Economic History of the US

Transcription

1 Economic History of the US Pax Americana, 1946 to the Financial Crisis of 2008 Lecture #5 Peter Allen Econ 120 1

2 Since Sept Worst Recession since WWII 2. Banking Crisis, Panic of 08 First since 1933 Bursting of Housing Bubble Possibility of insolvency of largest banks 3. Large, unprecedented, attempt at government stimulus Bank bailouts Fiscal stimulus Money injection Hangover and impact on recovery 2

3 Panic of 08 and the Great Recession Recession Dec to June 2009 Longest since WWII, 18 mos. Real GDP -5.1%, Unemployment US 4.9% to 10.1% Oct %, November 2011 Calif % to 12.5% Sep-Dec %, November 2011 Home prices US -31% from peak, May % since June 2009 Calif. -42% from peak, May since June 2009 Stock market Sep. 15, 2008 Mar. 2, % Mar. 2, 2009 Dec. 30, % Sep. 15, 2008 Dec. 30, % 3

4 4

5 Bank Panic, 2008-style Three phases Phase 1, 2007-mid-2008 Full-blown banking crisis first since early 1930s Banks/investment cos. who has subprime CDOs? Value unknown, possible insolvencies (Assets< Liabilities) Get rid of them can t too much nobody will buy, no price Hot potato Banks stopped short-term lending to institutions thought exposed to subprime CDOs Collapse of investment banks i.e. no deposits Bear Stearns, Lehman, Merrill (Goldman, Morgan Stanley barely survived) Forced mergers BofA purchased Merrill and Countrywide JPMorgan purchased Bear and Wamu Fed starts lowering rates again AIG July 2008 failure of IndyMac 5

6 Bank Panic, 2008-style Phase 2, Sep to May 4, 2009 TARP, Troubled Asset Relief Program ($700 bn) nationalization of 19 largest banks Federal government line in the sand Insolvency of banks, will they survive? Phase 3, May 4, 2009 today Banks earning high income on excess reserves using it to write down bad assets Monetary stimulus is helping them a lot Looks like they ll survive; all have repaid Tarp except Citi. Defaults on consumer credit rising Credit is still shrinking Regulatory overhaul? 6

7 Dilemmas of Lender of Last Resort October 2008 Problem to big must involve Congress Why bail-out banks when they caused the crisis? Political aspects Banks and monetary policy Liquidity trap Ultimate -- overhaul of regulation 7

8 Some Proportions Sep.2008 Subprime mortgages $1.3 tr. (9% of GDP) Alt-A mortgages, $950 bn. (6.7% of GDP) Subprime CDOs,?? $7-8 tr. (48% to 56% of GDP) => 48 to 56% of banking system assets Total losses?? $2-3 tr. (18% of GDP) Aug 2008: Delinquent or in foreclosure, 25% of subprime and 9.2% of all mortgages US mortgages, $10.6 tr (73% of GDP, 46% in 1990s) MBS, $7 tr. (50% of GDP) US Treasury bonds, $5 tr. (36% of GDP) 8

9 Response of the Government Guided by History Prevent Banking system Federal gov lender of last resort Prevent downward spiral of bank failure, money supply contraction, deflation TARP 2. Fed.$1.2 trillion increase of monetary supply Monetary base from $900 bn. to $2.1 tr., Δ = $1.2 tr. 3. Federal Government, $787 bn. stimulus package $1.25 trillion of fiscal stimulus when Multiplier effects included (= 1.6 * $787 bn.) 9

10 Fed Monetary Base ($ billion)

11 1-Jan-06 1-Mar-06 1-May-06 1-Jul-06 1-Sep-06 1-Nov-06 1-Jan-07 1-Mar-07 1-May-07 1-Jul-07 1-Sep-07 1-Nov-07 1-Jan-08 1-Mar-08 1-May-08 1-Jul-08 1-Sep-08 1-Nov-08 1-Jan-09 1-Mar-09 1-May-09 1-Jul-09 1-Sep-09 1-Nov-09 1-Jan-10 1-Mar-10 But Banks not Lending: Excess Bank Reserves ($ billion)

12 Money Supply post-crisis Monetary base: currency printed by the Fed., part in circulation and part in bank reserves Fed has increased M b by 133% since Sep but almost entire increase held as excess reserves 12

13 Why is the Economy so Weak in 2012? Ability of government to do more is limited by high deficits and debt Households are fearful, paying off debt instead of spending Banks won t lend US spending fueled global economy Election year paralyzes Congress. 13

14 14

15 Federal Government Deficit (% of GDP)

16 Federal Government Debt (% of GDP)

17 Household Savings and Debt 17

18 House prices may fall more By September 2008, average U.S. housing prices had declined by over 20% from their mid-2006 peak. Unexpected By Nov 2008, 14.7% of all homeowners more than all subprime borrowers - had negative equity 18

19 Inflated US Spending on Imported Products Globalization Between 1996 and 2006, the U.S. yearly current account deficit increased by $1 trillion, from 1.5% to 5.8% of GDP US market for the world Flood" of US $ invested by foreigners in U.S. financial markets. Much to Mortgage-backed securities. Sustained by artificial aggregate demand by inflated housing prices. 19

20 One factor that is holding the economy back now is the collapse of securitization by Wall Street firms Could be. A cause of banks unwillingness to lend Or A symptom 20