Publication date: 5 January 2009 | Covering: October – December 2008
Quarterly Briefing
- TARP enacted: October 3 Troubled Asset Relief Programme signed; US$700bn; bank recapitalisation; market panic partially arrested
- Fed to zero: December 16 FOMC cuts federal funds rate to 0–0.25% historic low; effectively zero; signals “for some time”
- QE1 launched: December 16 Fed announces US$600bn MBS and agency purchases; unconventional monetary policy begins; mortgage rates targeted
- Obama elected: November 4; wins 365 Electoral College votes; Democrats control both chambers; stimulus package anticipated
- GM/Chrysler bailout: December; US government emergency loans of US$17.4bn; bankruptcy avoided temporarily; industry in crisis
- US Q4 GDP: Contracts 6.8% annualised; worst quarter since 1982; recession confirmed; jobs collapsing 700,000/month
- Citigroup rescued: November 23 government injects US$20bn; guarantees US$306bn assets; too-big-to-fail in practice
- Jamaica: External shock intensifies; BOJ defending dollar; IMF discussions beginning in earnest
TARP; Fed Cuts to Zero; QE1 Launches
The fourth quarter of 2008 was one of the most consequential periods in modern economic history. Following the catastrophic failure of Lehman Brothers on 15 September — which had triggered a global seizure of credit markets, a collapse of interbank lending, and a panic run on money market funds — policymakers deployed tools at a scale and speed never seen in peacetime. On 3 October, President Bush signed the Emergency Economic Stabilization Act, creating the Troubled Asset Relief Programme with authority to deploy up to US$700 billion. Initial plans to purchase toxic mortgage assets from banks were quickly abandoned in favour of direct capital injections: US$250 billion was deployed to recapitalise major banks, including JPMorgan, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley, in the first weeks of October. On 16 December, the Federal Open Market Committee cut the federal funds rate to the historic range of 0–0.25% — effectively zero — and simultaneously announced the launch of QE1: purchases of up to US$600 billion of mortgage-backed securities and agency debt, explicitly targeting lower long-term mortgage rates to stabilise the housing market. The Fed’s balance sheet, which stood at approximately US$900 billion before the crisis, would expand to over US$2 trillion by early 2009.
Obama Elected; Auto Industry Crisis
On 4 November, Barack Obama defeated John McCain in the US presidential election, winning 365 Electoral College votes to McCain’s 173. Democrats also retained and expanded their majorities in both the House and Senate, providing the incoming administration with the congressional support to pass major legislation. Markets, which had already priced in significant uncertainty, reacted with initial volatility but ultimately focused on the likelihood of a large fiscal stimulus package — which would materialise as the ARRA in February 2009. The automotive industry’s crisis reached its nadir in December: General Motors and Chrysler, unable to access credit markets and losing cash at extraordinary rates, sought emergency government support. The Bush administration, having failed to obtain congressional authorisation for auto bailout funds, provided US$17.4 billion in emergency loans from TARP. Both companies would ultimately enter Chapter 11 bankruptcy in 2009, with restructuring that preserved the bulk of their operations under government ownership.
Jamaica: External Shock; Mortgage Conditions
Jamaica entered 2009 in a deeply challenging external environment. The global recession was reducing tourism demand at precisely the time when Jamaica’s fiscal position was already under strain from years of high debt service costs. Remittances from the Jamaican diaspora — equivalent to approximately 15% of GDP — were declining as diaspora workers in the United States and United Kingdom faced recession-driven unemployment and income pressure. The Bank of Jamaica was managing monetary policy to maintain exchange rate stability and contain inflation, which meant domestic interest rates remained high and tightly credit conditions. The IMF, recognising the severity of the external shock to small Caribbean economies, was in early discussions with the Jamaican government about a possible support programme. In the mortgage market, the NHT’s subsidised tiers — offering 0%, 2%, and 4% rates on loans to J$6.5 million individually or J$13 million jointly — were more important than ever as commercial lending rates remained elevated and banks tightened credit standards.
Looking Ahead to Q1 2009
As 2009 opens, the global economy faces the deepest recession in eight decades. The extraordinary monetary and fiscal policy response — zero interest rates, QE1, TARP bank recapitalisation, the incoming ARRA stimulus — represents an unprecedented peacetime intervention. Whether it will be sufficient to prevent a Depression-scale collapse, and how quickly recovery can begin, is the defining question of the year. For Jamaica, navigating the external shock while maintaining macroeconomic stability will require IMF support and potentially domestic debt restructuring.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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