1 the great panic of 2008: a historical perspective j watkins
TRANSCRIPT
1
The Great Panic of 2008: A Historical Perspective
j watkins
2
Capitalism: Inherently Dynamic System
Capitalism: System of mass production Capitalism has been plagued with crises: The tulip mania of the 1630s, the Panic of
1837, the Panic of 1873 and the depression of 1894, the depression of 1921.
Only the Great Depression of the 1930s is burned on our collective consciousness.
3
Great Depression of the 1930s The loss of jobs, the waste of resources, the social unrest that it
brings on the heels are just a part. The last global depression was unmatched in its ruthlessness:
From 1929 to 1932, Industrial output fell 45% Unemployment increased to 25% From 1929 to 1933, GNP fell by 46% Prices fell by 31%
Implications: WWII—war as an alternative to depression Laissez faire and representative democracy are incompatible
4
Nature of Capitalism
Private ownership of the means of production Free labor force
Free from (independent of) the means of production
Free to sell their labor power (capacity to do work) Production based on the pursuit of profit Commodity production
Commodities—goods and services produced for sale on the market
5
How Capitalist Make Profits
Adam Smith: to earn profits capital must circulate, “it must leave in one form and return in another.”
The central problem of capitalism: the conversion of commodities into money
Profits = Revenues – Expenses Revenues: income earned by selling commodities Expenses: costs incurred in producing
commodities.
Revenues
Revenues: income earned from the sale of commodities
Revenues: market price*quantity sold To increase revenues businesses try to
increase demand by: Changing tastes (marketing) Providing credit Changing price
6
Expenses
Fixed costs (costs that are invariant to output): Lease or mortgage Financial costs (interest and principal payments)
Variable costs (costs that vary with output) Labor costs Raw materials
Taxes or subsidies
7
8
Evolution of consumer Credit
The evolution of consumer credit: outgrowth of business efforts to convert commodities into profits
The more goods and service are converted into money, the greater business revenues, which in turn increase profits.
The problem from the corporate point of view: how to increase revenues without increasing expenses.
9
Credit …
enables the consumer to purchase products that would in many cases go unpurchased.
enhances corporate profits. Deficit expenditures by consumers create surpluses for corporations
10
The Rise of Consumer Capitalism (1890s to 1920s)
In an economy producing an abundance of consumer goods, the economizing habit (saving) among the masses hinders the accumulation of capital.
Emphasis shifts to sustaining demand, which involves fostering desires and providing credit to satisfy those desires.
11
Removing Constraints that Inhibit Consumer Spending
Dismantling the Protestant Ethic (Early 20th century)
Installment Credit (Durable goods revolution—early 20th century)
Universal Credit Card (1968) Equity Loans (1960s by flourished in 1980s) Credit Scoring (early 1990s) Securitizing credit card receivables (1990s) Subprime loans (early 2000s)
12
Dismantling the Protestant Ethic
First, industrialization transformed nineteenth century emphasis on production to consumption.
Second, the emergence of the corporation rendered personal saving unnecessary in financing investment
Third, mass production combined with competition proved ruinous.
Fourth, installment credit, considered by Daniel Bell "The greatest single engine in the destruction of the Protestant ethic.”
13
Installment Credit and the Durable Goods Revolution
Durable goods revolution: 1890-1920 "a structural change in consumer tastes in favor of
durable goods” Led by Two innovations:
Electrification Automobiles
Mass production created a need to sell. Calvin Coolidge: "mass production is only possible when there is mass demand.”
14
Universal Credit Card
The creation of the universal credit introduced in 1968
Marquette Decision (1978)—preempted state usury laws
Smiley v Citibank—pre-empted state laws regulating fees (1996)
The Office of the Comptroller of the Currency (OCC): repeatedly cited the National Bank Act of 1863 to pre-empt states from requiring credit card companies to provide consumers information.
15
Equity Loans
Home equity has been around at least since the 1960s.
The increase in home equity loans is associated with two factors: the rise in real-estate values beginning in the
1980s Tax Reform Act of 1986—eliminated interest
deductibility on credit cards.
16
Consumer Credit and Securitization
Examples Mortgage Backed Assets Collateralized Debt Obligations
Purpose: Transform a previously illiquid assets (income streams from mortgage payments or the income streams from credit card receivables) into Liquid Assets
Implication: Increased the allocation of purchasing power to consumers
17
Securitization
Creating an asset the value of which is based on payments (receivables) on various loans.
Banks can sell these assets Banks receive a fee Banks recoup the money originally loaned, enabling banks
to make more loans
Examples of Securitization
Asset backed Securities: equity loans, credit card receivables, etc. Credit cards receivables were relatively illiquid Banks securitize the receivables, receiving a lump sum for
the receivables, allowing banks to make new loans Moving securitization off balance sheet, effectively reduces
the capital requirements, increasing profits Mortgage backed Securities
Mortgages were also relatively illiquid Ginnie Mae created a market for securitized assets.
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19
Consumer Debt (pink) and Consumption (blue) as a Percentage of GDP
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
56.00%
58.00%
60.00%
62.00%
64.00%
66.00%
68.00%
70.00%
72.00%
Drop Page Fields Here
Year or quarter
Data
20
Corporate Profits by Industry as a % of GDP
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
16.00%
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Sum of Fin_Pr/GDP
Sum of ROW Corp/GDP
Sum of Other Non-Fin Corp/GDP
Sum of Info/GDP
Sum of Retail/GDP
Sum of Wholesale/GDP
Sum of Utilities/GDP
Sum of Transportation/GDP
Sum of Manf/GDP
Drop Page Fields Here
Year or quarter
Data
21
Consumer Debt (pink) and Financial Profits (blue) as a Percentage of GDP
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%1
95
9
19
64
19
69
19
74
19
79
19
84
19
89
19
94
19
99
20
04
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Drop Page Fields Here
Year or quarter
Data
22
Consumption Expenditures (pink) and Financial Profits (blue) as a Percentage of GDP
56.00%
58.00%
60.00%
62.00%
64.00%
66.00%
68.00%
70.00%
72.00%
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
Drop Page Fields Here
Year or quarter
Data
23
Federal Reserve Bank Profits and the Profits of Other Financial Indistitutions as a Percentage of GDP
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1959
.19
60.
1961
.19
62.
1963
.19
64.
1965
.19
66.
1967
.19
68.
1969
.19
70.
1971
.19
72.
1973
.19
74.
1975
.19
76.
1977
.19
78.
1979
.19
80.
1981
.19
82.
1983
.19
84.
1985
.19
86.
1987
.19
88.
1989
.19
90.
1991
.19
92.
1993
.19
94.
1995
.19
96.
1997
.19
98.
1999
.20
00.
2001
.20
02.
2003
.20
04.
2005
.20
06.
2007
:III
Sum of Other Financial/GDP
Sum of Fed Res Banks/GDP
Drop Page Fields Here
Year or quarter
Data
24
Non-Interest Income as a Percent of Net Operating Expenses
Total
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Total
Drop Page Fields Here
Sum of Non-Interest Income as % of Net Operating Revenues
Year
Drop Series Fields Here
25
Percent of Households filing for Bankruptcy
Total
0
0.5
1
1.5
2
2.5
198
0:0
1:0
0
198
5:0
1:0
0
199
0:0
1:0
0
199
5:0
1:0
0
200
0:0
1:0
0
200
5:0
1:0
0
Total
Sum of Share of households filing (percent)
Year and quarter
26
Housing Burden to Households 2006Moderate Burden: 30-50%Severe Burden: Over 50%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Bottom Decile BottomQuartile
Lower-MiddleQuartile
Sum of No Burden2
Sum of ModerateBurden2
Sum of Severe Burden2
27
Federal Reserve Bank Profits and Other Financial Profits as a Percentage of GDP
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1959
.19
60.
1961
.19
62.
1963
.19
64.
1965
.19
66.
1967
.19
68.
1969
.19
70.
1971
.19
72.
1973
.19
74.
1975
.19
76.
1977
.19
78.
1979
.19
80.
1981
.19
82.
1983
.19
84.
1985
.19
86.
1987
.19
88.
1989
.19
90.
1991
.19
92.
1993
.19
94.
1995
.19
96.
1997
.19
98.
1999
.20
00.
2001
.20
02.
2003
.20
04.
2005
.20
06.
2007
:III
Sum of Other Financial/GDP
Sum of Fed Res Banks/GDP
Drop Page Fields Here
Year or quarter
Data
28
Federal Reserve Bank Profits and Other Financial Profits as a Percentage of GDP
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1959
.19
60.
1961
.19
62.
1963
.19
64.
1965
.19
66.
1967
.19
68.
1969
.19
70.
1971
.19
72.
1973
.19
74.
1975
.19
76.
1977
.19
78.
1979
.19
80.
1981
.19
82.
1983
.19
84.
1985
.19
86.
1987
.19
88.
1989
.19
90.
1991
.19
92.
1993
.19
94.
1995
.19
96.
1997
.19
98.
1999
.20
00.
2001
.20
02.
2003
.20
04.
2005
.20
06.
2007
:III
Sum of Other Financial/GDP
Sum of Fed Res Banks/GDP
Drop Page Fields Here
Year or quarter
Data
29
Mortgage Debt/GDP
Total
0%
20%
40%
60%
80%
100%
120%
19
59
19
60
19
61
19
62
19
63
19
64
19
65
19
66
19
67
19
68
19
69
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
Total
Drop Page Fields Here
Sum of Total Mortgage Debt/GDP
End of year or quarter
Drop Series Fields Here
30
Ratio of Debt to Income Household Quintiles and the Top-Income Earning Decentiles
Year 0-19.9 % 20-39.9% 40-59.9% 60-79.9% 80-89.9% 90-99.9%
1992 734% 378% 477% 295% 242% 215%
1995 720% 508% 458% 312% 278% 197%
1998 737% 688% 442% 388% 284% 215%
2001 715% 565% 424% 318% 260% 225%
2004 760% 836% 543% 451% 355% 299%
31
Distribution of Income: 2006
3.48.6
14.5
22.9
50.5
Lowest Fifth
Second Fifth
Third Fifth
Fourth Fifth
Highest Fifth
32
Anatomy of a Depression
Depressions are characterized by deft deflation People and business alike took on debt to purchase
assets they believed would increase in value The increase in real estate values combined with
low interest rates Consumers increased their debt Increase in real estate values led people to borrow,
speculating that home prices would increase Banks seeking higher returns provided money to subprime
borrowers, bundled the mortgages, and sold them to unsuspecting investors
33
Revenues: Uncertain (based on expectations)
Debt obligations: Certain, stated contractually Decreases in revenues to business and
income to individuals preclude their ability to repay debts
Businesses and consumers sell assets, creating a fall in asset values
34
Credit Default Swaps
Type of insurance” that financial institutions purchased in case the mortgage borrowers defaulted.
AIG earned billions in fees selling credit default swaps. AIG assumed it would never have to pay.Others purchased swaps, betting consumers would default.
As of November of 2008, credit default swaps exceed thirty-two trillion dollars, more than double the output of the US economy.
35
The Problem
How do we sustain business revenues? Fall in consumer spending:
10 trillion decline in wealth People paying down debts Inability to borrow Loss of jobs or the uncertainty of a future job
Fall Investment: Investment depends on expectations Business confidence has collapsed
36
Fall in exports: The decline in the output of other countries
precipitates a decrease in exports abroad Rise the dollar as the safe-haven currency makes
our exports more expensive in terms of other currencies
Government? Function of government deficits: Function of the Federal Reserve
37
Government Expenditures as a Percentage of GDP
Government Deficits and Surpluses as a Percentage of GDP
38
1937
.
1940
.
1943
.
1946
.
1949
.
1952
.
1955
.
1958
.
1961
.
1964
.
1967
.
1970
.
1973
.
1976
.
1979
.
1982
.
1985
.
1988
.
1991
.
1994
.
1997
.
2000
.
2003
.
2006
.
2009
.
Trans
ition
quar
ter.
-35.00
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
5.00
10.00
Total
Total
39
Government Debt as a Percentage of GDP
1939
.
1942
.
1945
.
1948
.
1951
.
1954
.
1957
.
1960
.
1963
.
1966
.
1969
.
1972
.
1975
.
1978
.
1981
.
1984
.
1987
.
1990
.
1993
.
1996
.
1999
.
2002
.
2005
.
2008
.
2011
(est
imat
es).
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
Total
Total