POL 422

Global Economic Crisis

Notes 4

Economic crises are a lot like lightning on a dark night: They illuminate, if only briefly, much about the working of a real economic systems otherwise hidden.

Budget proposal for 2011

Phillips, Bad Money

Phillips was right about this crisis before it happened

3 decade bubble going back to the 1980s

  • Financial failures in subprime, CDOs, extreme debt levels -35
  • Peak Oil – flattening oil production, relative price shifts from expensive oil, dollar vulnerability
  • Ownership society to compensate for income inequality and income lagging groups
  • Inadequate national leadership: Bush, Paulson, Bernanke with weak regulatory environment
  • Shift from manufacturing to finance – page 31

Predicts in August 2007 a crisis and burst bubble

Sees growth of debt

public at national, state and local $11 T

private $37 T

debt is 300% of GDP

debt in 1987 = $10.5T

Growth of debt linked to the globalization of finance and the enormous increase in financial industry and rise of finance as central economic player

Debt levels over time = 7

Liberalization of finance = reduction of regulations and loosening of regulatory environment

Glass-Steagall Act 1933

FDIC

Split Banking and Investment Banks

Graham-Leach-Billey Act 1999

Volcker Rule

Opinion on Obama Bank Reform

Crisis Sequence:

  • By 2007 total indebtedness was three times the size of the gross domestic product, a ratio that surpassed the record set in the years of the Great Depression. From 2001 to 2007 alone, domestic financial debt grew to $14.5 trillion from $8.5 trillion, and home mortgage debt ballooned to almost $10 trillion from $4.9 trillion, an increase of 102 percent.
  • Credit Expansion in wake of 9/11
  • Expand of subprime lending
  • Wealth, stocks, housing – Phillips 13
  • Link to derivatives – CDOs, Phillips xxv
  • Housing peaks in 2005
  • Rise in resets, foreclosures, housing price declines
  • Slow motion exposure of the losses in big finance
  • Rapid collapse of CDOs and ABCP – Kevin Phillips - 103

OIL

Dollar – oil connection

Pricing of oil in dollars

Holding of reserves by foreign nations

Hostility toward Bush Adm fuels attacks on dollar

Broad Phillips thesis:

Page 20 – and 39

Why is an overemphasis on finance a bad idea – Bad Money?

Tax cuts for rich = money for finance = making money by shuffling paper = paper entrepreneurialism

Saving, debt and investment choices

Government deficits and debt –

Private debt replaces equity – Phillips – 39-45

Bush Adm = climax of debt system –

Finance and oil are “chosen industries”

Debt explosion – 51

Economic stimulus via debt – housing as lead industry – growth via national Ponzi scheme

Financialization of US economy = rising government bailouts to finance (57)

Rising income inequality – GINI Coefficient

GINI Coefficient (2004-2006)

US.45

Austria .26

Australia.35

Canada.32

Denmark.24

France.28

Germany.28

Italy.33

Japan.38

Korea (South).35

Norway.28

Sweden.23

China.47

India.36

Indonesia.36

Malaysia.46

Mexico.46

Russia.41

Vietnam.37

Uganda.47

Brazil.57

Paraguay.58

Rwanda.47

South Africa.58

Zimbabwe.57