U.S. Economic Normality
#1 Rising Income
New Normal #2 Oil Embargos and Competition
Began Wage Stagnation
New Normal #3 Financial Instability from
1999 Gramm–Leach–Bliley Act Increased Systemic Financial Risk once limited by the Glass-Steagall Great Depression Act. Initiated by Republicans it was 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2004 Uptick Short Rule of 1938 rescinded.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 decreased financial system collateral. Action resulted from a 1991 Government Accountability Office investigation of the $160,000,000,000 savings and loan bailout. Think moral hazard.
Financial Crisis to
Great Recession to Recovery
Understanding Balance Sheet Recessions
infrequent, severe, and long-lasting. Understanding them is necessary when
judging society's efforts to manage The Great Recession. It is like understanding a doctor's attempt
to relieve a headache requires knowing the level of difficulty. Was it a
Migraine Headache? A balance sheet 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
and debt must be repaid. Think 1837, 1873, 1890 & 1929 See
Most Severe US Recessions.
What Led To The
Great Recession Stages
The Shifts and the Shocks by Martin Wolf
1. Structured Investments Vehicles remove risk and create an unstable financial/credits system with extreme optimism then and panic in bad times. Think derivatives, securitization, credit default
swaps managed by banks and hedge funds with no skin in the game.
see Ireland Finally Sends 3 Bankers to Jail
2. Savings glut created as emerging countries lowered borrowing and increased trade surpluses after the 1997 Asian Debt Crisis made their foreign dollar dominate debt unsustainable. They expanded trade and kept personal consumption below economic growth. Less consumption and borrowing plus a trade surplus increased Dollar, Euro, and Yen reserves. Think China and Russia.
3. Aggregate demand stagnated as trade surplus countries didn't spend. Germany's 2005 economic renewal was saved and Japan's private sector saved much more after their 1990's credit bubble exploded. Adding to the 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 underfunded pension systems, also cut expenditures. Think Mercantilism.
4. Increased current account deficits by wealthy nations balanced world trade. Higher demand for foreign goods was made possible by massive central bank supported
loans. The FED's historic monetary expansion was made possible by
continued low inflation caused by expanded Flat World competition
and low oil prices. Innovative financing and lax financial regulation also fostered
expanded financial asset demand.
Think excess OPEC savings
financed the 1970's
Latin American Debt Crisis leading to Savings and Loan Crisis.