The%20US%20Economic%20Crisis:%20Causes%20and%20Possible%20Solutions

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The US Economic CrisisCauses and Possible
Solutions

• Fred Moseley
• Economics Department
• Mount Holyoke College

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A HISTORY OF HOME VALUES
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Shiller Lawler Trendlines
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Mortgage Delinquencies as Percentage of Loans
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Option ARM Delinquencies
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Total Bank Losses
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Losses Writedowns vs. Capital Raised
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EFFECT OF BANK LOSSESON THE REAL ECONOMY
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Household Debt (percentage of GDP)
Percentage point change
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Nonfinancial Business Debt (percentage of GDP)
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Financial Sector Debt (percentage of GDP)
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Comparisons to 1929

• private sector financial
  sector household debt
• debt as GDP debt as GDP
  as income
• 1929 150 10 30
• 2008 290 120 140

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Three ways to reduce the debt to income ratio

• D/GDP D/(PQ)
• 1. ? growth (? Q)
• 2. ? inflation (? P)
• 3. ? debt (? D)

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Bank Bailouts

• 1. Purchases of toxic assets at inflated prices.
• TARP I PPIP
• Inject capital into banks - to absorb future
  losses.
• TARP I I
• Insure the toxic assets at inflated prices and
  very low premiums.
• Citi and Bank of America PPIP

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• 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

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• Justification for bailouts
• If no bailouts, then economic collapse.
• Largest banks are "too big to fail".
• Unavoidable dilemma
• Economic Sophies Choice

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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.