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.