Economic Crisis 09 10 2012 Economic Crisis Lecture 9 10 12 Great Depression led to unemployment rates of up to 25 Great Depression led to fascism in Europe Financial Economic Crises are business as usual 2001 dot com bubble 1997 98 east Asia and Long Term Capital Management LTCM led by 2 Nobel Prize winners in finance economics 1989 90 Savings and Loan Crisis 150 billion bailout 1987 Stock Market Crash 23 decline 10 19 87 Bubble mentality East Asian economies were growing rapidly population was productive money flowed into east Asia rapidly the economy grew very quickly financial markets rose stock market values rose then it crashed LTCM crashed after 3 years created by 2 people Nobel prize winners financial experts and Savings and Loan financed the growth of individual family homes took in savings accounts Stock Market Crash 1 4 of all its value lost in one day Historical Pattern Kindleberger Manias Crashes and Panics Crisis every 8 5 years from 1770 present Basic Pattern Overleveraging Borrowing too much in pursuit of new profit opportunities Creates self reinforcing bubble Crisis begins when bubble bursts Impact of Financial Regulation and Deregulation Bipartisan support for deregulation Overleveraging borrowing too much idea that there s a shift in financial expectations Crisis occurs when people can t pay back the money they borrow The break in the pattern of a recession 8 5 years occurred after World War 2 As a result of the calamity of the GDP there was serious regulation put in place financial reform through FDR new deal Deregulation started the pattern up again Pattern of deregulation started to occur in the 1970 s 1998 the basic laws made by Glass and Steagle the new deal law was overturned Clinton Economic Advisors on Financial Deregulation 2001 economic report of the President given the massive financial instability of the 1930 s narrowing the range of banks activities was arguably important for that day and age But those rules What was Different This Time Subprime mortgage market and housing Bundling and securitizing mortgages Why it was supposed to reduce risk Role of rating agencies Moody s Standard Poors Why it actually increased Subprime market higher risk Bundling buy a lot of mortgages from the bank and bring them together then sell it as a stock or a bond investments collapsed Made to reduce risk to lenders Rating agencies evaluate risk and give grades heart of the problem rating agencies were using the concept of bundling mortgages and making high risk investments seem like low risk When housing prices collapsed people s ownership in the house also Impact of Collapse of Household Wealth creates macroeconomic vicious cycle Households less willing able to spend Leads to businesses less willing to invest to expand business Leads to less job creation Leads to markets are less buoyant How to break a vicious cycle Government spend money Stimulus program The Economy and You Results of Class Survey 09 10 2012 Economics Really is About You Nearly 70 of you and your families have experienced some hardships due to the financial crisis and recession income loss job loss loss of homes More than 90 also know people in other families who have experienced hardships family more severe hardships when broaden circle out beyond one s own overleveraging is what caused so much debt to be created Mortgage backed security buying something that has a high return but through financial markets it was perceived that the risk wasn t so high Economics as a Moral Science 1 09 10 2012 What is an Economy Economic Organizations o Households o Businesses o Markets o Governments o Money and Exchange How do they interact Combination of interactions defines an economy Capitalism and Socialism What is a Capitalist Economy o The US Market Economy Colander p 54 Meltzer p 3 What is a socialist economy o Socialism is based on individuals goodwill towards others Colander p 55 Alternative Perspectives on Video o Milton Friendman vs Michael Harrington o Noam Chomsky Alternative Perspectives on Economics o Institutionalist Radical Feminist Post Keynesian Religious Austrian Colander Preface for Students The Reality is Mixed Economies But What Mix Morals and Science Again Us as Market Economy but with Large Government Spending on o Public Education health care public pensions military o How large is government spending as share of economy Government interventions to stabilize economy Government regulations to prevent undesirable things that markets wont stop How do we pay for government activities o Warren Buffet tax proposals Stop Coddling the Super Rich Public Sector accounts for 35 of spending in the US Economy Government Interventions Regulations Interventions Regulations around Jobs o Supporting job creation Why Full Employment Pollin pp 7 9 o Minimum wage o Rights to organize unions Financial Markets o Limits on speculative trading Environmental Protection o Controlling greenhouse gas emissions Should there be o Bank Bailouts o More money to reduce poverty 46 million in poverty 15 highest in 52 years Two Observations by Adam Smith Adam Smith as First Great Economist Considered himself a Moral Philosopher Strong Supporter of both o Market Economy o Moral Foundation of Society Author of Wealth of Nations 1776 and Theory of Moral Sentiments 1759 If you want bread give me money Don t give me bread because I need bread give me bread because I will give you money It is necessary for a market economy to operate to worship the powerful and the rich at the same time it is the universal cause of the corruption of our moral sentiments Economics as a Moral Science 2 Analytics of Minimum Wages Basics on Minimum Wages What is a minimum wage 09 10 2012 o Lowest amount of money an employer can legally pay an employee What is a Living Wage o A minimum wage high enough to support a worker and his her family at decent minimal standard Certainly Combines Questions of Science and Morality o Is the Law of Unintended Consequences at Work o Hurting people you are trying to help The Minimum Wage Over Time Nominal vs Real Minimum Wage o Making an adjustment for inflation and the cost of living Nominal value of minimum wage is 350 higher than 1968 o 1 60 in 1968 7 25 today Real value of minimum wage is 27 lower than where it was in 1968 But Does Minimum Wage cause Unemployment Law of Demand o Raise the price of anything and demand will fall Colander The minimum wage hurts those who cannot find work a at the minimum wage but