Fed Explained by Bernanke (Review Questions) - Part 2
LECTURE TWO: THE FEDERAL RESERVE AFTER WWII
How did the Fed cooperate with the U.S. Treasury during and immediately after World War II??
During and immediately after World War II, the Federal Reserve and the U.S. Treasury cooperated closely to finance the war effort and to manage the postwar economic transition. The Fed implemented policies to keep interest rates low and to purchase government bonds to finance the war effort. It also worked closely with the Treasury to manage the federal debt and to ensure that there was sufficient liquidity in the financial system to support the war effort.
After the war, the Fed and Treasury continued to work together to manage the transition to a peacetime economy. The Fed kept interest rates low and purchased government bonds to support the postwar economic recovery. In addition, the Fed and Treasury collaborated to establish a system of international monetary management, including the Bretton Woods system, which helped to stabilize international currencies and facilitate trade.
What were the economic consequences of keeping interest rates low?
Keeping interest rates low can have both positive and negative economic consequences, depending on the context and the specific policies implemented by the Fed. In general, low interest rates can stimulate economic growth by making it cheaper to borrow money for investment and consumption. Lower interest rates can also stimulate the housing market and reduce the cost of servicing existing debt.
However, there are also potential downsides to keeping interest rates too low for too long. One risk is that low interest rates can lead to inflation by increasing demand for goods and services without a corresponding increase in supply. Another risk is that low interest rates can encourage excessive borrowing and risk-taking, which can lead to financial instability and potential crises.
It's worth noting that the Fed's decisions about interest rates are influenced by a wide range of factors, including economic growth, inflation, and financial stability. The Fed aims to set interest rates at a level that promotes sustainable economic growth and stability over the long term, while also taking into account the potential risks associated with low interest rates.
Describe the Fed-Treasury Accord and evaluate whether it was effective in improving economic conditions. Discuss the implications of the agreement.
The Fed-Treasury Accord was an agreement reached between the Federal Reserve and the U.S. Treasury in 1951. The agreement effectively ended the practice of the Treasury directing the Fed to maintain low interest rates to finance the government's debt, which had been in place since World War II. The Accord established the principle of central bank independence, which allows the Fed to make monetary policy decisions independently of political pressures.
The Fed-Treasury Accord was effective in improving economic conditions by restoring the Fed's independence and credibility. It allowed the Fed to focus on its mandate of price stability and full employment, without being subject to political interference. The Accord also helped to establish the Fed's reputation as a credible and independent central bank, which has contributed to its effectiveness in managing the economy over the years.
The implications of the Accord are significant. It established the principle of central bank independence, which has become a widely accepted practice among central banks around the world. It also helped to establish the Fed's credibility as a central bank, which has allowed it to maintain public trust and confidence in its ability to manage the economy. Finally, it set a precedent for future Fed-Treasury interactions, which have generally been characterized by cooperation and mutual respect.
Identify the various ways in which the Federal Reserve is insulated from political influence.
The Federal Reserve is insulated from political influence in several ways. First, the Fed is structured as an independent agency within the federal government, which means that it is not subject to direct political control. Second, the Fed is governed by a Board of Governors, whose members are appointed by the President and confirmed by the Senate, but whose terms are staggered and whose independence is protected by law. Third, the Federal Open Market Committee (FOMC), which is responsible for setting monetary policy, is composed of the Board of Governors and the presidents of the regional Federal Reserve Banks, who are chosen by the regional bank's board of directors, which is also independent. Fourth, the Fed is subject to oversight by Congress and by independent auditors, which helps to ensure transparency and accountability.
Compare the costs and benefits to society of central bank independence.
The costs and benefits of central bank independence are a subject of ongoing debate among economists and policymakers. On the one hand, central bank independence can help to insulate monetary policy from short-term political pressures, which can lead to more effective and stable macroeconomic outcomes over the long term. Independent central banks are also less likely to be influenced by special interests or political cycles, which can help to maintain public trust and confidence in the monetary system.
On the other hand, there are also potential costs associated with central bank independence. Independent central banks may be less accountable to the public and to elected officials, which can create a democratic deficit. In addition, independent central banks may be less responsive to changing economic conditions or to the needs of particular groups within society, which can lead to suboptimal macroeconomic outcomes.
Overall, the benefits of central bank independence are generally seen to outweigh the costs. However, there is ongoing debate about the appropriate balance between independence and accountability, and about the extent to which central banks should be insulated from political influence.
What was a "lean against the wind" policy? Was it effective in the 1950s and early 1960s??
A "lean against the wind" policy refers to a monetary policy approach where the central bank raises interest rates in order to reduce inflationary pressures, even if doing so may also slow down economic growth. This approach was first adopted by the Federal Reserve in the 1950s and early 1960s as a way to combat inflationary pressures that arose from the post-war economic boom.
The effectiveness of the "lean against the wind" policy in the 1950s and early 1960s is a subject of debate among economists. While some argue that the policy was successful in reducing inflationary pressures and maintaining stable economic growth, others point to the economic downturn that occurred in the late 1950s as evidence that the policy was not always effective.
Describe monetary policy in the mid-1960s and into the 1970s. What was the rationale of the policy?
Monetary policy in the mid-1960s and into the 1970s was characterized by a focus on achieving both low unemployment and low inflation, a goal that became known as the "Phillips curve" trade-off. The rationale for this policy was based on the belief that there was an inverse relationship between unemployment and inflation, such that reducing unemployment would lead to higher inflation, and vice versa. Therefore, policymakers believed that they could achieve both low unemployment and low inflation by targeting a specific level of inflation, and adjusting monetary policy as needed to keep inflation under control.
To achieve this goal, the Fed pursued an expansionary monetary policy, characterized by low interest rates and easy credit, throughout much of the 1960s and into the early 1970s. This policy helped to stimulate economic growth and reduce unemployment but also contributed to rising inflationary pressures.
Was the trade-off between inflation and unemployment relevant to the choice of policy? Why or why not?
The trade-off between inflation and unemployment was relevant to the choice of policy in the mid-1960s and into the 1970s, as policymakers believed that they could achieve both low unemployment and low inflation by targeting a specific level of inflation. However, this trade-off was ultimately proven to be less reliable than previously thought, as inflation continued to rise even as unemployment remained relatively low. This phenomenon, known as "stagflation," challenged the assumptions underlying the Phillips curve trade-off, and led to a reassessment of monetary policy in the late 1970s and early 1980s.
Evaluate the appropriateness of policy in the mid-1960s and into the 1970s and explain how policy impacted economic conditions.
The policy pursued in the mid-1960s and into the 1970s, which aimed to achieve both low unemployment and low inflation, ultimately proved to be inappropriate and ineffective. While the policy initially helped to stimulate economic growth and reduce unemployment, it also contributed to rising inflationary pressures. As inflation continued to rise even as unemployment remained relatively low, it became clear that the trade-off between inflation and unemployment was less reliable than previously thought, and that a new approach to monetary policy was needed.
Describe exacerbating factors other than monetary policy that may have contributed to the high rates of inflation and numerous recessions from the mid-1960s through the 1970s.
There were several other factors beyond monetary policy that contributed to the high rates of inflation and numerous recessions from the mid-1960s through the 1970s. These factors included:
Overall, the high rates of inflation and numerous recessions from the mid-1960s through the 1970s were the result of a complex set of factors, including both monetary and non-monetary factors. While monetary policy played a role, it was not the sole cause of these economic conditions.
Why was the idea of a permanent tradeoff between unemployment and inflation so important in contributing to inflationary conditions? How did that lead to a concept of "fine-tuning"?
The idea of a permanent tradeoff between unemployment and inflation was important in contributing to inflationary conditions because it led policymakers to believe that they could target a specific level of inflation and achieve both low unemployment and low inflation simultaneously. This belief led to the concept of "fine-tuning," which refers to the idea that policymakers could adjust monetary policy in small increments in order to achieve specific economic goals. The problem with this approach is that it assumed that there was a stable relationship between inflation and unemployment and that this relationship could be manipulated by monetary policy. In reality, this relationship is not stable and attempts to fine-tune the economy can lead to unintended consequences, such as rising inflation.
Why were the estimates of full-employment levels of unemployment so important?
Estimates of full-employment levels of unemployment were important because they provided policymakers with a target for unemployment that was consistent with stable inflation. The idea was that if the unemployment rate fell below the full-employment level, inflationary pressures would begin to build, and if the unemployment rate rose above the full-employment level, deflationary pressures would begin to build. However, accurately estimating the full-employment level of unemployment is difficult, and changes in the labor market and other factors can make these estimates less reliable over time.
Explain the roles and importance of data collection and forecasting in monetary policy. Why is accuracy in forecasting so important?
Data collection and forecasting are essential components of monetary policy. The Federal Reserve collects a vast array of economic data, including measures of inflation, employment, output, and financial conditions, in order to track economic conditions and make informed decisions about monetary policy. Forecasting is also important because it allows policymakers to anticipate how economic conditions are likely to change in the future and to adjust policy accordingly. Accuracy in forecasting is important because it allows policymakers to make informed decisions about monetary policy, and to avoid unintended consequences that can result from misguided policy decisions. However, forecasting is inherently uncertain, and policymakers must be prepared to adjust policy in response to unexpected changes in economic conditions.
What does "disinflation" mean? Is it desirable? Why or why not??
"Disinflation" refers to a slowdown in the rate of inflation, rather than an actual decrease in the price level. Disinflation can be desirable if it occurs in the context of an economy with low inflation, as it can help to prevent inflationary pressures from building over time. However, if disinflation occurs in the context of an economy with high inflation, it can be painful, as it often involves a period of higher unemployment and slower economic growth.
What was the role of monetary policy in contributing to disinflation in the late 1970s and early 1980s?
The role of monetary policy in contributing to disinflation in the late 1970s and early 1980s was significant. The Federal Reserve, under the leadership of Chairman Paul Volcker, adopted a highly restrictive monetary policy in order to combat inflation. This policy involved raising interest rates to very high levels, which had the effect of slowing economic growth and increasing unemployment. The policy was successful in reducing inflation, but at a significant cost in terms of economic pain.
Describe the conditions leading up to the 1981–82 recession.
The conditions leading up to the 1981-82 recession included high inflation, high unemployment, and slow economic growth. The economy had been suffering from stagflation, a combination of stagnant growth and high inflation. In addition, there were imbalances in the economy, such as high levels of debt and a large trade deficit.
Summarize monetary policy before and during the recession. What were Chairman Volker's goals?
Before and during the recession, Chairman Volcker's goals were to reduce inflation and restore stability to the economy. He believed that high inflation was a major problem and that it needed to be brought under control. To achieve this goal, he raised interest rates to very high levels, which had the effect of slowing economic growth and increasing unemployment.
Why was there significant political pressure against the policy?
There was significant political pressure against the policy because of the pain it caused in terms of higher unemployment and slower economic growth. Many people criticized the Federal Reserve for causing the recession and argued that it was unnecessary.
How did this experience affect monetary policy after the recession and even today? Will the U.S. ever have a similar phenomenon to the Great Inflation? Why or why not?
This experience affected monetary policy after the recession and even today. The Federal Reserve became more committed to controlling inflation and focused more on maintaining price stability. In addition, the experience led to greater independence for the Federal Reserve, as policymakers recognized the dangers of political pressure on monetary policy. It is possible that the U.S. could experience a similar phenomenon to the Great Inflation in the future, but it is unlikely in the near term, as inflation has been relatively low and stable in recent years. However, economic conditions can change quickly, and policymakers must remain vigilant in their efforts to maintain price stability.
Define the term "Great Moderation." Give examples of its characteristics.
What happened to the rate of growth of real GDP? What happened to inflation rates?
During the Great Moderation, the rate of growth of real GDP was relatively stable and steady, with fewer fluctuations than in previous decades. Inflation rates were also low and stable during this period, with average inflation rates of around 2% per year.
What happened to the length and frequency of recessionary periods?
The Great Moderation was also characterized by longer and less frequent recessionary periods. Prior to the Great Moderation, recessions were typically deeper and more frequent, with shorter recovery periods. During the Great Moderation, however, recessions tended to be shallower and less frequent, with longer recovery periods. For example, the 1990-91 and 2001 recessions were relatively mild compared to earlier recessions, and the recovery periods were longer.
What was the role of monetary policy during the Great Moderation?
The role of monetary policy during the Great Moderation was to maintain macroeconomic stability, including low and stable inflation, low and stable interest rates, and low and stable unemployment. The Federal Reserve used a variety of tools to achieve this, including adjusting the federal funds rate, open market operations, and other measures.
How could changes in business practices, such as improved inventory management, make a difference in recessionary pressures and inflation?
Changes in business practices, such as improved inventory management, could make a difference in recessionary pressures and inflation by reducing the volatility of output and prices. By better managing inventories, businesses could avoid overproduction and prevent the buildup of excess inventory during periods of weak demand, which could lead to sharp price cuts and lower profits.
Were there financial crises during the Great Moderation? What were the effects?
Yes, there were financial crises during the Great Moderation. The most notable examples include the savings and loan crisis of the 1980s and early 1990s, the collapse of Long-Term Capital Management in 1998, and the dot-com bubble of the late 1990s.
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What can we learn from the Great Moderation? How does that period affect monetary and fiscal policy today?
From the Great Moderation, we can learn that maintaining macroeconomic stability is critical for promoting long-term growth and stability in the economy. The period has also highlighted the importance of sound monetary policy, fiscal policy, and regulatory frameworks in promoting economic stability. Today, policymakers continue to draw lessons from the Great Moderation in their efforts to promote stable economic growth.
Compare monetary policy since the Volcker era to monetary policy in the 1960s and 1970s. What are the key differences? Which was more effective, and why?
The key differences between monetary policy since the Volcker era and monetary policy in the 1960s and 1970s include a greater focus on inflation targeting, greater transparency and communication from the Federal Reserve, and a more rules-based approach to monetary policy. The policy since the Volcker era has generally been more effective at achieving macroeconomic stability, particularly in terms of controlling inflation.
Explain why financial crises became less of a concern during the Great Moderation. Did they disappear?
Financial crises did not disappear during the Great Moderation, but they were less frequent and less severe than in earlier periods. One possible explanation for this is that the period was characterized by relatively stable macroeconomic conditions, which may have reduced the likelihood of financial instability. Additionally, the period saw a number of structural changes in the financial sector, including increased regulation and the adoption of new technologies, which may have helped to reduce systemic risk.
How large was the increase in housing prices??
The increase in housing prices from the late 1990s to the mid-2000s was significant. According to the S&P/Case-Shiller national home price index, housing prices increased by about 85% between 1997 and 2006.
Describe what caused the rapid rise in housing prices.
The rapid rise in housing prices was caused by several factors. Low interest rates, easy access to credit, and a belief that housing prices would continue to rise all contributed to an increase in demand for housing. At the same time, the supply of housing was limited by zoning laws, environmental regulations, and other factors, leading to a shortage of available homes in some areas.
What is a bubble? Why are rising asset prices not necessarily a positive event for everyone?
A bubble is a situation where asset prices rise far beyond their fundamental value, driven by speculation and a belief that prices will continue to rise. Rising asset prices are not necessarily a positive event for everyone, as they can create significant risks for the financial system and the broader economy if they are not sustainable.
What are several possible causes of the bubble?
Several possible causes of the housing bubble include loose monetary policy, which kept interest rates low and encouraged borrowing; lax lending standards, which allowed borrowers to take on too much debt; a belief that housing prices would continue to rise indefinitely; and financial innovation, which led to the creation of new financial instruments that made it easier to invest in housing. Additionally, government policies aimed at increasing homeownership, such as tax incentives and subsidies, may have also contributed to the bubble.
Describe the characteristics of the decline in lending standards.
The decline in lending standards was characterized by lenders offering increasingly risky loans to borrowers with weaker credit histories and lower incomes. These loans often had features such as low initial teaser rates that reset to higher rates after a few years, adjustable interest rates, interest-only payments, and negative amortization. These features made the loans more affordable in the short term but riskier in the long term. Additionally, some lenders did not require borrowers to provide documentation of their income, assets, or employment history.
Explain why lending standards seemed to deteriorate. Give examples of changing incentives.
Lending standards seemed to deteriorate for several reasons. One factor was the increasing competition among lenders to originate more loans, driven by the demand for mortgage-backed securities from investors seeking higher yields. This competition led lenders to lower their standards in order to attract more borrowers. Additionally, government policies aimed at expanding homeownership, such as the Community Reinvestment Act and affordable housing goals for Fannie Mae and Freddie Mac, incentivized lenders to make loans to borrowers who previously would not have qualified for them. Finally, the compensation structure for mortgage brokers and loan officers often rewarded them for originating more loans rather than for ensuring that borrowers could afford them.
How could deterioration in lending standards be caused by a bubble and at the same time contribute to the housing bubble?
Deterioration in lending standards contributed to the housing bubble because it allowed more borrowers to obtain mortgages, which increased demand for housing and pushed up prices. At the same time, the bubble itself made lending standards deteriorate further, as lenders and investors became more confident in the value of housing collateral and therefore more willing to lend against it. This created a feedback loop where rising home prices led to more lending, which further pushed up prices, and so on. However, as the bubble began to deflate, many borrowers who had obtained mortgages with lax standards found themselves unable to make their payments, which contributed to the high rates of defaults and foreclosures that characterized the housing crisis.
List several causes of the bursting of the housing bubble. Explain how each could contribute to the decline in housing prices.
There were several causes of the bursting of the housing bubble, including:
What were the effects of the bursting housing-price bubble on the rest of the economy?
The bursting of the housing bubble had significant effects on the rest of the economy. The decline in housing prices led to a decline in household wealth, which in turn led to a decline in consumer spending. Many homeowners who had taken out home equity loans found themselves underwater, owing more on their mortgages than their homes were worth. This made it difficult for them to refinance or sell their homes, contributing to the wave of foreclosures. Banks and other financial institutions suffered significant losses due to defaults on mortgages and declines in the value of MBS. The resulting credit crunch made it difficult for businesses and households to borrow money, exacerbating the economic downturn. Finally, the decline in housing prices led to a decline in construction activity, which had ripple effects throughout the economy.
Define a financial crisis trigger and give examples.
A financial crisis trigger is an event or a set of circumstances that initiate a severe economic downturn or financial market disruption. Examples of financial crisis triggers include a sudden sharp increase in interest rates, a significant decline in asset prices, a liquidity shortage, or a sudden increase in uncertainty or risk aversion.
Define a financial crisis vulnerability and give examples.
A financial crisis vulnerability refers to the conditions or characteristics of an economy or financial system that make it susceptible to financial instability or crisis. Examples of financial crisis vulnerabilities include high levels of debt or leverage, inadequate regulation or supervision, the absence of adequate risk management practices, and structural imbalances in the economy or financial system.
How did the triggers and vulnerabilities lead to serious declines in economic conditions? Why was the collapse in housing prices so much more serious than the collapse of dot-com stock prices in 2001? How did the Great Moderation affect the vulnerability of the economy to a serious financial trigger?
The triggers and vulnerabilities that led to the 2008 financial crisis resulted in a severe decline in economic conditions. The collapse in housing prices was particularly significant because it had far-reaching effects throughout the economy. When housing prices fell, it led to a wave of defaults and foreclosures, which caused a sharp contraction in the housing market and reduced consumer confidence. This decline in confidence led to a contraction in consumer spending, which in turn led to job losses, lower incomes, and a decline in economic activity.
The bursting of the dot-com bubble in 2001 was not as severe as the housing market collapse because it was confined to a relatively small segment of the economy. The impact of the dot-com bust was primarily limited to the technology sector and did not have widespread effects on the broader economy.
The Great Moderation may have contributed to the vulnerability of the economy to a serious financial trigger by fostering a sense of complacency about the risks of financial instability. During the Great Moderation, the economy experienced a long period of stable economic growth and low inflation, which may have led to a sense of overconfidence about the resilience of the economy and the financial system. This overconfidence may have contributed to the relaxation of regulatory standards and the growth of financial innovation that led to the buildup of risk in the financial system.
What were the private-sector vulnerabilities that amplified the effects of the triggers?
Private-sector vulnerabilities refer to the weaknesses within the financial system that amplified the effects of the triggers and made the financial crisis worse. Some of the private-sector vulnerabilities that were present during the financial crisis include increased leverage, failure to monitor risk adequately, increased short-term funding, and new exotic financial instruments.
Explain how increased leverage, financial institutions’ failure to monitor their own risk adequately, increased short-term funding, and new exotic financial instruments amplified the effects of the triggers.
Increased leverage: Prior to the crisis, financial institutions were highly leveraged, which means they had high levels of debt relative to their equity. This made them vulnerable to losses, as even small declines in asset values could wipe out a significant portion of their capital.
Failure to monitor risk adequately: Financial institutions failed to adequately monitor and manage their own risk, as evidenced by their heavy exposure to risky mortgage-backed securities and other complex financial instruments. This lack of risk management left many financial institutions vulnerable to the sharp declines in asset values that occurred during the crisis.
Increased short-term funding: Financial institutions relied heavily on short-term funding to support their operations, such as borrowing through the overnight interbank lending market. This reliance on short-term funding left them vulnerable to runs when lenders became concerned about their solvency.
New exotic financial instruments: The development of new financial instruments, such as collateralized debt obligations (CDOs) and credit default swaps (CDSs), amplified the effects of the triggers by spreading the risk of subprime mortgages and other loans across the financial system. These instruments were complex and opaque, making it difficult to understand their risks and vulnerabilities. When the housing bubble burst and defaults on subprime mortgages increased, these instruments magnified the losses and spread the contagion throughout the financial system.
What were the public-sector vulnerabilities that amplified the effects of the triggers?
Public-sector vulnerabilities that amplified the effects of the triggers include:
What were the gaps in the regulatory structure? How did those gaps lead to a worsening of the financial crisis?
Increased leverage amplified the effects of the triggers because it meant that small declines in asset values could wipe out the capital of financial institutions, leading to a domino effect as other institutions who held those assets were also affected. Financial institutions' failure to monitor their own risk adequately meant that they did not fully understand the risks they were taking on and how those risks could affect them in a crisis. Increased short-term funding meant that financial institutions were highly vulnerable to runs when confidence in the markets was low. Exotic financial instruments such as credit default swaps amplified the effects of the triggers by spreading the risk of subprime mortgages throughout the financial system in complex and opaque ways, making it difficult for financial institutions to understand their true level of risk exposure.
What additional failures by regulatory agencies took place during the financial crisis? Explain how each contributed to a worsening of the crisis.
Additional failures by regulatory agencies during the financial crisis included:
Each of these failures contributed to a worsening of the crisis by allowing financial institutions to take on more risk than they could handle, and by creating an environment of uncertainty and lack of trust in the markets.
What are systemic problems?
Systemic problems are problems that affect the entire financial system, rather than just individual banks or groups of banks. Systemic problems can arise when the failure of one institution or market can lead to a cascade of failures throughout the financial system, as happened during the financial crisis.
How did systemic problems differ from problems with individual banks or small groups of banks? Why did they receive insufficient attention?
Systemic problems differ from problems with individual banks or small groups of banks in that they are much more difficult to address and require a systemic approach to resolve. However, systemic problems often receive insufficient attention because they are complex and difficult to understand, and because there is often resistance to taking actions that might be perceived as limiting the freedom of financial institutions.
Summarize the evidence about the role of monetary policy in contributing to the crisis.?Is that evidence convincing one way or another?
There is ongoing debate among economists about the role of monetary policy in contributing to the financial crisis. Some argue that the Federal Reserve kept interest rates too low for too long, fueling a housing bubble that eventually burst and triggered the crisis. Others argue that other factors, such as the growth of the shadow banking system and the proliferation of subprime mortgages, were more significant in causing the crisis.
Evidence on the role of monetary policy is mixed. On the one hand, some studies have found that the Federal Reserve's low interest rate policy in the early 2000s contributed to the housing bubble by making it easier for borrowers to obtain financing and encouraging excessive risk-taking by lenders. On the other hand, other studies have found that the Fed's interest rate policy was not a primary driver of the crisis, and that other factors such as regulatory failures, lax lending standards, and the growth of the shadow banking system were more significant.
Overall, the evidence is not conclusive, and the role of monetary policy in the financial crisis remains a subject of debate among economists.
Summarize the effects of the financial crisis on financial markets.
The financial crisis had significant effects on financial markets, including a sharp decline in stock prices, increased volatility, and frozen credit markets. Many financial institutions, including Lehman Brothers and Bear Stearns, failed, while others received government bailouts to prevent their collapse.
How did the collapse of the housing bubble affect housing construction? Explain why.
The collapse of the housing bubble led to a significant decline in housing construction, as demand for new homes fell sharply. Builders faced difficulties obtaining financing for new projects, and many projects were abandoned mid-construction due to lack of funds.
Describe how and why unemployment changed during the bubble and the subsequent financial crisis.
During the housing bubble, unemployment was relatively low, as the construction industry and related sectors boomed. However, as the bubble burst and the financial crisis hit, unemployment rose sharply, reaching a peak of 10% in October 2009. Many industries were affected by the recession, and businesses were forced to lay off workers in order to cut costs and stay afloat.