The US Economic Crisis: Causes and Possible Solutions Fred Moseley Economics Department Mount...

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.