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

TARPTroubled 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-federal-reserve/72959402/

• Gangster Bankers: Too Big to Jail• http://www.rollingstone.com/politics/news/gangster-bankers-too-big-to-jail-20130214

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Unemployment Rateaverage unemployment rate, 1948.01-2.12.08 = 5.79%

Depth

Duration (months)

Real GDP Real GDIUnemployment

Rate

Average, 1948-2001 10 -2.05 -2.20 2.85

Current Episode 16 -1.73 -0.36 3.67

Current + SPF Forecast 20-22 -2.83 NA 4.60

Great Depression 43 -26.50 -26.70 24.60

Measures of Recession Depth and Duration

NOTE: Depth measures the average percent change from peak to trough for real GDP and realGDI 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.

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GDPR

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/

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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)

http://www.propublica.org/special/government-bailouts

History of U.S. Gov’t 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 populationU.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 Dodd-Frank) 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