Learning from History in Economic Crisis

1. Learning from History in Economic Crisis

2. Buying a Home – How it used to be. . . • Go to local bank for loan (mortgage) • Bank reviews income, other debt, collateral, and the home to purchase • Bank determines likelihood of borrower repaying debt; loan made only to good credit risk • Over 30 years, borrower pays off loan with interest to local bank

3. Buying a Home – What it has become. . . • 1990s – 2006 housing prices rose continually (good investment) • Mortgages no longer by local banks; $$ loaned and mortgage sold as a mortgage backed security • Many loans put together and sold to investors (profit from interest) • Because lender was not holding loan, would make loans to poor credit risks (subprime loans) just to be able to sell to investors

4. Housing Crisis • Poor credit risks cannot pay off loans (default) & banks foreclose • With large number of bad loans, many foreclosures • Banks try to sell foreclosed houses, but fewer possible buyers • Supply of available homes increase, value of properties fall • Banks, investors in properties, those seeking to sell homes to move, etc. lose money

5. Lesson Learned from Housing Crisis • Banks must make loans to those who can afford them & not to poor credit risks • Consumers must only seek loans that they can pay off • Buying properties to invest with “guarantee” of increased price (flipping houses, etc.) is not good practice • When prices rise significantly, prices may come down significantly (invest wisely)

6. Housing Crisis Leading to a Credit Crisis • Modern economies rely upon credit to run • Farmers (borrow for seed/pay off after harvest) • Businesses (raw materials/pay off after sale) • Consumers (autos, college, homes . . . ) • Local & state governments (build schools, maintain infrastructure . . .) • When banks begin to lose from bad loans, they become very conservative (afraid to loan & tight with money)

7. Credit Crisis Leads to Recession • Without banks loaning, economy freezes • Consumers not spending • Businesses not producing • Local governments hold off on projects • All leads to lower production, layoff of workers, lower incomes, less spending, lower production . . . • November 2008 (lost 533,000 jobs, 6.7% unemployment, consumer spending down • So, now what?????

8. Current Attempts at Economic Recovery • Stimulus checks issued by government during the summer of 2008 (increase consumption) • $600 to single members; $1200 to families • $700 Billion Bank Bailout Program • Banks and mortgage companies loaned the money to relieve credit crisis (government regulations & to ensure change) • Automotive Bailout Program??? • GM, Ford, Chrysler requesting loans to keep from failure (government regulations & controls) • “Cash for Clunkers” program

9. President Barack Obama’s Economic Recovery Plan • Create jobs for working & middle class • Infrastructure projects (highways, bridges, water & sewer systems, etc) • Upgrade energy efficiency & technology of federal buildings, schools, etc. • Renew & improve information superhighway making available to more people (US is currently ranked 15) • Modernize hospitals (technology, electronic medical records, etc.)

10. American Recovery and Reinvestment Act – 2009 (“Stimulus Package”) • $787 Billion • Create millions of jobs by upgrading U.S. energy, technology, transportation, education, etc. • Cut taxes • Provide unemployment and other benefits to struggling families • Includes many “Green” projects

11. Photo Credits • FDR in car - weblogs.amny.com • Obama Time cover – www.time.com