Recession, monetary policy affect students and their families
What does the current financial crisis mean to the average household or the average high school or middle school student? And how is the Fed's monetary policy working to stabilize the economy?
The current recession is already being called "the Great Recession" because it appears to be longer and, by many measures, deeper than any economic downturn since the Great Depression in the 1930s. At 21 months and counting, the current slump is already older than the 16-month slide in 1973–75 and the 11-month recession in 1948–49.
Since the recession began in December 2007, the total number of nonfarm jobs in the United States fell from 138.1 million to 131.2 million by August 2009—a net loss of 6.9 million jobs. That's a 5 percent decline, which is worse than the 3.1 percent drop during the severe 1981–82 recession but not quite as bad as the 5.2 percent decline in 1948–49.
Hitting close to home
For many students, these numbers mean that there is a good chance that someone in their own household or someone they know has been laid off and may be suffering financial difficulties. Summer jobs were hard to find this year; some students have been forced to change their plans for college, and some families have even lost their homes.
Causes and cures
Policymakers at the Federal Reserve, the U.S. Treasury Department, Congress, and the Federal Deposit Insurance Corp. (FDIC) have responded with a range of measures aimed at stabilizing credit markets, repairing the financial system, supporting the housing market, and rebuilding confidence in the economy. The Fed has focused its efforts on providing liquidity to credit markets, which nearly came to a standstill in September 2008 after several large firms came under heavy pressure from creditors, counterparties, and customers. The Fed used one of its traditional monetary policy tools, open market operations, to lower the federal funds rate target from 5.25 percent in the summer of 2007 all the way to 0 percent–0.25 percent in December 2008.
The Fed also used its existing powers to temporarily extend the terms (duration) and kinds of collateral for its loans to banks and to nonbank markets. It has supported the mortgage markets by purchasing mortgage-backed securities from agencies like Fannie Mae and Freddie Mac. And it has worked to keep longer-term interest rates down by purchasing longer-term Treasury securities.
Signs of recovery
Still, it will take time for the banking system and the labor markets to recover. In fact, most economists expect a restructuring of the labor market: Some traditional jobs may be in less demand, but new jobs in new areas may open up, many of which will require retraining and higher levels of education. Also, economists anticipate that households will need to rebuild their savings, and for many that will mean curtailing spending, especially credit-driven spending. Students who were used to spending freely may have to readjust their habits and begin preparing for their financial futures. Education will be more important than ever. (See the Katrina's Classroom extension activity on financing options for higher education.)
By Gary Tapp, economic education director, Public Affairs