the us economic crisis: causes and possible solutions fred moseley economics department mount...
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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 LOSSESON THE REAL ECONOMY
FIGURE 2: RATIO OF HOUSEHOLD DEBT TO DISPOSABLE INCOME, 1950-2007
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
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)
private sector financial sector household debt debt as % GDP debt as % GDP as % income
1929: 150% 10% 30%2008: 290% 120% 140%
Comparisons to 1929
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.