Social Structure of Accumulation Economics Discussion

Description

Explain what is meant by the “social structure of accumulation (SSA)?” What are the four dimensions of each social structure of accumulation? How does an SSA promote a high rate of profit and capital accumulation? Why does the SSA’s ability to promote a high rate of accumulation eventually diminish? 

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Wrapping up …
? Unemployment and Business Cycles
? Definitions & importance
? Why, in most years, are a significant
percentage of workers unemployed?
? What policies can be used to combat
unemployment and recessions?
1
Keynesian Policy
? Keynes proposed a way for the government to
? Reduce the ups and downs of the business
cycle
? Move the economy toward full
employment.
2
Moderating the Business Cycle
Government “leans against the wind.”
? When I rising rapidly:
? Lower G, Raise T and i
? When recession threatening
? Raise G, lower T and i
? Automatic stabilizers do this
? Unemployment compensation
? Income taxes
? Food stamps
3
Eliminating Unemployment
? Government expands aggregate demand
until there is full employment by
? Increasing G
? Reducing T
? Lowering the interest rate
? Keynes thought increase G was the most
effective policy measure against high
unemployment.
4
Budget Deficits
? Suppose G increases with no tax increase, to reduce
unemployment.
? This may lead to a budget deficit (G>T)
? How is this financed: the government borrows from
the public or from the Federal Reserve.
? Rationale: Unemployment occurs because private I is
too low – business is unwilling to borrow to finance
enough I to bring full employment.
? Hence, government borrows the funds that business
declines to borrow and spends them.
5
Problems with full employment
? Unemployment has big costs.
? But full employment causes problems in a capitalist
economy.
? Full employment -> workers have a lot of bargaining
power -> wages rise rapidly -> profits fall.
? This is called the “high employment profit squeeze.”
? This can cause the capitalists to stop investing ->
recession.
? Full employment is not stable.
6
Problems with full employment
(cont’)
? If wage rise rapidly, why don’t firms just raise
their prices to maintain their profits?
? Competition limits the power of firms to
raise prices.
? If they do succeed in raising prices, the
result is a wage-price spiral type of
inflation.
? When this happens, the Fed raises
interest rates, leading to a recession.
7
Two problems of capitalism
Unemployment and business cycles have two
kinds of causes:
1. Coordination failure: Firms make investment
decisions independently, in pursuit of their
individual profit, and in ignorance of what the
others will do. But the net result of their
decisions can bring a recession that hurts
them all.
8
Two problems of capitalism
2. Class conflict
The unemployment rate affects the relative
bargaining power of labor and capital – at full
employment, capitalists cannot make much
profits.
9
Solving the two problems
? Keynesian policy provides a potential solution
to the coordination failure of capitalism at the
macroeconomic level:
? The government corrects for a coordination
failure of individual decision-making
through fiscal (changing G and T) and
monetary (changing i) policy.
? But it is not so easy to correct for the effects of
class struggle on the macroeconomy.
10
class 18
social structure of
accumulation theory I
3/27/22
Today
? How can we explain the distinct stages, or
forms, of capitalism over time?
? Why do severe long-run economic crises
periodically occur?
12
Social Structure of
Accumulation (SSA) Theory
SSA: A coherent, long-lasting set of institutions
that support profit-making and accumulation
Institution: a practice or behavioral pattern
Capitalist history shows a sequence of
distinct SSAs.
13
4 Dimensions of
an SSA
1
2
3
4
14
What are the relations among
capitalists, among
enterprises, among sectors
of the economy, and within
enterprises?
1
capitalcapital
relation
15
What is the character of the
relation between labor and
capital?
2
capitallabor
relation
16
What types of labor are
performed, what is the
nature of the labor process?
3
laborlabor
relation
17
What roles does the state
play in the economy?
4
stateeconomy
relation
18
How an SSA Promotes Profit Rate and Accumulation
The institutions of an SSA promote a high profit rate by
affecting the wage rate, productivity, intensity and
duration of labor.
An SSA promotes growth of total demand which is
necessary for continuing accumulation.
The institutions of an SSA encourage accumulation by
creating stability and predictability.
19
Two Phases of an SSA
consolidation
1
The period when the SSA has been
largely built and is working
effectively.
2
decay (or crisis)
an SSA can
last 25 to
50 years.
The period when the SSA no longer works
effectively to promote profit-making and
accumulation.
20
Why does an SSA eventually stop
working effectively?
Capitalism and capital accumulation always
eventually produce conflicts and problems that
undermine further expansion:
? Growing capital-labor conflict
? Excessive competition
? Insufficient growth of total demand
An SSA resolves those problems but not permanently.
21
eventual
fall in the rate of profit
instability discourages accumulation
key institutions of the SSA collapse
22
The Crisis Phase
? Once the SSA stops working effectively, longrun economic crisis begins.
? This is the SSA theory of long-run crisis – the
crisis begins when an SSA stops working
effectively.
? There follows a long period of economic
instability and either stagnation or decline.
23
How does an
SSA Crisis
End?
24
If capitalism is to survive, a new SSA
must be created.
? Various classes and groups engage in political
and economic struggle to create new
institutions.
? So far, every crisis of an SSA has been followed
eventually by the construction of a new SSA that
again promotes profit making and accumulation.
? Each new SSA has been different in at least some
respects from the previous ones.
25
Dating and Naming the Current SSA
Understanding
Capitalism:
Transnational
capitalism
1991 to present
Most SSA Theorists:
Neoliberal
capitalism.
Around 1980 to
present.
26
Four SSAs in US History
1. Competitive Capitalist SSA
? (1840s to 1890s)
2. Monopoly Capitalist SSA
? (1890s to 1940s)
3. Regulated Capitalist SSA
? (late 1940s to ~1980)
4. Neoliberal Capitalist SSA
? (~1980 to present)
27
Competitive Capitalist SSA
1840s-1890s
? Competitive industrial structure of small, local
companies
? Owner directly controls the labor process and workers,
although skilled craft workers have some bargaining
power.
? Free immigration supplies a growing labor force
? Limited role in the economy, but government aids in
the creation of a national market through subsidizing
canals and railroads and tariffs on imports.
28
Crisis of Competitive Capitalist SSA
Period of crisis: 1870s-1890s
Long and severe recessions.
Deflation – prices fell over the period.
Rise of large corporations with increasingly intense
competition among them.
Periodic financial crises.
Growing class conflict: railroad and industrial strikes,
general strikes.
29
Monopoly Capitalist SSA
1890s-1940s
1) Domination of many industries by a few major giant
national corporations
2) A few banks control a large part of the non-financial
sector.
3) Restrained, or co-respective, competition in many
industries.
4) Mechanization leads to rapid growth of relatively
homogeneous semi-skilled machine-operator type
jobs.
5) Owners control the labor process through a
hierarchical system of managers and foremen.
30
Monopoly Capitalist SSA
1890s-1940s (con’t)
6) State aids companies in repressing labor unions ?
workers have little bargaining power.
7) Some state regulation of business: food, drugs, antitrust, Federal Reserve, railroads, telephone
communication, electric power
8) First major assertion of US power beyond the border
region in support of US business interests.
Puerto Rico, Cuba, Philippines.
9) New philosophy holding that of all groups in society
should share the fruits of progress through
cooperation among business, labor, and
government.
31
Monopoly Capitalist SSA
1890s-1940s (con’t)
In last decade before Great Depression – the 1920s –
there was significant shift back toward the type of
institutions in the crisis period of first SSA:
Intensifying competition
State withdraws from regulation of business
Return of the philosophy of rugged individualism.
32
Crisis of Monopoly Capitalist SSA
Great Depression lasting from 1929-39.
Very intense class conflict: millions of industrial and
other workers join new unions, general strikes,
sitdown strikes.
World War II 1942-45: Labor gains from full
employment, participates in government planning of
the economy.
In 1945 unions were very strong, led a big strike wave in
1946, US Communist Party had significant influence.
33
Regulated Capitalist SSA
late 1940s – about 1980
1) Rise of the transnational corporation.
2) Wider practice of co-respective, restrained
competition among large corporations.
3) Peaceful collective bargaining
Result: A major part of the jobs become stable, longterm jobs with rising pay over time.
4) Government regulation of the financial sector.
5) Government social programs provide security for
workers.
6) Progressive income taxation.
34
Regulated Capitalist SSA
late 1940s – about 1980 (con’t)
7) Fiscal and monetary policies promote economic
growth and low unemployment.
Keynesian policies are followed.
8) Government regulation of business is extended to job
safety, product safety, and environmental protection.
9) Government spending on weapons and
transportation system plays a major role in the
economy.
10) US becomes the dominant capitalist world power.
35
Regulated Capitalist SSA
late 1940s – about 1980 (con’t)
11) Bretton Woods System: US dollar is the international
money backed by gold.
Fixed exchange rates for major currencies.
Governments allowed some control of capital
movements and trade in goods and services.
12) New ideology of the “mixed economy.”
A capitalist system is viewed as the best system but
active state intervention and regulation are necessary.
The ideas of John Maynard Keynes were a major part of
this new dominant ideology.
36
How did Regulated Capitalist SSA
Emerge?
Supporters of regulated capitalism in the late1940s:
organized labor and most of big business.
Reasons for big business support:
1) Big business had tried to defeat the new unions but
failed – ready to make a deal.
2) Fear that the Great Depression would return unless
the state stabilized the economy.
3) Fear of strong Socialist and Communist parties in the
major capitalist countries.
4) Rivalry with the state socialist countries.
37
U.S. Economic Performance 1948-73
1) US and world capitalist GDP grew faster than at any
other time before or after.
2) The average real wage grew by 2.2% per year, just
below the 2.4% growth rate of output per hour.
3) Income distribution was unequal, but it became
somewhat less unequal over time.
4) Public services expanded, including K-12 education
and very low tuition public higher education.
Often called the “Golden Age of Capitalism.”
38
class 19
social structure of
accumulation theory 2
3/30/22
Four SSAs in US History
1. Competitive Capitalist SSA
? (1840s to 1890s)
2. Monopoly Capitalist SSA
? (1890s to 1940s)
3. Regulated Capitalist SSA
? (late 1940s to ~1980)
4. Neoliberal Capitalist SSA
? (~1980 to present)
2
Today
? How can we explain the distinct stages, or
forms, of capitalism from 1940 to now?
3
Regulated Capitalist SSA
late 1940s – about 1980
1) Rise of the transnational corporation.
2) Wider practice of co-respective, restrained
competition among large corporations.
3) Peaceful collective bargaining
Result: A major part of the jobs become stable, longterm jobs with rising pay over time.
4) Government regulation of the financial sector.
5) Government social programs provide security for
workers.
6) Progressive income taxation.
4
Regulated Capitalist SSA
late 1940s – about 1980 (con’t)
7) Fiscal and monetary policies promote economic
growth and low unemployment.
Keynesian policies are followed.
8) Government regulation of business is extended to job
safety, product safety, and environmental protection.
9) Government spending on weapons and
transportation system plays a major role in the
economy.
10) US becomes the dominant capitalist world power.
5
Regulated Capitalist SSA
late 1940s – about 1980 (con’t)
11) Bretton Woods System: US dollar is the international
money backed by gold.
Fixed exchange rates for major currencies.
Governments allowed some control of capital
movements and trade in goods and services.
12) New ideology of the “mixed economy.”
A capitalist system is viewed as the best system but
active state intervention and regulation are necessary.
The ideas of John Maynard Keynes were a major part of
this new dominant ideology.
6
How did Regulated Capitalist SSA
Emerge?
Supporters of regulated capitalism in the late 1940s:
organized labor and most of big business.
Reasons for big business support:
1) Big business had tried to defeat the new unions but
failed – ready to make a deal.
2) Fear that the Great Depression would return unless
the state stabilized the economy.
3) Fear of strong Socialist and Communist parties in the
major capitalist countries.
4) Rivalry with the state socialist countries.
7
U.S. Economic Performance 1948-73
1) US and world capitalist GDP grew faster than at any
other time before or after.
2) The average real wage grew by 2.2% per year, just
below the 2.4% growth rate of output per hour.
3) Income distribution was unequal, but it became
somewhat less unequal over time.
4) Public services expanded, including K-12 education
and very low tuition public higher education.
Often called the “Golden Age of Capitalism.”
8
Percentage Increase in the Average Real Family
Income of Quintiles and the Top 5 Percent.
140%
131.4%
120%
103.0%
112.6%
108.6%
99.6%
100%
86.7%
74.0%
80%
60%
51.7%
40%
28.2%
18.0%
20%
11.0%
0.6%
0%
Lowest fifth
Second fifth
Third
fifth
Fourth
fifth
Highest fifth Top 5 percent
1948 to 1973
1979 to 2007
9
Crisis of Regulated Capitalism
Period of crisis of regulated capitalism: late 1960s to
about 1980.
Starting in the late 1960s peaceful collective bargaining
gave way to growing class conflict over wages and
working conditions.
In the late 1960s the unemployment rate got so low that
workers had a lot of bargaining power.
This was a major factor in the sharp decline in the profit
rate after 1966.
10
Figure 4.1 Rate of Profit in the US and in Three European Economies
US Profit Rate
European profit rate
26.0
24.0
20.0
18.0
16.0
14.0
12.0
10.0
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Percentage Rate of Profit
22.0
Year
11
Crisis of Regulated Capitalism (con’t)
US capitalists were facing challenges from every
direction in 1966-80:
1) US workers were demanding a bigger share of the
income.
2) Rival capitalists in Europe and Japan were gaining
market share in many industries in US.
3) There were rebellions in the developing countries
against Western control (Vietnam War).
4) Oil producing states in the Middle East and Latin
America were asserting control over their oil, raising
the price.
12
Crisis of Regulated Capitalism (con’t)
These conflicts produced economic effects:
1) Spiraling inflation
2) Instability in the international monetary system
3) Severe recessions in 1974-75 and again in 1980-82.
13
What Does “Liberal” Mean?
? In U.S. politics, “liberal” means favoring an active
government aimed at benefitting the majority.
? Liberals believe the government should act as a
counter-force to the power of business and should
regulate business.
? Outside the U.S., “liberal” means the opposite:
favoring a very limited government role in the
economy.
? “Liberal” means a free-market approach outside the
U.S.
14
The Neoliberal SSA
? The new SSA that began to develop in the late
1970s embodied the non-US meaning of
liberalism.
? It is usually called “neoliberalism,” meaning
new or modified liberalism.
? The neoliberal SSA is the new institutional
form of capitalism that arose during late 70searly 80s.
15
New Economic Theories
Claims of the new neoliberal economic theories:
1) A capitalist economy produces optimal results
without any government regulation.
Government intervention and regulation will only
produce worse outcomes.
2) All unemployment in a capitalist economy is
voluntary.
If the government spends money to create jobs, it will
reduce private sector jobs by an equal amount.
16
New Economic Theories (con’t)
3) The state is an enemy of individual freedom.
4) Labor unions are organizations that prevent free
choice by individual workers.
By the late 1970s, these new economic theories had
become dominant in academic economics in the US
and UK, replacing the previous Keynesian theories.
17
Emergence of the Neoliberal SSA
Key developments:
1. In the U.S., the Carter Administration shifts toward
neoliberal policies in 1979.
2. In the U.K., Conservative Party leader Margaret
Thatcher becomes Prime Minister in 1979.
3. In 1981 Ronald Reagan takes office.
By the early 1980s a neoliberal SSA had emerged in the
US and UK.
18
Neoliberal Capitalist SSA
1979 to the Present
1) Marginalization of collective bargaining, employers
set wages and working conditions.
2) Deregulation of business and finance.
This included deregulation of the banks.
3) Privatization of government services through
contracting them out to private companies.
4) No more use of fiscal policy to promote growth and
low unemployment.
5) Big reductions in government social programs.
19
Neoliberal Capitalist SSA
1979 to the Present (con’t)
6) Reduction in taxes on business and the rich.
7) Change in the labor process from stable long-term
jobs to temporary, contingent, and part-time jobs.
8) An unrestrained form of competition among large
corporations.
9) Introduction of market principles inside large
corporations.
This included hiring CEOs from the outside.
20
Neoliberal Capitalist SSA
1979 to the Present (con’t)
10) Removal of barriers to movement of goods, services,
and capital across national boundaries.
11) After the disintegration of the USSR in 1991, the US
becomes the lone superpower, dominant in the
entire global system.
12) A new dominant ideology: neoliberal ideas, which
endorsed all of the above.
21
Why did the Neoliberal SSA Arise?
1) A main cause of the crisis of the 1970s was the rising
bargaining power of the working class.
Neoliberalism served to resolve that problem for the
capitalist class.
2) The political coalition that had built regulated
capitalism – organized labor and big corporations -dissolved in 1970s.
In the 1970s big corporations shifted from support of
regulated capitalism to support for neoliberal
restructuring.
22
Why did Big Corporations Shift to
Support for Neoliberalism?
1) The Great Depression had become a distant memory
and seemed to be an accident.
2) Socialist and Communist parties in the capitalist
countries had weakened and become reformist.
3) The Communist Party led governments seemed to be
no longer a serious threat to capitalism.
During 1980-91 those countries turned away from state
socialism.
23
Why did Big Corporations Shift to
Support for Neoliberalism?
4) Big business wanted to reverse the expansion of
government social regulation:
Environmental, consumer product safety, and job
safety regulation.
24
U.S. Economic Performance under the
Neoliberal SSA
1) The profit rate recovered and rose in the US (and also
in Western Europe).
2) There were 3 long economic expansions: 1982-90,
1991-2000, 2001-07
Inflation was very low after the mid 1980s.
3) GDP growth was not very rapid.
25
Figure 4.1 Rate of Profit in the US and in Three European Economies
US Profit Rate
European profit rate
26.0
24.0
20.0
18.0
16.0
14.0
12.0
10.0
19
48
19
50
19
52
19
54
19
56
19
58
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
Percentage Rate of Profit
22.0
Year
26
Annual Growth Rate of U.S. Gross Domestic
Product in 2005 Dollars
4.5%
4.0%
4.0%
3.5%
3.0%
3.0%
3.0%
1973 – 1979
1979 – 2007
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
1948 – 1973
27
U.S. Economic Performance under the
Neoliberal SSA (con’t)
4) Wages declined over time: 1979-2007 the average
real wage fell by 1%, while labor productivity rose by
72.7%.
5) Economic inequality rose rapidly.
The richest 0.01% of families received 5% of total
income in 2005, compared to 1-1.5% of income in the
1950s (those figures include capital gains income).
This was the highest share for the top 0.01% since 1929.
28
Wages and Property Income as Shares of Total Private Sector Income
90%
80%
77.4%
70.8%
70%
60%
50%
40%
29.2%
30%
22.6%
20%
10%
0%
1979
2007
Wages
Property Income
29
Shares of Total Income
60.0
48.5
50.0
41.4
40.0
30.0
24.1
20.0
22.9
21.5
17.5
15.3
15.1
11.6
9.5
10.0
5.4
4.0
0.0
Lowest fifth
Second fifth
Third fifth
Fourth fifth
1979
Highest fifth
Top 5 percent
2006
30
Percentage Increase in the Average Real Family
Income of Quintiles and the Top 5 Percent.
140%
131.4%
120%
103.0%
112.6%
108.6%
99.6%
100%
86.7%
74.0%
80%
60%
51.7%
40%
28.2%
18.0%
20%
11.0%
0.6%
0%
Lowest fifth
Second fifth
Third
fifth
Fourth
fifth
Highest fifth Top 5 percent
1948 to 1973
1979 to 2007
31
U.S. Economic Performance under the
Neoliberal SSA (con’t)
6) The unemployment rate was higher than in the
previous SSA.
7) A series of financial crises occurred outside the US.
8) Huge global imbalances developed starting in the
late 1990s.
The US ran a deficit on trade in goods and services of 36% of GDP starting in 1999.
Other countries ran large trade surpluses: Germany,
China.
32
Average Annual Unemployment Rate in
the U.S.
6.8%
7.0%
6.1%
6.0%
5.0%
4.8%
4.0%
3.0%
2.0%
1.0%
0.0%
1949-1973
1974-1979
1980-2007
33
Average Unemployment Rate in Five Countries
Country
1950-73
1974-79
1980-2000
France
2.0
4.6
10.0
Italy
6.1
6.7
10.7
Japan
1.7
1.9
2.9
UK
1.8
4.8
8.5
USA
5.0
6.7
6.4
34
How does your family’s
history fit into the
economic timeline?
35
Suppose we were researchers
doing detective work to decide
whether the idea of social
structures of accumulation is a
sound one.
Think of it as a hypothesis – a claim
that is both debatable and testable.
How would we test it?
36
class 20
2008 economic crisis
4/4/22
Last Class
? Regulated Capitalism
? Characteristics, how it emerged
? Performance
? Crisis
? Neoliberal Capitalism
? Characteristics, how it emerged
? Performance
2
Today’s Class
? The emergence of the crisis
? How neoliberal capitalism eventually
produced the financial crisis and the Great
Recession
? The government’s responses to the crisis
? The economy after 2009
3
Financial Deregulation
? Before 1980, banks and other financial institutions
in the US were closely regulated by the
government (since 1930s).
? Staring in the early 1980s, these controls were first
loosened, then largely eliminated.
? In 2000 the last major bank regulatory law from
the 1930s was replaced.
? Banks and other financial institutions had been
freed to do whatever brought the highest profit
4
Financial Deregulation (cont)
? Alan Greenspan
? Chairman of US Federal Reserve 1987-2006
? In 2008 be said before US Congressional
committee: “I believed the self-interest of
banks was sufficient to regulate them.”
? The leading economists thought bank
deregulation would increase efficiency and
would reduce risk
5
One Way to Borrow Money
? Traditional loan: A legally recognized
agreement between 2 parties, the borrower
and lender.
? The agreement specifies the amount of the
loan, schedule of payments, interest rate,
collateral, etc.
? Mortgage: A traditional loan for buying a
house (or commercial property) – the house is
the collateral.
6
2nd Way to Borrow Money
? Securities: The borrower issues documents
called securities and sells them to investors.
? The securities have a face value and specify
the term and interest payments.
? Securities can be resold again and again.
7
Securities
? Bond: A type of security used by corporations
and governments to borrow money.
? Shares of stock in a corporation are securities
– the holder has ownership rights including
receipt of dividends.
8
Financial “Innovation” #1
? Securitization of home mortgages.
? Previously home loans and traditional
mortgage loans between homeowner and
bank.
? New system arose: many mortgages were
pooled together and securities were created
backed by the mortgages
? Mortgage backed security (MBS): a security
based on a large number of mortgages
9
Financial “Innovation” #2
? Subprime mortgage: mortgage for a person
with a bad credit rating.
? “NINJA” mortgage – for someone with “no
income, no job, no assets”
? Adjustable rate mortgage (ARM): Interest rate
is very low initially, later can rise significantly
10
Financial “Innovations” #3, 4, 5
? Financial derivative: A security or other assets
whose value depends on the value of something
else.
? Collateralized debt obligations (CDOs): Securities
that make payments from other securities.
? Credit default swap: A two-party insurance
contract that pays the buyer if some future event
occurs, such as the default (failure to pay) of a
bond.
11
Financial “Innovations”
? Subprime mortgages outstanding rose from near
zero in late 1990s to $625 billion in 2006 and $1
trillion by January 2008.
? In 2006 and early 2007 $450 billion of CDOs were
created based on asset-based securities.
? Value of credit default swaps grew from $1 trillion
in 2001 to $65 trillion in 2007.
? Credit default swaps’ value grew to 12 times the
value of the securities they insured.
12
? Why did the value of credit default swaps rise
to about 12 times the value of the securities
they insured?
? Why did respected economists think it was a
good idea to allow trillions of dollars of
subprime securities to spread through the
financial system?
13
More Deregulation
? In 1999 Brooksley Born, the head of the
Commodity Futures Trading Commission,
proposed regulation of derivatives.
? She was stopped by Lawrence Summers, then
US Treasury Secretary.
? A ban of regulation of derivatives was written
into the law later in 1999.
14
Warning
? Warren Buffet, US investor, warned in March
2003:
? Financial derivatives of “financial weapons
of mass destruction, carrying dangers that,
while now latent, are potentially lethal.”
? This warning was ignored.
15
The Financial Crisis
? Housing prices kept rising from 2001 to 2005.
? People were persuaded they would rise forever.
? Many subprime loans had a low “teaser rate”
for 2 years then would rise (2% – 10%).
? Borrowers were persuaded that in 2 years their
home value would be much higher.
? They could avoid the rate increase by
refinancing, take out a new low-rate loan to pay
off the old one.
16
The Financial Crisis
? In 2006 housing prices in the US stopped
rising and in 2007 they began to fall.
? Once US housing prices started to fall, all the
securities based on home mortgages were
endangered.
? In 2007 the first signs of financial problems
emerged.
17
Estimated Average House Price by Calendar
Quarter, 2000-2010
18
The Financial Crisis
? Crisis broke out fully in September 2008:
? US Treasury bailed out Fannie Mae and
Freddy Mac, two giant privately owned by
government sponsored enterprises.
? It rescued Merrill Lynch and AIG Insurance.
? Lehman Brothers was allowed to fail
? Suddenly trillions of dollars of assets on the
books of financial institutions in the US and
other countries turned out to be “toxic”
19
The Financial Crisis
? Several times the global banking system started to
“seize up” – major banks would not lend to each
other.
? The biggest US banks became insolvent.
? Citigroup and bank of America were bailed out.
? All leading US investment banks faced failure and
had to convert to bank holding companies.
? A similar financial meltdown happened in the UK
and several other countries.
20
The Financial Crisis
? The US government eventually made
commitments to spend, lend, invest, or
guarantee $12.1 trillion (85% of GDP) for
financial institutions.
? Actually used $2.5 trillion.
? Unemployment rate rose from 4.9% in Jan
2008 to 10.0% in Oct 2009
? 8.3 million jobs were lost from December
2007 to October 2009.
21
Neoliberal Capitalism in the USA
? Deregulation
? Privatization
? Renunciation of
Keynesian macroregulation
? Reductions in social
spending
? Tax cuts for businesses
and the rich
? Attack on trade unions
? Shift to temporary and
part-time workers
? Unrestrained
competition
? Market in corporate
CEOs
22
Three Developments
The features of neoliberal capitalism gave rise
to 3 developments:
1. Growing inequality
2. Financial sector increasingly devoted to
speculative high-risk activities
3. Series of large asset bubbles.
23
Asset Bubbles
? Asset bubble: A sustained rise in the price of an asset
due to purchases of the asset that are motivated by an
expectation of further rises in the asset price.
? The aim of buyers is to obtain capital gains from further
increase in the asset price.
? An asset bubble is a continuing, self-sustaining rise in
the price of an asset without any relation to the true
economic value of the asset.
24
Roots of these 3 Developments
? Inequality: All features of neoliberal
capitalism contributed to the rapid growth of
inequality.
? Speculative, high-risk financial sector:
Result of financial deregulation, Unrestrained
competition, Market in corporate CEOs
? Asset bubbles: Result of first 2 developments
25
Speculative, High Risk Financial
Sector
? The share of profits of financial institutions in
total corporate profits:
? 1979: 21.1%
? 2002: 41.2%
26
Neoliberalism and Long Expansions
? Rapid growth of profits produced a strong
incentive to expand production.
? Problem: With wages stagnating or falling,
who will buy the growing output?
? Someone had to spend more than their
income.
? Asset bubbles provides the collateral.
27
1990s Asset Bubble
? The stock market bubble stimulated rising
consumption by middle- and upper-income
households.
? They borrowed against the rising securities
wealth.
? This permitted consumer spending to rise
faster than GDO during 1997-2000, which
prolonged the expansion.
28
Expansion of 2000s
? Solving the demand problem
? Asset bubble provided the collateral for
borrowing, enabling spending more than
income.
? Speculative financial sector provided the
supply of loans.
? Inequality guaranteed a demand for loans.
29
Financial Crisis
? The character of the long expansions under
neoliberal capitalism gave rise to
unsustainable trends.
30
Figure 6. Household debt as a Percentage of Disposable Personal Income
140.0%
130.0%
128.8%
120.0%
110.0%
100.0%
90.0%
91.1%
80.0%
77.5%
70.0%
60.0%
59.0%
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
50.0%
31
Unsustainable Trends
? Household debt could not rise indefinitely.
? As the financial fragility of the financial sector
rose, it became increasingly vulnerable to the
deflation of a bubble.
? As the size of bubbles grew, the potential
impact of bubble deflation grew larger.
? The deflation of the housing bubble was the
final act, destroying the financial system.
32
Great Recession
? The housing bubble deflation was the main immediate
?
?
?
?
cause of both the financial crisis and the recession in the
nonfinancial sector (“Great Recession”).
As the bubble deflated, consumer spending and
residential investment contracted.
This had a secondary impact on business fixed investment.
Declining state and local tax revenues forced cuts in public
spending.
The global spread of the recession reduced export
demand.
33
Government’s Response to the Crisis
? Sudden return of Keynesian ideas and policies.
? Fed pursued super-expansionary monetary policy.
? Drove short-term interest rates to zero.
? Even some leading neoliberal economists
endorsed a big government spending program.
? Congress passed a $787 billion economic stimulus
bill made up of spending and tax cuts over two
years in Feb 2009
34
Reaction against Keynesian Policies
? By the beginning of 2010, banks had been bailed out
and the steep dive of the real sector had been stopped.
? Suddenly the neoliberal ideas were back.
? Spring 2010: warnings about rising government
deficits/debt appeared.
? Deficit: 10.8% of GDP in q2 2010
?