Transcript The limits of finance led capitalism in the US

The limits of finance-led
capitalism in the US
Trevor Evans
Berlin School of Economics and Law
Key features of US economy since 1980
• Strengthened position of financial sector
• Major corporations plan globally; outsourcing
• Redistribution of income to top
• Dependence on credit expansion (and asset bubbles)
sustained by expansionary monetary (& fiscal) policy
• Net inflows of financial capital
The rhythm of growth
US economic growth (change in real GDP over 4 quarters, %)
10
8
6
4
2
0
-2
-4
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
Corporate profitability &
investment
US corporate profitability (pre-tax profits as % GDP)
12
T o ta l
10
8
6
N o n fin a n cia l
4
2
F in a n cia l
0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Source: US Bureau of Economic Affairs, National Income and Product Accounts, Table 1.14
2002
2004
2006
2008
US private fixed investment (% GDP)
20
18
16
T o ta l
14
12
10
N o n re sid e n tia l
8
6
4
R e sid e n tia l
2
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
Source: Bureau of Economic Affairs, National Income and Product Accounts, Table 1.1.5
2002
2004
2006
2008
US non-financial corporations spending on fixed capital,
share buy-backs and dividends ($ billions)
1 ,2 0 0
F ixe d in ve stm e n t
N e t p u rch a se o f co rp o ra te e q u itie s
N e t d ivid e n d p a ym e n ts
1 ,0 0 0
800
600
400
200
0
2002
2003
2004
Source: Federal Reserve Board, Flow of Funds Accounts, Table F102
2005
2006
2007
Employment & income
Change in US employment over 12 months (millions)
5
4
3
2
1
0
-1
-2
-3
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: Bureau of Labour Statistics, Current Employment Statistics Survey, seasonally adjusted
2004
2006
2008
Changes in US real hourly wages at percentile points, all workers (1979=100)
130
$35.23
125
90th percentile
80th percentile
120
50th percentlie
$26.27
10th percentile
115
110
$15.11
105
100
$7.79
95
90
85
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
Source: The State of Working America, 2006/2007, Table 3.4 and 2008/2009, Table 3.5. Figures in dollars show income in 2007.
Real annual income growth by groups
Average annual increase
Average
income
Top
1%
Bottom
99%
Fraction of total growth
captured by top 1%
Clinton expansion
1993-2000
4.0%
10.3%
2.7%
45%
Bush expansion
2002-2006
2.9%
10.9%
1.0%
73%
Source: Thomas Pickerty & Emmanual Saez, ‘Income inequality in the US’, Updated data, July 2008
Share of top 1% in US national income, 1915-2006 (%)
25
23
E xclu d in g ca p ita l g a in s
In clu d in g ca p ita l g a in s
21
19
17
15
13
11
9
7
1915
1925
1935
1945
1955
1965
1975
1985
Source: Thomas Pickerty & Emmanuel Saez, ‘Income inequality in the US’ Updated data, July 2008
1995
2005
US indebtedness by sector (% GDP)
120
F inancial business
H ouseholds
100
N on-financial business
G ov ernm ent
80
60
40
20
1980
1982
1984
1986
1988
1990
1992
Source: Federal Reserve Board, Flow of Funds Accounts
1994
1996
1998
2000
2002
2004
2006
2008
The Crisis
Background to crisis
• Fed responded to stock market crash by cutting lead interest rate
from 6.5% (2001) to 1.0% (2003)
• Growth of lending
– Leveraged loans (Private equity funds)
– Mortgage lending
• Securitisation
• ‘Shadow banking system’
– Investment banks
– Hedge funds
– Structured investment vehicles
• House-price bubble
US house price inflation (%)
25
20
15
10
5
0
-5
-1 0
-1 5
-2 0
-2 5
1990
92
94
96
98
2000
02
Source: S&P / Case-Shiller House Price Index
04
06
08
The crisis
•
Fed raises interest rates 2004-2006; peak of housing-price boom
•
House-price bubble ends 2006; prices fall 2007
–
–
Mortgage backed securities loose value
Banks announce first losses from investments
•
9 August 2007: Breakdown in trust between banks; money market dries up
•
15 September 2008: Failure of Lehman Brothers sets of chain of financial failures and
credit crunch
•
Oct 2008: Leading capitalist states agree to inject capital in banking systems; partial
nationalisation of banks; chain of failures stemmed
•
US Recession
–
–
–
Official start December 2007
Major deepening 2008 Q4 and 2009 Q1
‘Green Shoots’
US inter-bank interest rates (%)
7
6
5
4
3
1 m o n th in te r-b a n k ra te
O ve rn ig h t in te r-b a n k ra te
2
F e d fu n d s ta rg e t ra te
1
0
Ja n 0 7
Apr
Ju l
O ct
Ja n 0 8
Apr
Ju l
O ct
Policy response
•
Monetary expansion
–
–
–
–
–
•
Massive provision of reserves
Lending to non-financial companies
Purchasing government bonds
… but banks not lending
How to deal with toxic / troubled / legacy assets?
Fiscal expansion
– Bush: $168 billion (2008)
– Obama: $787 billion (2009-10)
•
Regulatory reform
– Systemic risk to be monitored
– Limited coordination of regulatory agencies
•
Sources of future growth?
International transmission
Source: IMF, World Economic Outlook, Update, July 2009
Economic Growth (%)
Source: IMF, World Economic Outlook, Update, July 2009
Transmission to W. Europe
• Banking system
– European banks investments in US mortgage backed
securities
– Huge bank losses (IMF estimate €737 bn)
– Major contraction of credit
• Trade
– EU dependence on exports made it highly vulnerable
to US recession
– Germany most vulnerable of large economies
Euro area inter-bank interest rates (%)
5 .5
5 .0
4 .5
4 .0
3 .5
1 m o n th in te r-b a n k ra te
3 .0
O ve rn ig h t in te r-b a n k ra te
2 .5
2 .0
E C B m a in ra te
Apr 07
Ju l
O ct
Ja n 0 8
Apr
Ju l
O ct
Transmission to E. Europe
• Financing current account deficits
– Hungary
– Baltic states (Estonia, Latvia, Lithuania)
• Contraction of credit by W. European owned
banks
• Exports to W. Europe
– Czech Republic
– Slovakia
– Slovenia
Transmission to rest of world
• Demand for manufactured goods in US and
Europe (Japan, China, India …)
• Primary commodity prices
– Oil (Russia, Middle East, Venezuela)
– Mineral & agricultural products (Latin America, Africa)
• Remittances (Mexico, Central America,
Indonesia, India)
Economic Growth (%)
Projections
2007
2008
Source: IMF, World Economic Outlook, Update, July 2009
2009
2010