverty would have grown to the second-highest level on record, rather than reducing.
What will the state of the economy be in 2022?
“GDP growth is expected to drop to a rather robust 2.2 percent percent (annualized) in Q1 2022, according to the Conference Board,” he noted. “Nonetheless, we expect the US economy to grow at a healthy 3.5 percent in 2022, substantially above the pre-pandemic trend rate.”
Is America experiencing a downturn?
The United States is officially in a downturn. With unemployment at levels not seen since the Great Depression the greatest economic slump in the history of the industrialized world some may be asking if the country will fall into a depression, and if so, what it will take to do so.
What is the outlook for the economy in 2021?
In 2021, real GDP is expected to expand by 5.6 percent, before increasing by 3.7 percent in 2022 and 2.4 percent in 2023. Supply difficulties will gradually subside, allowing businesses to restore inventories and boost demand growth in the short run. Nominal wage growth will accelerate further as the labor market continues to improve. While price inflation is expected to lessen in some areas as supply disruptions subside, increased salaries, along with recent rises in housing rents and shipping rates, are expected to result in faster total consumer price growth than before the epidemic.
How much debt does America have?
“Parties in power have built up the deficit through increased spending and poorer tax collection, regardless of political affiliation,” says Brian Rehling, head of Global Fixed Income Strategy at Wells Fargo Investment Institute.
While it’s easy to suggest that a specific president or president’s administration led the federal deficit and national debt to move in a given direction, it’s crucial to remember that only Congress has the power to pass legislation that has the greatest impact on both figures.
Here’s how Congress responded during four major presidential administrations, and how their decisions affected the deficit and national debt.
Franklin D. Roosevelt
FDR served as the country’s last four-term president, guiding the country through a series of economic downturns. His administration spanned the Great Depression, and his flagship New Deal economic recovery plan aided America’s rebound from its financial abyss. The expense of World War II, however, contributed nearly $186 billion to the national debt between 1942 and 1945, making it the greatest substantial rise to the national debt. During FDR’s presidency, Congress added $236 billion to the national debt, a rise of 1,048 percent.
Ronald Reagan
Congress passed two major tax cuts during Reagan’s two administrations, the Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986, both of which reduced government income. Between 1982 and 1990, Congress passed Acts that reduced revenue as a percentage of GDP by 1.7 percent, resulting in a revenue shortfall that contributed to the national debt rising 261 percent ($1.26 trillion) during his presidency, from $924.6 billion to $2.19 trillion.
Barack Obama
The Obama administration oversaw both the Great Recession and the recovery that followed the collapse of the mortgage market throughout his two years in office. The Economic Stimulus Act of 2009, which pumped $831 billion into the economy and helped many Americans avoid foreclosure, was passed by Congress in 2009. When passed by a strong bipartisan vote, congressional tax cuts added extra $858 billion to the national debt. During Obama’s two terms in office, Congress increased the national deficit by 74% and added $8.6 trillion to the national debt.
Donald Trump
Congress approved the Tax Cuts and Jobs Act in 2017, slashing corporate and personal income tax rates, during his single term. The cuts, which were seen as a bonanza for the wealthiest Americans and corporations at the time of their passage, were expected by the Congressional Budget Office to increase the government deficit by $1.9 trillion at the time of their passing.
The federal deficit climbed from $665 billion in 2017 to $3.13 trillion in 2020, despite the Treasury Secretary’s prediction that the tax cuts would reduce it. Some of the rise was due to tax cuts, but the majority of the increase was due to successive Covid relief programs.
The public’s share of the federal debt has risen from $14.6 trillion in 2017 to more than $21 trillion in 2020. The national debt is made up of public debt and intragovernmental debt (amounts owed to federal retirement trust funds such as the Social Security Trust Fund). It refers to the amount of money owed by the United States to external debtors such as American banks and investors, corporations, people, state and municipal governments, the Federal Reserve, and foreign governments and international investors such as Japan and China. The money is borrowed in order to keep the United States running. Treasury banknotes, notes, and bonds are included. Treasury Inflation-Protected Securities (TIPS), US savings bonds, and state and local government series securities are among the other holders of public debt.
“The national debt is growing at a rate it hasn’t seen in decades,” says James Cassel, chairman and co-founder of Cassel Salpeter, an investment bank. “This is the outcome of the basic principle of spending more money than you earn.” Cassel also points out that while both major political parties have spoken seriously about reducing the national debt at times, discussions and strategies have stopped.
When both sides pose discussing raising the debt ceiling each year, the national debt is more typically utilized as a bargaining chip. The United States would default on its debt obligations if the debt ceiling was not raised. As a result, Congress always votes to raise the debt ceiling (the maximum amount of money the US government may borrow), but only after parties have reached an agreement on other legislation.
Is the US economy in good shape in 2022?
As higher-order dangers have taken center stage as a result of Russia’s conflict, those indicators of economic strength have become almost useless. The reality of a long-term battle and a changed geoeconomic landscape has yet to sink in. But it’s not too early to speculate on how the impact might manifest. Is a recession on the horizon?
One or more of three transmission routes delivers the impact of an economic shock. Let’s take a look at where the hazards are the largest and why.
Financial recessions are still the most dangerous type. They occur when banks are crippled by a shock, either due to liquidity or capital worries, forcing them to deleverage. They leave behind long-term asset price damage, harmed investment plans, and sluggish recovery times. This was the narrative in 2008, but in 2020, it was effectively avoided.
Before the war, the US banking system was in good shape and continues to be relatively stress-free. The capital position of US banks is robust, profitability is at an all-time high, and liquidity is abundant. Russian asset exposure is modest, and real-time credit spread data is comforting.
There are still a lot of unknowns. Banking is a highly interconnected environment that can conceal flaws. A crippling cyberattack on western financial infrastructure stands out as a novel risk, demonstrating the importance of never dismissing the financial industry as a source of major surprise.
Real-world recessions are usually milder, and they are triggered by unexpected demand or supply shocks that can send an already vulnerable economy into a tailspin. Has the crisis in Ukraine created enough headwinds to cause such a shock? A few things jump out on the negative side of the ledger:
- Oil prices in the United States (WTI) climbed from just around $50/barrel to more over $75/barrel in 2021 (direct effects). Because inflation assesses price changes rather than price levels, the influence on inflation (and real incomes) would have decreased if prices had stayed the same. However, in the aftermath of the Ukraine incursion, prices have risen to as high as $130/barrel, equating to a price increase equivalent to last year’s and affecting real salaries once more.
- Energy prices (effect on confidence): There is a clear inverse association between consumer confidence and energy prices. Consider how confidence didn’t fully rebound in the previous expansion until oil prices plummeted in 2014. High oil costs that trickle down to the gas pump are likely to erode consumer confidence.
- Falling asset prices cause households to feel less fortunate, causing them to cut back on spending and save more.
- Supply-chain disruptions: Russia’s invasion is yet another setback for globally integrated supply systems, which have slowed economic growth in recent months.
Despite this slew of headwinds, it’s not obvious that they outweigh the tailwinds that the US economy is still experiencing:
- Despite the fact that growth is slowing, it is nevertheless maintaining speed and is expected to exceed trend growth in 2022, offering some protection from shocks.
- The household sector is still in good shape, with stable balance sheets across all income groups and high cash balances.
- With record job postings, high hiring, and significant salary rises, labor markets are extremely tight, creating a strong domestic tailwind for ongoing consumption.
- As they seek to build resilience and additional capacity, businesses remain lucrative and interested in investing.
- Overall, direct commercial links between the United States and Russia and Ukraine are limited, and possible interruptions will arise when Americans recover from the Covid shutdowns.
These tailwinds and headwinds are neither exhaustive, nor can they be reliably netted against one another. However, the backdrop of the US cycle suggests that the expansion can continue.
What should I put away in case of economic collapse?
Having a strong quantity of food storage is one of the best strategies to protect your household from economic volatility. In Venezuela, prices doubled every 19 days on average. It doesn’t take long for a loaf of bread to become unattainable at that pace of inflation. According to a BBC News report,
“Venezuelans are starving. Eight out of ten people polled in the country’s annual living conditions survey (Encovi 2017) stated they were eating less because they didn’t have enough food at home. Six out of ten people claimed they went to bed hungry because they couldn’t afford to eat.”
Shelf Stable Everyday Foods
When you are unable to purchase at the grocery store as you regularly do, having a supply of short-term shelf stable goods that you use every day will help reduce the impact. This is referred to as short-term food storage because, while these items are shelf-stable, they will not last as long as long-term staples. To successfully protect against hunger, you must have both.
Canned foods, boxed mixtures, prepared entrees, cold cereal, ketchup, and other similar things are suitable for short-term food preservation. Depending on the food, packaging, and storage circumstances, these foods will last anywhere from 1 to 7 years. Here’s where you can learn more about putting together a short-term supply of everyday meals.
Food takes up a lot of room, and finding a place to store it all while yet allowing for proper organization and rotation can be difficult. Check out some of our friends’ suggestions here.
Investing in food storage is a fantastic idea. Consider the case of hyperinflation in Venezuela, where goods prices have doubled every 19 days on average. That means that a case of six #10 cans of rolled oats purchased today for $24 would cost $12,582,912 in a year…amazing, huh? Above all, you’d have that case of rolled oats on hand to feed your family when food is scarce or costs are exorbitant.
Basic Non-Food Staples
Stock up on toilet paper, feminine hygiene products, shampoo, soaps, contact solution, and other items that you use on a daily basis. What kinds of non-food goods do you buy on a regular basis? This article on personal sanitation may provide you with some ideas for products to include on your shopping list.
Medication and First Aid Supplies
Do you have a chronic medical condition that requires you to take prescription medication? You might want to discuss your options with your doctor to see if you can come up with a plan to keep a little extra cash on hand. Most insurance policies will renew after 25 days. Use the 5-day buffer to your advantage and refill as soon as you’re eligible to build up a backup supply. Your doctor may also be ready to provide you with samples to aid in the development of your supply.
What over-the-counter drugs do you take on a regular basis? Make a back-up supply of over-the-counter pain pills, allergy drugs, cold and flu cures, or whatever other medications you think your family might need. It’s also a good idea to keep a supply of vitamin supplements on hand.
Prepare to treat minor injuries without the assistance of medical personnel. Maintain a well-stocked first-aid kit with all of the necessary equipment.
Make a point of prioritizing your health. Venezuelans are suffering significantly as a result of a lack of medical treatment. Exercise on a regular basis and eat a healthy diet. Get enough rest, fresh air, and sunlight. Keep up with your medical and dental appointments, as well as the other activities that promote health and resilience.
How long did it take to recover from the financial crisis of 2008?
When the decade-long expansion in US housing market activity peaked in 2006, the Great Moderation came to an end, and residential development began to decline. Losses on mortgage-related financial assets began to burden global financial markets in 2007, and the US economy entered a recession in December 2007. Several prominent financial firms were in financial difficulties that year, and several financial markets were undergoing substantial upheaval. The Federal Reserve responded by providing liquidity and support through a variety of measures aimed at improving the functioning of financial markets and institutions and, as a result, limiting the damage to the US economy. 1 Nonetheless, the economic downturn deteriorated in the fall of 2008, eventually becoming severe and long enough to be dubbed “the Great Recession.” While the US economy reached bottom in the middle of 2009, the recovery in the years that followed was exceptionally slow in certain ways. In response to the severity of the downturn and the slow pace of recovery that followed, the Federal Reserve provided unprecedented monetary accommodation. Furthermore, the financial crisis prompted a slew of important banking and financial regulation reforms, as well as congressional legislation that had a substantial impact on the Federal Reserve.
Rise and Fall of the Housing Market
Following a long period of expansion in US house building, home prices, and housing loans, the recession and crisis struck. This boom began in the 1990s and accelerated in the mid-2000s, continuing unabated through the 2001 recession. Between 1998 and 2006, average home prices in the United States more than doubled, the largest increase in US history, with even bigger advances in other locations. During this time, home ownership increased from 64 percent in 1994 to 69 percent in 2005, while residential investment increased from around 4.5 percent of US GDP to nearly 6.5 percent. Employment in housing-related sectors contributed for almost 40% of net private sector job creation between 2001 and 2005.
The development of the housing market was accompanied by an increase in household mortgage borrowing in the United States. Household debt in the United States increased from 61 percent of GDP in 1998 to 97 percent in 2006. The rise in home mortgage debt appears to have been fueled by a number of causes. The Federal Open Market Committee (FOMC) maintained a low federal funds rate after the 2001 recession, and some observers believe that by keeping interest rates low for a “long period” and only gradually increasing them after 2004, the Federal Reserve contributed to the expansion of housing market activity (Taylor 2007). Other researchers, on the other hand, believe that such variables can only explain for a small part of the rise in housing activity (Bernanke 2010). Furthermore, historically low interest rates may have been influenced by significant savings accumulations in some developing market economies, which acted to keep interest rates low globally (Bernanke 2005). Others attribute the surge in borrowing to the expansion of the mortgage-backed securities market. Borrowers who were deemed a bad credit risk in the past, maybe due to a poor credit history or an unwillingness to make a big down payment, found it difficult to get mortgages. However, during the early and mid-2000s, lenders offered high-risk, or “subprime,” mortgages, which were bundled into securities. As a result, there was a significant increase in access to housing financing, which helped to drive the ensuing surge in demand that drove up home prices across the country.
Effects on the Financial Sector
The extent to which home prices might eventually fall became a significant question for the pricing of mortgage-related securities after they peaked in early 2007, according to the Federal Housing Finance Agency House Price Index, because large declines in home prices were viewed as likely to lead to an increase in mortgage defaults and higher losses to holders of such securities. Large, nationwide drops in home prices were uncommon in US historical data, but the run-up in home prices was unique in terms of magnitude and extent. Between the first quarter of 2007 and the second quarter of 2011, property values declined by more than a fifth on average across the country. As financial market participants faced significant uncertainty regarding the frequency of losses on mortgage-related assets, this drop in home values contributed to the financial crisis of 2007-08. Money market investors became concerned of subprime mortgage exposures in August 2007, putting pressure on certain financial markets, particularly the market for asset-backed commercial paper (Covitz, Liang, and Suarez 2009). The investment bank Bear Stearns was bought by JPMorgan Chase with the help of the Federal Reserve in the spring of 2008. Lehman Brothers declared bankruptcy in September, and the Federal Reserve aided AIG, a significant insurance and financial services firm, the next day. The Federal Reserve, the Treasury, and the Federal Deposit Insurance Corporation were all approached by Citigroup and Bank of America for assistance.
The Federal Reserve’s assistance to specific financial firms was hardly the only instance of central bank credit expansion in reaction to the crisis. The Federal Reserve also launched a slew of new lending programs to help a variety of financial institutions and markets. A credit facility for “primary dealers,” the broker-dealers that act as counterparties to the Fed’s open market operations, as well as lending programs for money market mutual funds and the commercial paper market, were among them. The Term Asset-Backed Securities Loan Facility (TALF), which was launched in collaboration with the US Department of Treasury, was aimed to relieve credit conditions for families and enterprises by offering credit to US holders of high-quality asset-backed securities.
To avoid an increase in bank reserves that would drive the federal funds rate below its objective as banks attempted to lend out their excess reserves, the Federal Reserve initially funded the expansion of Federal Reserve credit by selling Treasury securities. The Federal Reserve, on the other hand, got the right to pay banks interest on their excess reserves in October 2008. This encouraged banks to keep their reserves rather than lending them out, reducing the need for the Federal Reserve to offset its increased lending with asset reductions.2
Effects on the Broader Economy
The housing industry was at the forefront of not only the financial crisis, but also the broader economic downturn. Residential construction jobs peaked in 2006, as did residential investment. The total economy peaked in December 2007, the start of the recession, according to the National Bureau of Economic Research. The drop in general economic activity was slow at first, but it accelerated in the fall of 2008 when financial market stress reached a peak. The US GDP plummeted by 4.3 percent from peak to trough, making this the greatest recession since World War II. It was also the most time-consuming, spanning eighteen months. From less than 5% to 10%, the jobless rate has more than doubled.
The FOMC cut its federal funds rate objective from 4.5 percent at the end of 2007 to 2 percent at the start of September 2008 in response to worsening economic conditions. The FOMC hastened its interest rate decreases as the financial crisis and economic contraction worsened in the fall of 2008, bringing the rate to its effective floor a target range of 0 to 25 basis points by the end of the year. The Federal Reserve also launched the first of several large-scale asset purchase (LSAP) programs in November 2008, purchasing mortgage-backed assets and longer-term Treasury securities. These purchases were made with the goal of lowering long-term interest rates and improving financial conditions in general, hence boosting economic activity (Bernanke 2012).
Although the recession ended in June 2009, the economy remained poor. Economic growth was relatively mild in the first four years of the recovery, averaging around 2%, and unemployment, particularly long-term unemployment, remained at historically high levels. In the face of this sustained weakness, the Federal Reserve kept the federal funds rate goal at an unusually low level and looked for new measures to provide extra monetary accommodation. Additional LSAP programs, often known as quantitative easing, or QE, were among them. In its public pronouncements, the FOMC began conveying its goals for future policy settings more fully, including the situations in which very low interest rates were likely to be appropriate. For example, the committee stated in December 2012 that exceptionally low interest rates would likely remain appropriate at least as long as the unemployment rate remained above a threshold of 6.5 percent and inflation remained no more than a half percentage point above the committee’s longer-run goal of 2 percent. This “forward guidance” technique was meant to persuade the public that interest rates would remain low at least until specific economic conditions were met, exerting downward pressure on longer-term rates.
Effects on Financial Regulation
When the financial market upheaval calmed, the focus naturally shifted to financial sector changes, including supervision and regulation, in order to avoid such events in the future. To lessen the risk of financial difficulty, a number of solutions have been proposed or implemented. The amount of needed capital for traditional banks has increased significantly, with bigger increases for so-called “systemically essential” institutions (Bank for International Settlements 2011a;2011b). For the first time, liquidity criteria will legally limit the amount of maturity transformation that banks can perform (Bank for International Settlements 2013). As conditions worsen, regular stress testing will help both banks and regulators recognize risks and will require banks to spend earnings to create capital rather than pay dividends (Board of Governors 2011).
New provisions for the treatment of large financial institutions were included in the Dodd-Frank Act of 2010. The Financial Stability Oversight Council, for example, has the authority to classify unconventional credit intermediaries as “Systemically Important Financial Institutions” (SIFIs), putting them under Federal Reserve supervision. The act also established the Orderly Liquidation Authority (OLA), which authorizes the Federal Deposit Insurance Corporation to wind down specific institutions if their failure would pose a significant risk to the financial system. Another section of the legislation mandates that large financial institutions develop “living wills,” which are detailed plans outlining how the institution could be resolved under US bankruptcy law without endangering the financial system or requiring government assistance.
The financial crisis of 2008 and the accompanying recession, like the Great Depression of the 1930s and the Great Inflation of the 1970s, are important areas of research for economists and policymakers. While it may be years before the causes and ramifications of these events are fully known, the attempt to unravel them provides a valuable opportunity for the Federal Reserve and other agencies to acquire lessons that can be used to shape future policy.