Transcript The US Economic Crisis: Causes and Possible Solutions
The US Economic Crisis: Causes and Possible Solutions Fred Moseley Economics Department Mount Holyoke College A HISTORY OF HOME VALUES Shiller Lawler Trendlines Mortgage Delinquencies as Percentage of Loans Option ARM Delinquencies Total Bank Losses Losses & Writedowns vs. Capital Raised EFFECT OF BANK LOSSES ON THE REAL ECONOMY FIGURE 2: RATIO OF HOUSEHOLD DEBT TO DISPOSABLE INCOME, 1950-2007 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 Household Debt (percentage of GDP) Percentage point change Nonfinancial Business Debt (percentage of GDP) Financial Sector Debt (percentage of GDP) Comparisons to 1929 private sector debt as % GDP 1929: 2008: 150% 290% financial sector debt as % GDP household debt as % income 10% 120% 30% 140% Three ways to reduce the debt to income ratio D/GDP = D/(PQ) 1. ↑ growth (↑ Q) 2. ↑ inflation (↑ P) 3. ↓ debt (↓ D) Bank Bailouts 1. Purchases of toxic assets at inflated prices. TARP I PPIP 2. Inject capital into banks - to absorb future losses. TARP I I 3. Insure the toxic assets at inflated prices and very low premiums. Citi and Bank of America PPIP Total cost of bailouts to taxpayers: $1 trillion or more $3,300 for every person in the US $13,200 for a family of four Grossly inequitable and therefore unacceptable Justification for bailouts: If no bailouts, then economic collapse. Largest banks are "too big to fail". Unavoidable dilemma Economic Sophie’s Choice “Too Big To Fail” Requires Nationalization Once banks have become “too big to fail”, meaning that everyone recognizes that the government will always bail out these large banks in order to avoid a systematic collapse, then it follows as a matter of straightforward logic and economic justice that these banks have to be nationalized.