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

Investment financing Want home Save up Find investor Buy and Repay with collateralize debt

New Mortgage Market Over priced houses Piggy back sub prime on prime mortgage Little or no documentation to collateralize debt

Sub Prime Problem Delinquency rate 2 tenths of 1 % in 1979 Today 2% (10 times higher): 2,820,000 households. How did market get so risky?

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

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

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

Context: Regulate or Deregulate Constitution requires Congress regulate banks Regulation mostly by States. In 1913 FED authorized by Congress.

Little Regulation Until New Deal Unregulated stock market Bank’s heavily invested in stocks Deposits not insured

Regulation Glass Steagall FDIC Security & Exchange Commission Freddie Mac/ Fannie Mae established HUD in 1960s

Deregulation Deregulation of thrifts No regulation of “derivatives” Mortgages can be sold in fractions.  S&L scandal

Deregulation Continues Despite warnings Congress repeals Glass Steagall in 1999.

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

EVIDENCE Foreclosures by type and trends Stock market learning curve Jobs U.S. and others

Foreclosures and Sub Prime Rates of loss by mortgage type.

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

Wall Street Learning Curb 2003, 1 st down 2008, 2 nd down 2011, recovery

Jobs in the aftermath 2009, 0% job growth

OECD Rate of US recovery versus other industrial democratic countries.

Break Be back in 10 minutes for the analysis

Inside the Meltdown: What the Bush Administration did to forestall the implosion of the national economy. Congressional action and authority eltdown/view/ eltdown/view/

Building a robust financial system 1. Madison’s perspective 2. Role for state government 3. Role for federal government 4. Democratic capitalist view 5. Democratic socialists view 6. Conservatives vs. liberals view.

Madison’s Perspective Why did system fail?

What should States do? --

National Responsibility Federal Government Uncle Sam

Democratic Socialist view --

Democratic Capitalist view --

Liberals --

Conservatives --

Conclusions --

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

Postscript Define issue Use Library Resources, no Wikipedia /the-word---wikilobbying?videoId=81454http:// 2007/the-word---wikilobbying?videoId=81454 See ses/politicalscience.html ses/politicalscience.html

Postscript (cont.) Use correct APA citations. See: /560/01/ /560/01/ Looking for: timely, data (e.g. GAO), both sides of issue. NOT earns// earns//