The US Economic Crisis: Causes and Possible Solutions Fred Moseley Economics Department Mount Holyoke College

A HISTORY OF HOME VALUES

Shiller Lawler Trendlines

Mortgage Delinquencies as Percentage of Loans

Option ARM Delinquencies

Total Bank Losses

Losses & Writedowns vs. Capital Raised

EFFECT OF BANK LOSSES ON THE REAL ECONOMY

Household Debt (percentage of GDP) Percentage point change

Nonfinancial Business Debt (percentage of GDP)

Financial Sector Debt (percentage of GDP)

private sector financial sector household debt debt as % GDP debt as % GDP as % income 1929: 150% 10% 30% 2008: 290% 120% 140% Comparisons to 1929

Three ways to reduce the debt to income ratio D/GDP = D/(PQ) 1. ↑ growth(↑ Q) 2. ↑ inflation (↑ P) 3. ↓ debt(↓ D)

Bank Bailouts 1.Purchases of toxic assets at inflated prices. TARP I PPIP 2.Inject capital into banks - to absorb future losses. TARP I I 3.Insure the toxic assets at inflated prices and very low premiums. Citi and Bank of America PPIP

Total cost of bailouts to taxpayers: $1 trillion or more $3,300 for every person in the US $13,200 for a family of four Grossly inequitable and therefore unacceptable

Justification for bailouts: If no bailouts, then economic collapse. Largest banks are "too big to fail". Unavoidable dilemma Economic Sophie’s Choice

“Too Big To Fail ” Requires Nationalization Once banks have become “ too big to fail ”, meaning that everyone recognizes that the government will always bail out these large banks in order to avoid a systematic collapse, then it follows as a matter of straightforward logic and economic justice that these banks have to be nationalized.