The limits of finance-led capitalism in the US

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The limits of finance-led capitalism in the US

• Trevor Evans
• Berlin School of Economics and Law

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Key features of US economy since 1980

• Strengthened position of financial sector
• Major corporations plan globally outsourcing
• Redistribution of income to top
• Dependence on credit expansion (and asset
  bubbles) sustained by expansionary monetary (
  fiscal) policy
• Net inflows of financial capital

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The rhythm of growth
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US economic growth (change in real GDP over 4
quarters, )
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(No Transcript)
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Corporate profitability investment
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US corporate profitability (pre-tax profits as
GDP)
Source US Bureau of Economic Affairs, National
Income and Product Accounts, Table 1.14
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US private fixed investment ( GDP)
Source Bureau of Economic Affairs, National
Income and Product Accounts, Table 1.1.5
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US non-financial corporations spending on fixed
capital, share buy-backs and dividends (
billions)
Source Federal Reserve Board, Flow of Funds
Accounts, Table F102
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Employment income
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Change in US employment over 12 months (millions)
Source Bureau of Labour Statistics, Current
Employment Statistics Survey, seasonally adjusted
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Changes in US real hourly wages at percentile
points, all workers (1979100)
Source The State of Working America, 2006/2007,
Table 3.4 and 2008/2009, Table 3.5. Figures in
dollars show income in 2007.
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Real annual income growth by groups
Average annual increase Average annual increase Average annual increase Fraction of total growth captured by top 1
Average income Top 1 Bottom 99 Fraction of total growth captured by top 1
Clinton expansion 1993-2000 4.0 10.3 2.7 45
Bush expansion 2002-2006 2.9 10.9 1.0 73
Source Thomas Pickerty Emmanual Saez, Income
inequality in the US, Updated data, July 2008
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Share of top 1 in US national income, 1915-2006
()
Source Thomas Pickerty Emmanuel Saez, Income
inequality in the US Updated data, July 2008
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US indebtedness by sector ( GDP)
Source Federal Reserve Board, Flow of Funds
Accounts
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The Crisis
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Background to crisis

• Fed responded to stock market crash by cutting
  lead interest rate from 6.5 (2001) to 1.0
  (2003)
• Growth of lending
• Leveraged loans (Private equity funds)
• Mortgage lending
• Securitisation
• Shadow banking system
• Investment banks
• Hedge funds
• Structured investment vehicles
• House-price bubble

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US house price inflation ()
Source SP / Case-Shiller House Price Index
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The crisis

• Fed raises interest rates 2004-2006 peak of
  housing-price boom
• House-price bubble ends 2006 prices fall 2007
• Mortgage backed securities loose value
• Banks announce first losses from investments
• 9 August 2007 Breakdown in trust between banks
  money market dries up
• 15 September 2008 Failure of Lehman Brothers
  sets of chain of financial failures and credit
  crunch
• Oct 2008 Leading capitalist states agree to
  inject capital in banking systems partial
  nationalisation of banks chain of failures
  stemmed
• US Recession
• Official start December 2007
• Major deepening 2008 Q4 and 2009 Q1
• Green Shoots

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US inter-bank interest rates ()
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Policy response

• Monetary expansion
• Massive provision of reserves
• Lending to non-financial companies
• Purchasing government bonds
• but banks not lending
• How to deal with toxic / troubled / legacy
  assets?
• Fiscal expansion
• Bush 168 billion (2008)
• Obama 787 billion (2009-10)
• Regulatory reform
• Systemic risk to be monitored
• Limited coordination of regulatory agencies
• Sources of future growth?

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International transmission
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Source IMF, World Economic Outlook, Update, July
2009
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Economic Growth ()
Source IMF, World Economic Outlook, Update, July
2009
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Transmission to W. Europe

• Banking system
• European banks investments in US mortgage backed
  securities
• Huge bank losses (IMF estimate 737 bn)
• Major contraction of credit
• Trade
• EU dependence on exports made it highly
  vulnerable to US recession
• Germany most vulnerable of large economies

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Euro area inter-bank interest rates ()
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Transmission to E. Europe

• Financing current account deficits
• Hungary
• Baltic states (Estonia, Latvia, Lithuania)
• Contraction of credit by W. European owned banks
• Exports to W. Europe
• Czech Republic
• Slovakia
• Slovenia

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Transmission to rest of world

• Demand for manufactured goods in US and Europe
  (Japan, China, India )
• Primary commodity prices
• Oil (Russia, Middle East, Venezuela)
• Mineral agricultural products (Latin America,
  Africa)
• Remittances (Mexico, Central America, Indonesia,
  India)

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Economic Growth ()
Projections
2007 2008 2009 2010
Source IMF, World Economic Outlook, Update, July
2009