The Present Crisis
Michael Reich, Economics, UC Berkeley
Financial Bloat — Neil Fligstein, Sociology, UC Berkeley
1. My main theme is that the banks created the crisis. They did so by shifting their business in the early 1990s to a vertically integrated industrial model where they became involved in mortgage origination, mortgage securitization, the selling of mortgage backed securities, the holding of those securities as investments, and the servicing of the underlying loans. They made money off of all phases of the market.
2. This meant that by 2000, there were few differences between commercial banks, mortgage banks, savings and loans banks, and investments banks.
3. These facts explain two important features of the crisis: why all of these banks went bankrupt (or nearly so), and that all of them held onto mortgage backed securities because this is how they were making money.
4. The crisis was caused by the sudden move from the prime to sub prime market beginning in 2003. The prime market began to dry up and vertically integrated mortgage banks needed to find a new source for mortgages. They entered into the sub prime market with a vengeance.
5. When housing prices began to level out, people who had taken out sub prime mortgages were no longer able to refinance. This cascaded through the system. Since the entire model of banking depended on a continuous flow of mortgages, the downturn put pressure on all of the businesses of banks.
6. The good news: the vertically integrated banking model is dead with or without financial reform. The government owns half of the mortgages in the country and without the government, no mortgages will be written and the mortgage backed securities market is on life support. The bad news: the mortgage crisis has not run its course. A huge percentage of mortgages are under water. Even worse, given how important the finance driven sector of the economy was to economic growth from 2000-2008, it is impossible to see where growth will come from.
Housing Bubble & Bust — John Quigley, Economics & Public Policy, Berkeley
The Woeful Economy — Doug Henwood, Left Business Observer, New York
We all know the story of the proximate causes of the economic crisis - a housing bubble enabled by not merely massive applications of credit, but credit packaged in unimaginably complex and obscure forms and a dispersion of responsibility that comes with securitization. All that is true. But it also has a prehistory going back to the problems of the 1970s and the neoliberal prescription for fixing those problems.
The "problem" of the 1970s was, of course, stagflation (though the stag part is partly inaccurate - growth in the 1970s was pretty decent, better than the last decade). But the inflation part was important. Inflation wasn't just about rising prices - it was also. about sagging productivity, falling profitability, limp financial markets, and, less quantifiably, a general loss of discipline in the workplace and the erosion of American power in the world. The Volcker-Reagan crackdown - 20% interest rates, deep recession, debt crisis, the firing of PATCO - launched a very successful reversal of what the elite considered the 1970s syndrome. Profitability recovered strongly, productivity finally joined in, the world was neoliberalized, U.S. power enhanced, and discipline problems were a thing of the past.
But a system dependent on high levels of mass consumption - not only economically, but for political legitimation - has a hard time living with a wage squeeze. That potential sore spot was greatly assuaged by the liberal use of debt - credit card first, and then mortgage from the mid-1990s onward. The explosion in household credit - from 65% of disposable income in 1983 to 135% at the 2007 peak - is what made the booms and bubbles of the last three decades possible. But it seems impossible to go back to that old model of doing an economy. What next? While the encouragement of clean energy and other green technologies would seem to hold great promise for generating fresh growth over the longer term, the political and financial systems seem incapable of getting there - our ruling class, such as it is, seems to have lost the capacity to think beyond the next quarter.
Financialization & Reform — Rob Johnson, Senior Fellow and Director of the Global Finance project, Roosevelt Institute
» A Paradox of Risk Aversion: Structural Uncertainty and the Challenges of A Dysfunctional International Monetary System
» The Rich and Powerful Can Avoid Risk
» Too Big to Bail: The "Paulson Put," Presidential Politics, and the Global Financial Meltdown PART I
» Too Big to Bail: The "Paulson Put," Presidential Politics, and the Global Financial Meltdown PART II
» Credible Resolution: What It Takes To End Too Big To Fail
Learning from the New Deal
Rebuilding a Nation — Gray Brechin, Geography, UC Berkeley
Building (and Unearthing) A Civilization Worthy of the Name: The Ethical Content of New Deal Public Works and the Need for A National Inventory
When President Franklin Roosevelt requested a panel of architects to select the best structures built by the Public Works Administration up to 1939, the authors of the resultant tome concluded that future generations might "classify these years as one of the epoch-making periods of advancement in the civilization not only of our own country but also of the human race." Yet the beneficiaries of that vast and largely indispensable legacy of buildings, infrastructure and parks created by the New Deal's "alphabet soup" agencies within less than ten years of the Great Depression almost immediately took it for granted and forgot its origin after the war that killed those agencies. The oblivion into which those artifacts have fallen not only dishonors the veterans of forgotten peacetime armies such as the WPA, CWA, and CCC, but also serves the interests of critics like Amity Shlaes who claim that the New Deal only prolonged the Depression.
As John Ruskin claimed to find sermons in the stones of ancient architecture, a rediscovery of the quality and purpose of New Deal public works reveals a moral dimension largely buried under the ash fall of neoliberal rhetoric. Gray Brechin will explain the California Living New Deal project and the need to expand it into a national inventory of the varied initiatives undertaken by legions of workers to dig themselves out of the last Great Depression. That rediscovery suggests ways to dig out of our own.
The Payoff of Public Works — Jason Scott Smith, History, University of New Mexico
Stimulus & Response
Transformation of American Federalism — Margaret Weir, Sociology, Berkeley
Bailouts & Financial Reform — Dean Baker, Center for Economic Policy Research, W.D.C.
Controversies on the Great Recession
There are two main areas of controversy on the downturn. The first is over the need for TARP, the second is over the possible paths for boosting the economy.
On TARP, I would argue that the only thing seriously at risk was the survival of the Wall Street banks. With the possible exception of JP Morgan, all the investment banks and the top Wall Street banks would have collapsed in the absence of the TARP and special Fed and FDIC interventions. The government could have either made its support condition on a complete reshaping of these firms (e.g. binding pay caps of $1 million a year and a commitment to break up in a near time horizon) or it could have just let them collapse and then moved in to pick up the pieces.
Unless the Fed was unbelievably incompetent, it must have had a plan in place to maintain the system of payments in the event of a collapse. (It did in the 80s when the Latin American debt crisis threatened the money center banks.) This means that even in a worse case scenario, the Fed should have been able to get the system of payments in order again shortly after a collapse. (There would be 50 million lawsuits to sort things out, but who cares?)
The other issue is over what was and is needed to boost the economy. There seem three obvious routes to increased output, all blocked at the moment.
- more fiscal stimulus;
- having the Fed target an inflation rate of 3-4 percent (the only Fed action that is likely to have much effect);
- getting the dollar down against other currencies to boost trade.
If a boost to output is blocked, the other possible route to full employment is work sharing. This path also has the benefit that it can also advance longstanding goals of progressives, like paid vacations and paid family leave. In addition, getting workers to take the benefits of productivity in the form of more leisure rather than income would also have important environmental benefits.
Is a New Financial Order Possible? — Barry Eichengreen, Economics, UC Berkeley
Battered but Not Beaten — Brad DeLong, Economics, Berkeley
» Battered and Beaten
» Depression: Like an Ice-Cold Douche
» Does Washington care about unemployment?
» We Are Live at the Week: "A (Keynesian) Voice Crying in the Wilderness, Saying..."
» How Is It That We Have Lost the Argument?
Job Creation & Destruction — Jesse Rothstein, Public Policy, UC Berkeley
The Federal government's response to the Great Recession has been unprecedented since at least the Great Depression, with dramatic increases in Federal spending on stabilization and stimulus programs. One important part of this response has been a dramatic increase in the duration of unemployment benefits. Where traditional benefits last for 26 weeks and the pre-existing Extended Benefits program provides up to an additional 13-20 weeks, in recent years we have seen repeated extensions and reauthorizations of the Emergency Unemployment Compensation program. When first authorized in June 2008 this program provided 13 weeks of additional benefits (for a total of up to 59 weeks), but it was since expanded to 33 weeks (79 total) in November 2008 and to 53 weeks (99 total) in November 2009.
The case for extended unemployment benefits in the context of a weak labor market is strong: Even if the beneficiaries reduce their job search effort, this will just free up jobs for other workers with little effect on overall employment. Moreover, UI benefits are an attractive form of fiscal stimulus, as unemployed workers are likely to have high marginal propensities to consume. However, some observers have argued that UI extensions have increased the unemployment rate, possibly slowing the recovery of the labor market. Indeed, UI has even been held up as a source of "structural" unemployment that would make it impossible to get unemployment down to pre-recession levels even in the presence of strong demand.
There are two channels by which UI extensions might increase unemployment. First, UI might discourage the unemployed from searching aggressively for work. This would extend their unemployment spells (though there would be much less than a one-for-one impact on overall unemployment in a demand-deficient labor market, as noted above). Second, people who would otherwise have given up hope of finding jobs might continue their job searches in order to remain eligible for UI. Because people looking for work are counted as unemployed while those who have left the labor force are not, this would raise measured unemployment. There have been a few ad hoc efforts to estimate the importance of these two channels, but little is known about them.
Mishel, Lawrence, Heidi Shierholz, and Kathryn Edwards, "Reasons for Skepticism about Structural Unemployment: Examining the Demand-Side Evidence." Economic Policy Institute Briefing Paper #279, September 2010.
Tasci, Murat, and John Linder. "Has the Beveridge Curve shifted?" Federal Reserve Bank of Cleveland Economic Trends, August 10, 2010.
Fujita, Shigeru, "Economic Effects of the Unemployment Insurance Benefit," Federal Reserve Bank of Philadelphia Business Review, forthcoming.
Valetta, Rob and Katherine Kuang, "Extended Unemployment and UI Benefits," Federal Reserve Bank of San Francisco Economic Letter 2010-12, April 2010.
Hope in the Dark?
What is to Be Done? — Robert Reich, Public Policy, UC Berkeley
Which Way Out? — Fred Block, Sociology, UC Davis
What are the prospects for recovery from the recession in the United States? The standard view is that this is simply another recession and that recovery will eventually come so long as the government does not undermine business confidence. Some on the right have argued that a substantial share of current unemployment is "structural", but what they mean by this is that it is beyond policy interventions. They are arguing that we simply have to learn to live with these higher levels of unemployment.
My view is that this recession is different; it grows out of the exhaustion of a growth model based on consumer purchases of single family homes, new cars, and other consumer durables. The mortgage meltdown was, in fact, the consequence of trying to keep this model going by vast new infusions of consumer lending. But this model is now dead; consumers simply cannot drive a recovery.
If there is to be a vigorous recovery, it has to be investment-led, driven by high levels of public and private spending on infrastructure, green energy, and conservation. The Obama Administration has been working harder than most people realize to make this happen, making ample use of Build America Bonds and government loan guarantees in the energy sector. But big corporations have remained largely on the sidelines, sitting on very large piles of cash. So the prospects for recovery continue to be highly dependent on politics-specifically the ability of the Administration to step up investment spending in 2011 and 2012.
Where's the Social Movement? — Barbara Epstein, History of Consciousness, UC Santa Cruz
One factor in the strength of the movements of the 30s was the existence of organizations and of the host of organizers and activists who formed the backbone of those movements (and by "those movements" I mean primarily, the labor movement, and the plethora of organizations, projects etc. that constituted the Popular Front). I point out that today left/progressive membership organizations have withered, and we have no comparable independent arena of mass-based left/progressive politics. Instead we have the left wing of academia, plus staff-driven non-profits.
A second factor: the relationship between social movements and the state. FDR did not come into office as an ally of labor, but due to circumstances he gradually moved in that direction, giving working people and others, previously excluded from politics, a sense of possibility. This sense of possibility was a major factor in the explosive growth of the labor movement and the Popular Front in the latter part of the 30s. Obama has moved in the opposite direction - he won the election with the support of a leftward titled popular movement, but then distanced himself from the left. Whatever one thinks his options were, this had a demoralizing effect on the left/progressive arena.
But I believe that the left could form organizations, and openings could be created for left influence, and the left could nevertheless remain dormant. The movements of the 30s had an analysis of the problem: the huge gap in wealth and power between those on the top and everyone else - and a strategy for doing something about it: an alliance between the working class and the middle class and professional sector, based on the idea that if the rights and situation of poor and working people were improved, life would be better for everyone (except the very wealthy), and that for this to take place, the working class had to become organized, and the state had to intervene on behalf of the welfare of the population. I believe that the left no longer has a viable or convincing paradigm - and could learn a few things from the movements of the 30s.
Is California Salvageable? — Richard Walker, Geography, UC Berkeley