Great Recession

Return to Current Political Economy Issues   Updated 4/14/18         Please link to, use to educate and 

New Normal #1 Created by WW 2 
as U.S. industry had few competitors so  both profits and wages increased substantially for 25 years.

New #2 Oil Embargos and Japanese Competition
Began Wage Stagnation

Japan's competitive manufacturing sector accelerated causing stagnate Rust Belt wages and employment. Why? Japan got lucky when gas efficient small green cars required change and U.S. manufacturing responded by protected profits with less quality improving capital investment. They also got unions to accept a two-tier wage system that minimized wage increases for new workers.  Pressure on foreign manufactures resulted in them building new U.S. plants.

#3 Philosophical Change Causes Financial Instability
1980 Depository Institutions Deregulation and Monetary Control Act began a return to Conservative Business Regulation caused by adverse voter reaction to increased government regulation and welfare spending. Think Great Society and lax derivative regulation.
1980's Major Investments Banks Went Public creating a need to balance client needs with equity needs. Think expansion of financial industry.
1980's Accounting Standards Declined as accountancy firms struggled to balance their commitment to high audit standards with the desire to grow their consultancy business. Think off-balance-sheet items and Arthur Anderson Scandal.
1980's Home Equity Loans Increased Current Consumption and Lowered Savings as they replaced home improvement loans. Think many not prepared for retirement.

 


1983 Reverse Mortgages Approved for FHA loans. Think less retirement savings.
1999 Gramm–Leach–Bliley Act Increased Systemic Financial Risk limited by the Glass-Steagall Great Depression Act. passed by a Republican  majority and signed by President Clinton. Think financial industry expansion. See Five Bad Bush/Clinton Policies
2004 Uptick short rule of 1938 rescinded. Think stock market gambling.
2006 FASB requirement that housing assets be mark-to-market lowered financial system collateral. Action resulted from a 1991 Government Accountability Office investigation of $160,000,000,000 savings and loan crisis bailout.
Think moral hazard. Neoliberalism Capitalism

From Financial Crisis to
Recession to Great Recession

1. 2007-8 Financial Crisis was tamed by the Federal Reserve.
2. 2008-9 Recession was tamed by monetary and fiscal policy.
3. European financial instability and world-wide austerity slowed economic recovery which added to slow secular income growth for all but the very, very, very wealthy. Think top 1/10th of one-percent.
4. Great Recession Recovery Has Varied Around The World

Understanding Balance Sheet Recessions.
1. Balance sheet recessions like The Great Depression are infrequent, severe, and long-lasting. Understanding them is necessary when judging society's efforts to manage The Great Recession like   understanding a doctor's attempt to relieve a headache requires knowing the level of difficulty. Was it a Migraine Headache?
2. Economist Paul Krugman feels the financial crisis ..."was one manifestation of a broader problem... associated with a "balance sheet recession." Economist Richard Koo wrote Japan's 1990- ? "Great Recession "was a "balance sheet recession."  

Was Our Great Recession a Balance Sheet Recession?
A balance sheet  recession type is caused by  high levels of private sector debt. Assets must equal liabilities plus equity. If assets values like housing collateral fall below their associated debt, equity must make up the difference or insolvency results. To regains solvency, debt must be repaid. Think 1837, 1873, 1890 & 1929 See  Most Severe US Recessions

What Led To The Great Recession?.

1. Free Market Capitalism Lowered Regulation.

2. Innovative Expanded Investment Banking.

4. Financial and Housing Easy Money Bubbles
 

3. Global Trade Imbalances Built a Savings Glut Which Lowered Interest Rates

China 2012       
Germany 2012        
Saudi Arabia 2009   
Japan 2011     
Russia 2012        
   

$214B
208B
150B
119B
81B
 

Great Recession Stages from The Shifts and the Shocks by Martin Wolf
1. A more complex unstable large1 financial/credits system evolved creating extreme optimism in good times and panic in bad times. Think derivatives, securitization, credit default swaps all managed by hedge funds.
2. Emerging countries lowered borrowing and increased trade surpluses creating a savings glut after the 1997 Asian Debt Crisis made their foreign dollar dominate debt buildup unsustainable. Instead they expanded trade and kept personal consumption below economic growth. Less consumption and borrowing plus a trade surplus increased Dollars, Euros, and Yen reserves the world's spenders could borrow. Think China and Russia.
3. Aggregate demand stagnated because high income countries like German, Japan and OPEC increased trades surpluses. Germany's 2005 economic renewal was not spent and Japan's private sector saved much more after their 1990's credit bubble explosion.
Adding to these demand shortage were companies who maintained profit by decreasing capital investment spending despite historically low interest rates. Globalization and technology also helped them maintain profit as wage increases were limited to most valuable employees. State and local governments, especially those with under funded pension systems, also cut expenditures. Think workers maintain living standards with home equity loans.

4. Increased current account deficits by wealthy countries balanced world trade. Higher demand for foreign goods was made possible by massive central bank supported low interest loans. The  FED's historic monetary expansion was made possible by continuing low inflation resulting from expanding world competition and low oil prices. Innovative financing and lax regulation also fostered demand expansion. Think excess OPEC savings caused Latin American Debt Crisis..
5. Real Estate and Stock bubbles resulted as expected from low long-term real interest rates.  New home buyers borrowed the surplus savings and investors devoured the growing unique debt securities created by an expanding finance industry that now promised insured difficult to understand almost guaranteed financial instruments. Leverage rose dramatically. Fraud, near fraud and data manipulation exploded. Few remembered the housing collapse of the Great Depression. Think Bubbles.
6. Poor Crisis Management by politicians as their economic advisors who believed market capitalism would prevent serious recessions. This view was amplified by the fifteen year Great Moderation. Few knew that new unique financial market instruments increased possible financial contagion. When it started, political, intellectual and bureaucratic leaders resisted quick action especially in areas requiring cooperation. A depression was avoided in the U.S. by FED, Treasury and Congressional efforts that were slowed by austerity. Iceland, Ireland, Greece, Spain and Portugal experienced economic depression. See VII of The Great Recession and
Mark Blyth: After the Financial Crisis: How to Tell the Forest from the Trees 57 min. video

Recovery Was Historically Slow Though Not For a Balance Sheet Recession
1.
Chart Book: The Legacy of the Great Recession 4/13/18
10 YEARS AFTER THE CRISIS for more data
2. Econ Talk Podcast Recession, Stagnation, and Monetary Policy EconTalk Podcast 1/9/173.
3.
Mark Blyth: After the Financial Crisis: How to Tell the Forest from the Trees 57 min. video
4.
Have Big Banks Gotten Safer?  Brookings' Report Fall 2016

Part Two
Financial Bailout, Economic Recovery, Poverty Stuck at 15%, Income Stagnates, Wellbeing Grows

 A Quick U.S. Bailout History The $700 billion 2008 financial-sector rescue plan is the latest of many bailouts that go back to the Panic of 1792 when the federal government bailed out the 13 over-burdened by their Revolutionary War Debt 13 states. Private commercial banks and investment bankers took over and led financial bailouts until the Panic of 1907 when the economy was so big that J.P. Morgan needed US Treasury help. This led to the 1913 Federal Reserve System designed to be the lender of last resort.

  Recently the 1987 Savings and Loan Crisis bailout cost about $160 billion. Other recent government private industry bailouts have included: 1970 Penn Central Railroad 1971 Lockheed Corporation 1980 Chrysler Corporation 1984 Continental Illinois 1991 Executive Life Insurance Company bailout by states assessing other insurers and the 1998 Long-Term Capital Management bailout by commercial and investment banks. Think overcoming greed is difficult. US does better than most!

Recession Cost Were High But Growth Cured Budget Problems
Economic Cost of Great Recession Estimated at 12.8 Trillion
Some add the loss in home values but this is a reach since the housing bubble had inflated values. US FED Profit of 100b in 2014 were up from 47b in 2009 and with 420b from 2010-14. 
 Source See Treasury financial analysis of Great Recession in Charts        

Think this is how we don't pay for war.

Bailout Made a Profit
681 Billion Treasury Inflows

Money refunded
Dividends earned
Interest
Stock Warrants   
Fees, equity, asset sales
Source/


390
260
2
10
20

 

 


616 Billion Treasury Outflows

Banks/Financial Institutions
Fannie and Freddie
US Auto Cos.
AIG
Toxic Assets Purchased
Mortgage Modifications




245
187
80
68
19
17
 

 
Chart 2 ". provides a first approximation of how correcting the 2013 poverty rate for noncash food and housing benefits, refundable tax credits, and upward bias in the CPI-U would change the 2013 poverty rate. With these corrections the official poverty rate falls from 14.5 to 4.8 percent, making the 2013 rate roughly a quarter of the 1964 rate (19.0 percent). If we were to lower the poverty threshold for cohabiting couples to match that for married couples the 2013 poverty rate would have fallen even more. From War on Poverty-Was It Lost NYT 4/2/15 Other Data 1  Data 2 Think different political philosophies use true but not necessarily appropriate data to make their share of the pie. With our obesity problem how could many have one to bed hungry during the Great Recession.

# 5
Profit Beating Labor

 

Twenty-first century war expenditures helped profit recover after a dot com dot-com bubble recession, then crash with The Great Recession and then they grew to new heights. US Companies compete very well in a flat world using technology, outsourcing to Asia, Mexico...and by keeping wage increases low. Total compensation has done better though Obama Care has given gave companies an opportunity to again lower compensation. Source  More Data 1   Data 2. Think Rust Belt then NAFTA and soon TPP.

#6 Most Significant Normal, Wellbeing, Continually Increased
 

1. Society's stability has resulted in tremendous economic growth which is key to individual well-being. The public safety net, child safety, and poverty rates after non-cash transfers have all improved over the last 100 years.  Think economic distress in Russia, Europe, Japan and China.
2) Scientific achievements have continuously added to citizen well-being
. Think cured diseases, smart phones, streaming audio-video, Gillette Stadium ... See Health Problems Solved
3) Personal Income increased continuously if not always rapidly thanks to improved nature, nurture and personal characteristics. Think Russia, China, and Europe's really slow recovery from the Great RecessionSource Is The Country In Trouble, Will Stagnate Income Hurt Our Children and Recent Decades Ranked By Problems
.


Source #1    Source #2

 

 

 

Quick Notes Great Recession2