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 http://www.getrichslowly.org/blog/2009/02/25/the-credit-crisis-

visualized/

Break

Be back in 10 minutes for the analysis

The Micro Economic and Political Consequences Bill Moyer’s Report

http://www.pbs.org/moyers/journal/07182008/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 page

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

http://www.thedailyshow.com/watch/tue-march-16-2010/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 http://hnn.us/articles/1849.html.

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), 409-422

Phillips, Kevin (2002). Wealth and Democracy. New York: Random House.

Stigliz, Joseph 2010. Freefall: America, free markets and the sinking of the world economy. New York: Norton Press.

Q and A