3Q 2009 Investment Perspectives

October 15, 2009 | Christopher Caparelli, CFA, Managing Partner, Mike Spychalski, CAIA, Vice President

Update on Government Stimulus Programs
With the United States’ economy plunging into the most severe downturn since the Great Depression, policymakers have been faced with the unenviable task of reviving an $11 trillion economy saddled with debt and struggling to maintain its lead in the global marketplace. As mounting losses at the nation’s “too big to fail” financial institutions were agitating the global markets, the government was being urged to intervene in order to avoid a systemic collapse. After the traditional tools used to rouse the economy during cyclical downturns provided little relief, it quickly became clear that this unprecedented crisis would require an unprecedented response.  Displaying little faith in free market capitalism’s “invisible hand,” the nation’s financial leaders responded with pointed economic stimulus designed to match the crisis in both size and scope. In response to the crisis, Congress, together with the Department of the Treasury, the Federal Reserve, and numerous other government agencies apportioned over $2 trillion in bank bailouts, tax cuts, and spending programs. This represented the largest amount of government spending America had ever seen. Considered strong and swift by some, and reckless by others, the stimulus was designed for widespread relief and met with an even wider range of public opinion. Now, with the worst of the crisis having passed and a less than certain future ahead, a review of some of the marquee financial programs of the largest government stimulus effort in the country’s history is in order.

Credit Markets Update
The economic crisis that we are currently in the midst of has commonly been referred to as a credit crisis or credit crunch. This is largely due to the fact that much of the rapid deterioration in economic conditions over the past two years was either directly caused by or greatly exacerbated by problems in the credit markets. This crisis, which began as a problem with subprime mortgages in early 2007, gradually spread throughout the credit markets, and eventually brought the global economy to its knees. The consensus among policymakers and economists alike is that the global economy will not be able to recover without a properly functioning credit market, and toward that end, the U.S. government has spent a significant amount of resources toward repairing the damaged credit markets of 2008.

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