The Causes and Cures of the Economic Crisis

Dean Baker, Co-DirectorCenter for Economic and Policy Research

September 14-15, 2011

Key Points on the Economic Crisis 

1) The main cause was the collapse of the $8 trillion housing bubble

2) The financial crisis was secondary3) In the short-term the government must

fill demand gap, in the longer term the dollar must fall to reduce the trade deficit.

Real House Prices Rose by More Than 70 Percent

Source: Case-Shiller 20-city index.

Lost Annual Demand due to the Recession and the Annual Stimulus,

2009-2010

The Financial System is Not the Problem

1) Homebuyers are able to get mortgages (Mortgage Application Index).

2) Firms can borrow on credit markets at unusually low interest rates (we are not Japan).

3) Even small firms do not consider credit a problem.

4) Investment in equipment and software is close to pre-recession levels.

Interest rates on Aaa and Baa corporate debt, 1981-2010

Investment in Equipment and Software as a Share of GDP, 2000-

2011

Budget Deficit as Percentage of GDP, 2002-2010

Potential Savings from Free-market Drugs, 2011-2020

Potential Revenue from a Financial Speculation Tax, 2011-2020

Ways Out of Current Downturn

1) Stimulus – spend moneya) youth jobs programsb) aid to state and local governmentsc) infrastructure projects

2) Federal Reserve Board3) Work Sharing – fewer hours per job,

more jobs4) Lower valued dollar – move toward

balanced trade

Conclusion: We Must Act Quickly to Restore Economy

1) Long-term unemployment is devastating to workers and families

2) Unemployment is an enormous waste of resources

3) We know how to do it4) It was not the unemployed who

messed up on the job