Dean Baker CoDirector Center for Economic and Policy Research April 13 2012 Key Points on the Economic Crisis The main cause was the collapse of the 8 trillion housing bubble The financial crisis was secondary ID: 803215
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Slide1
The Causes and Cures of the Economic Crisis
Dean Baker, Co-DirectorCenter for Economic and Policy ResearchApril 13, 2012
Slide2Key Points on the Economic Crisis
The main cause was the collapse of the $8 trillion housing bubbleThe financial crisis was secondary
In the short-term the government must fill demand gap, in the longer term the dollar must fall to reduce the trade deficit.
Slide3Real House Prices Rose
by More Than 70 Percent
Source: Case-Shiller 20-city index.
Slide4Demand Generated by the Housing Bubble
Construction rose to near record levels – more than 2 percentage points of GDP (@$300-400 billion annually)
Consumption soared, based on bubble generated equity, as savings fell to near zero (@ $600 billion annually)
Bubble in non-residential real estate led to construction boom (@$150 billion annually)
Slide5Lost Annual Demand due to the Recession and the Annual Stimulus, 2009-2010
Slide6Elements of the Financial Crisis
Issue to fail mortgages – main abusers were lenders, not borrowersNegligence/fraud by securitizers (investment banks)
Negligence/fraud
by rating agenciesAIG and credit default swaps
Extreme
negligence by regulators, first and foremost the Fed
Slide7Choices in the Financial Crisis
Bailout banks without conditionsBailout banks with strict conditionsLet banks fail
Second
Great Depression was not a risk.
Slide8Route Chosen: Bailout with Few Conditions
TARP Money – $700 billion appropriated, less than $500 billion usedFed lending – over $3 trillion
Fed
, Treasury and FDIC guarantees – many trillion
Slide9The Financial System is Not the Problem
Homebuyers are able to get mortgages (Mortgage Application Index
)
Firms can borrow on credit markets at unusually low interest rates (we are not Japan
)
Even small firms do not consider credit a
problem
Investment in equipment and software is close to pre-recession
levels
Slide10Interest rates on Aaa and Baa corporate debt, 1981-2010
Slide11Investment in Equipment and Software as a Share of GDP, 2000-2011
Slide12Ways Out of Current Downturn
Stimulus – spend moneyyouth jobs programsaid to state and local governmentsinfrastructure projects
Federal Reserve Board
Lower valued dollar – move toward balanced
trade
Work
Sharing – fewer hours per job, more
jobs
Slide13Conclusion: We Must Act Quickly to Restore Economy
Long-term unemployment is devastating to workers and familiesUnemployment is an enormous waste of resourcesWe know how to do it
It was not the unemployed who messed up on the job