The Economy in Crisis
Eco 352
Fall 2015
NBER Business Cycle Data
• http://www.nber.org/cycles/cyclesmain.html
Some Economic Indicators
Employment
Unemployment Broadly Defined
Long-term Unemployed
Weak Recovery
Inequality and Weak Recovery
• Rising Inequality Is Holding Back the
U.S. Economy
http://www.newsweek.com/rising-inequality-holding-back-us-economy-354777
Case-Shiller U.S. Home Price Index, 1890-2012
(January 2000 = 100)
Time Line (1)
• November 1999: The Gramm-Leach-Bliley Act
(Financial Services Modernization Act) passes. It repeals
the Glass-Steagall Act of 1933.
• August 2005: Raghuram Rajan delivers his paper "Has
Financial Development Made the World Riskier?",
warning about credit default swaps, at the Jackson Hole
Economic Symposium. His arguments are rejected by
attendees, including Alan Greenspan, Donald Kohn, and
Lawrence Summers
Timeline (2)
• August 9, 2007: French investment bank BNP Paribas suspends
three investment funds that invested in subprime mortgage debt,
due to a "complete evaporation of liquidity" in the market. The
bank's announcement is the first of many credit-loss and write-down
announcements by banks, mortgage lenders and other institutional
investors, as subprime assets went bad, due to defaults by subprime
mortgage payers. This announcement compels the intervention of
the European Central Bank, pumping 95 billion euros into the
European banking market.
• September 15, 2008: Lehman Brothers files for bankruptcy
protection.
Diagnoses
• Panic. A diagnosis preferred by Geithner,
et al. Once confidence is restored,
normality will follow
• Debt overhang. A diagnosis preferred by
Krugman, et al. Need for debt relief and
fiscal stimulus*
•
•
•
Shadow banks
Insolvency vs. illiquidity
Classics:
–
–
•
Walter Bagehot, Lombard Street: A description of the Money Market
Movie: It’s a Wonderful Life
*Does He Pass the Test? Paul Krugman, The New York Review of Books, July 10, 2014, Stress Test: Reflections on Financial Crises, by Timothy F.
Geithner. Crown, 580 pp., $35.00
TARP
Troubled Asset Relief Program
• a program of the United States
government to purchase assets and equity
from financial institutions to strengthen its
financial sector that was signed into law by
U.S. President George W. Bush on
October 3, 2008. It was a component of
the government's measures in 2008 to
address the subprime mortgage crisis.
Dodd–Frank Wall Street Reform and
Consumer Protection Act (7/2/2010)
• an Act to promote the financial stability of
the United States by improving
accountability and transparency in the
financial system, to end "too big to fail", to
protect the American taxpayer by ending
bailouts, to protect consumers from
abusive financial services practices, and
for other purposes.
American Recovery and Reinvestment
Act of 2009
• Emergency Economic Stabilization Act,
2008
• Home Affordable Modification Program
Asset Concentration
Top 5 Banks as of end of 2014
•
•
•
•
•
JPMorgan Chase
$2.60
Bank of America
$2.10
Citigroup
$1.89
Wells Fargo
$1.69
The Bank of NY Mellon $0.374
Stress Test
(Kugman, Paul, “Does He Pass the Test?” New York Review of Books, July 10, 2014, pp. 6-10.)
Subprime Mortgages and Race
(Source: http://www.huffingtonpost.com/2014/07/02/civil-rights-act-anniversary-racism-charts_n_5521104.html)
Subprime Mortgages and Race
(2)
Robosigning
• Wells Fargo's Master Spin Job
•
http://www.rollingstone.com/politics/news/wells-fargos-master-spin-job-20151002
Rating Agencies
• The Last Mystery of the Financial Crisis
•
http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619
Too big to fail, too big to jail
• Ben Bernanke: More execs should have
gone to jail for causing Great
Recession
•
http://www.usatoday.com/story/news/politics/2015/10/04/ben-bernanke-execs-jail-great-recession-federalreserve/72959402/
• Gangster Bankers: Too Big to Jail
•
http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214
Unemployment Rate
average unemployment rate, 1948.01-2.12.08 = 5.79%
11
10
9
8
7
6
5
4
3
2
50
55
60
65
70
75
80
85
90
95
00
05
10
Measures of Recession Depth and Duration
Depth
Duration
(months)
Real GDP
Real GDI
Unemployment
Rate
Average, 1948-2001
10
-2.05
-2.20
2.85
Current Episode
16
-1.73
-0.36
3.67
20-22
-2.83
NA
4.60
43
-26.50
-26.70
24.60
Current + SPF Forecast
Great Depression
NOTE: Depth measures the average percent change from peak to trough for real GDP and real
GDI and the average percentage-point change from trough to peak for the unemployment rate.
Changes in real GDP and real GDI during the Great Depression are based on annual data.
SOURCE: Kevin L. Kliesen’s calculations based on quarterly data. Economic Synopses,
Federal Reserve Bank of St. Louis, March 23, 2009.
GDPR
12,000
10,000
8,000
6,000
4,000
2,000
0
50
55
60
65
70
75
80
85
90
95
00
05
GDPR
12,000
11,600
11,200
10,800
10,400
10,000
9,600
00
01
02
03
04
05
06
07
08
U.S. NATIONAL DEBT CLOCK
The Outstanding Public Debt as of 20 April 2009 is:
$ 1 1 , 197, 726, 249, 988
The estimated population of the
United States is 306,038,582, so each
citizen's share of this debt is
$36,589.26
The National Debt has continued to increase an average of
$3.84 billion per day since September 28, 2007!
Source: U.S. National Debt Clock, http://www.brillig.com/debt_clock/
U.S. International Indebtedness (Net U.S. asset position as a % of GDP)
Source: Calculations by Eshragh Motahar based on data from the Fed and the BEA)
10
0
-10
-20
-30
-40
-50
-60
55
60
65
70
75
80
85
NETASSETGDP
90
95
00
05
History of U.S. Gov’t Bailouts
http://www.propublica.org/special/governm
ent-bailouts
Universal HealthCare
• $104 billion per year could implement the
Obama healthcare plan
• The above is equal to 15% of U.S.’s 2008
military budget
(Source: Paul Krugman, “Kealthcare Now,” The Newy York Times, 1/30/2009, citing research from
The Commonwealth Fund.)
•
•
•
•
•
•
•
US military spending accounts for 48 percent, or almost half, of the
world’s total military spending
US military spending is more than the next 46 highest spending
countries in the world combined
US military spending is 5.8 times more than China, 10.2 times more than
Russia, and 98.6 times more than Iran.
US military spending is almost 55 times the spending on the six “rogue”
states (Cuba, Iran, Libya, North Korea, Sudan and Syria) whose spending
amounts to around $13 billion, maximum. (Tabulated data does not include
four of the six, as the data only lists nations that have spent over 1 billion in
the year, so their budget is assumed to be $1 billion each)
US spending is more than the combined spending of the next 45
countries.
The United States and its strongest allies (the NATO countries, Japan,
South Korea and Australia) spend $1.1 trillion on their militaries combined,
representing 72 percent of the world’s total.
The six potential “enemies,” Russia, and China together account for
about $205 billion or 29% of the US military budget.
Source: http://www.globalissues.org/article/75/world-military-spending#USMilitarySpending
U.S. population: 4% of World population
U.S. Military Spending vs. the Rest of the World
More Economic Indicators
• Median household income, adjusted for
inflation, lower in 2007 than in 2000
Dodd-Frank
• The Dodd-Frank Wall Street Reform and
Consumer Protection Act (Pub.L. 111-203,
H.R. 4173; commonly referred to as DoddFrank) was signed into federal law by President
Barack Obama on July 21, 2010 at the Ronald
Reagan Building in Washington, DC.
Dodd-Frank (cont’d)
Long title
an Act to promote the financial stability
of the United States by improving
accountability and transparency in the
financial system, to end "too big to fail",
to protect the American taxpayer by
ending bailouts, to protect consumers
from abusive financial services
practices, and for other purposes.
Source: Confer Thomas Philippon: "The future of the financial
industry", Finance Department of the New York University Stern
School of Business at New York University