Sub-primes and the Credit Crisis PLS/EC 480 Greed and Need Dr. Emerson

The Great Depression Stock Market Crash Banks loose capital Decline in market activity Government inaction FDR and try anything approach

Regulation FDIC Security & Exchange Commission Glass Steagall Freddie Mac/ Fannie Mae

Deregulation Deregulation of thrifts [Savings and Loans] No regulation of “derivatives” Mortgages sold in fractions- precursor of CDO. Gramm Leach Bliley

Federal Reserve Bank Policies Low interest Sub primes unregulated No action on defaults Fed vs. Congress

EVIDENCE: Sub Prime Problem Delinquency rate is 2 tenths of 1 % in 1979 Today 2% (10 times higher): 2,820,000 households and rising.

Foreclosures and Sub Prime Rates of loss by mortgage type.

Default Consequences GAO report:  No piggyback and documentation 0%  Piggyback OR little documentation 25-31%  Piggyback AND no documentation = 60%

Evolution of Crisis Rotten apple parallel Sub prime and impact on prime

Jobs in the aftermath 2009, 0% job growth

OECD Rate of US recovery versus other industrial democratic countries.

Cost of gambling The Credit Crisis by J. Jarvis visualized/ visualized/

Break Be back in 10 minutes for the analysis

The Micro Economic and Political Consequences Bill Moyer’s Report moyers/journal/ /watch.html moyers/journal/ /watch.html

1930s SAME as today’s crisis Unregulated market Commercial and high risk investments Worldwide crisis Downward spiraling Income disparities

Differences? Starts as homeowner crisis US a global power US government reacts with TARP bailout FDIC protects depositors No tariffs OTHER

Inside the Meltdown: Bush Administration, TARP 1 and Congress Matrix of Events –see web pageMatrix of Events

Suggested Reforms Financial reporting No mart to marketing Accounting regulations No off shore companies Intelligible instruments Reinstate Glass Steagall Insurance reform Credit default swaps End “too big to fail”

JONCO and other reforms: --In Dodd We Trust m/watch/tue-march /in-dodd-we-trust (Firefox)

National Responsibility Federal Government

What should States do?

Citations Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at Bitner, Richard (2008). Inside the Subprime Debacle. U.S. News and World Report. 145 (2) 12. GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

Citations Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. Stigliz, Joseph Freefall: America, free markets and the sinking of the world economy. New York: Norton Press.

Q and A