Sub-primes and the Credit Crisis

1
Sub-primes and the Credit Crisis

• PLS/EC 480 Greed and Need
• Dr. Emerson

2
The Great Depression

• Stock Market Crash
• Banks loose capital
• Decline in market activity
• Government inaction
• FDR and try anything approach

3
Regulation

• FDIC
• Security Exchange Commission
• Glass Steagall
• Freddie Mac/ Fannie Mae

4
Deregulation

• Deregulation of thriftsSavings and Loans
• No regulation of derivatives
• Mortgages sold in fractions- precursor of CDO.
• Gramm Leach Bliley

5
Federal Reserve Bank Policies

• Low interest
• Sub primes unregulated
• No action on defaults
• Fed vs. Congress

6
EVIDENCE Sub Prime Problem

• Delinquency rate is 2 tenths of 1 in 1979
• Today 2 (10 times higher) 2,820,000 households
  and rising.

7
Foreclosures and Sub Prime

• Rates of loss by
• mortgage type.

8
Default Consequences

• GAO report
• No piggyback and documentation 0
• Piggyback OR little documentation 25-31
• Piggyback AND no documentation 60

9
Evolution of Crisis

• Rotten apple parallel
• Sub prime and impact on prime

10
Jobs in the aftermath

• 2009, 0 job growth

11
OECD

• Rate of US recovery versus other industrial
  democratic countries.

12
Cost of gambling

• The Credit Crisis by J. Jarvis
• http//www.getrichslowly.org/blog/2009/02/25/the-c
  redit-crisis-visualized/

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Break

• Be back in 10 minutes for the analysis

14
The Micro Economic and Political Consequences

• Bill Moyers Report http//www.pbs.org/moyers/jour
  nal/07182008/watch.html

15
1930s SAME as todays crisis

• Unregulated market
• Commercial and high risk investments
• Worldwide crisis
• Downward spiraling
• Income disparities

16
Differences?

• Starts as homeowner crisis
• US a global power
• US government reacts with TARP bailout
• FDIC protects depositors
• No tariffs
• OTHER

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Inside the Meltdown

• Bush Administration, TARP 1 and Congress
  Matrix of Events see web page

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Suggested Reforms

• Financial reporting
• No mart to marketing
• Accounting regulations
• No off shore companies
• Intelligible instruments
• Reinstate Glass Steagall
• Insurance reform
• Credit default swaps
• End too big to fail

19
JONCO and other reforms

• --In Dodd We Trust
• http//www.thedailyshow.com/watch/tue-march-16-201
  0/in-dodd-we-trust
• (Firefox)

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National Responsibility

• Federal Government

21
What should States do?

22
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.

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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.

24
Q and A