Sub-primes and the Credit Crisis
PLS/EC 480
Greed and Need
Dr. Emerson
Investment financing
Want home
 Save up
 Find investor
 Buy and
 Repay with collateralize debt

New Mortgage Market



Over priced houses
Piggy back sub prime on prime mortgage
Little or no documentation to collateralize debt
Sub Prime Problem

Delinquency rate 2 tenths of 1 % in 1979

Today 2% (10 times higher): 2,820,000
households.

How did market get so risky?
Default Consequences

GAO report:
 No
piggyback and with documentation 0%
 Piggyback
OR little documentation 25-31%
 Piggyback
AND no documentation = 60%
Cost of gambling

The Credit Crisis by J. Jarvis

http://www.getrichslowly.org/blog/2009/02/25/the-credit-crisisvisualized/
The Micro Economic and
Political Consequences

Bill Moyer’s Report
http://www.pbs.org/
moyers/journal/071
82008/watch.html
Context: Regulate or Deregulate



Constitution requires
Congress regulate
banks
Regulation mostly by
States.
In 1913 FED
authorized by
Congress.
Little Regulation Until New Deal



Unregulated stock
market
Bank’s heavily
invested in stocks
Deposits not insured
Regulation





Glass Steagall
FDIC
Security & Exchange
Commission
Freddie Mac/ Fannie Mae
established
HUD in 1960s
Deregulation



Deregulation of thrifts
No regulation of
“derivatives”
Mortgages can be
sold in fractions.

S&L scandal
Deregulation Continues

Despite warnings
Congress repeals
Glass Steagall in
1999.
Federal Reserve Bank Policies




Low interest
Sub primes
unregulated
No action on defaults
Fed vs. Congress
EVIDENCE
Foreclosures by
type and trends
 Stock market
learning curve
 Jobs
 U.S. and others

Foreclosures and Sub Prime
Rates of loss by
mortgage type.
Evolution of Crisis

Rotten apple
parallel

Sub prime and
impact on prime
Wall Street Learning Curb

2003, 1st down

2008, 2nd down

2011, recovery
Jobs in the aftermath

2009,
0% job
growth
OECD

Rate of US
recovery versus
other industrial
democratic
countries.
Break

Be back in 10 minutes for the analysis
Inside the Meltdown:
What the Bush Administration did to
forestall the implosion of the national
economy.
 Congressional action and authority
 http://www.pbs.org/wgbh/pages/frontline/m
eltdown/view/

Building a robust financial
system
1.
2.
3.
4.
5.
6.
Madison’s perspective
Role for state government
Role for federal government
Democratic capitalist view
Democratic socialists view
Conservatives vs. liberals view.
Madison’s Perspective

Why did system fail?
What should States do?

--
National Responsibility

Federal Government

Uncle Sam
Democratic Socialist view

--
Democratic Capitalist view

--
Liberals
--
Conservatives

--
Conclusions

--
Citations

Alford, Rob (2003). What are the origins of Freddie Mac
and Fannie Mae. Accessed August 28, 2008 at
http://hnn.us/articles/1849.html.

Bitner, Richard (2008). Inside the Subprime Debacle.
U.S. News and World Report. 145 (2) 12.

GAO Report (2007) Briefing to the Committee on
Financial Service, House of Representatives. GPO:
Washington, D. C.
Citations

Jost, Kenneth (2008). Financial Crisis. CQ
Researcher 18(18), 409-422

Phillips, Kevin (2002). Wealth and Democracy.
New York: Random House.

Stigliz, Joseph 2010. Freefall: America, free
markets and the sinking of the world
economy. New York: Norton Press.
Q and A
Postscript

Define issue

Use Library Resources, no Wikipedia
http://www.colbertnation.com/the-colbert-report-videos/81454/january-292007/the-word---wikilobbying?videoId=81454

See
http://www.csupomona.edu/~library/databa
ses/politicalscience.html
Postscript (cont.)
Use correct APA citations. See:
http://owl.english.purdue.edu/owl/resource
/560/01/
 Looking for: timely, data (e.g. GAO), both
sides of issue.
NOT
http://www.hillbillyreport.com/blog/bear_st
earns//
