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The limits of finance-led capitalism in the US Trevor Evans Berlin School of Economics and Law Key features of US economy since 1980 • Strengthened position of financial sector • Major corporations plan globally; outsourcing • Redistribution of income to top • Dependence on credit expansion (and asset bubbles) sustained by expansionary monetary (& fiscal) policy • Net inflows of financial capital The rhythm of growth US economic growth (change in real GDP over 4 quarters, %) 10 8 6 4 2 0 -2 -4 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Corporate profitability & investment US corporate profitability (pre-tax profits as % GDP) 12 Total 10 8 6 Nonfinancial 4 2 Financial 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: US Bureau of Economic Affairs, National Income and Product Accounts, Table 1.14 2002 2004 2006 2008 US private fixed investment (% GDP) 20 18 16 Total 14 12 10 Nonresidential 8 6 4 Residential 2 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 Source: Bureau of Economic Affairs, National Income and Product Accounts, Table 1.1.5 2002 2004 2006 2008 US non-financial corporations spending on fixed capital, share buy-backs and dividends ($ billions) 1,200 Fixed investment Net purchase of corporate equities Net dividend payments 1,000 800 600 400 200 0 2002 2003 2004 Source: Federal Reserve Board, Flow of Funds Accounts, Table F102 2005 2006 2007 Employment & income Change in US employment over 12 months (millions) 5 4 3 2 1 0 -1 -2 -3 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 Source: Bureau of Labour Statistics, Current Employment Statistics Survey, seasonally adjusted 2004 2006 2008 Changes in US real hourly wages at percentile points, all workers (1979=100) 130 $35.23 125 90th percentile 80th percentile 50th percentlie 10th percentile 120 115 $26.27 110 $15.11 105 100 $7.79 95 90 85 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 Source: The State of Working America, 2006/2007, Table 3.4 and 2008/2009, Table 3.5. Figures in dollars show income in 2007. Real annual income growth by groups Average annual increase Average income Top 1% Bottom 99% Fraction of total growth captured by top 1% Clinton expansion 1993-2000 4.0% 10.3% 2.7% 45% Bush expansion 2002-2006 2.9% 10.9% 1.0% 73% Source: Thomas Pickerty & Emmanual Saez, ‘Income inequality in the US’, Updated data, July 2008 Share of top 1% in US national income, 1915-2006 (%) 25 23 Excluding capital gains 21 Including capital gains 19 17 15 13 11 9 7 1915 1925 1935 1945 1955 1965 1975 1985 Source: Thomas Pickerty & Emmanuel Saez, ‘Income inequality in the US’ Updated data, July 2008 1995 2005 US indebtedness by sector (% GDP) 120 Financial business Households Non-financial business Government 100 80 60 40 20 1980 1982 1984 1986 1988 1990 1992 Source: Federal Reserve Board, Flow of Funds Accounts 1994 1996 1998 2000 2002 2004 2006 2008 The Crisis Background to crisis • Fed responded to stock market crash by cutting lead interest rate from 6.5% (2001) to 1.0% (2003) • Growth of lending – Leveraged loans (Private equity funds) – Mortgage lending • Securitisation • ‘Shadow banking system’ – Investment banks – Hedge funds – Structured investment vehicles • House-price bubble US house price inflation (%) 25 20 15 10 5 0 -5 -10 -15 -20 -25 1990 92 94 96 98 2000 02 Source: S&P / Case-Shiller House Price Index 04 06 08 The crisis • Fed raises interest rates 2004-2006; peak of housing-price boom • House-price bubble ends 2006; prices fall 2007 – – Mortgage backed securities loose value Banks announce first losses from investments • 9 August 2007: Breakdown in trust between banks; money market dries up • 15 September 2008: Failure of Lehman Brothers sets of chain of financial failures and credit crunch • Oct 2008: Leading capitalist states agree to inject capital in banking systems; partial nationalisation of banks; chain of failures stemmed • US Recession – – – Official start December 2007 Major deepening 2008 Q4 and 2009 Q1 ‘Green Shoots’ US inter-bank interest rates (%) 7 6 5 4 3 1 month inter-bank rate Overnight inter-bank rate Fed funds target rate 2 1 0 Jan 07 Apr Jul Oct Jan 08 Apr Jul Oct Policy response • Monetary expansion – – – – – • Massive provision of reserves Lending to non-financial companies Purchasing government bonds … but banks not lending How to deal with toxic / troubled / legacy assets? Fiscal expansion – Bush: $168 billion (2008) – Obama: $787 billion (2009-10) • Regulatory reform – Systemic risk to be monitored – Limited coordination of regulatory agencies • Sources of future growth? International transmission Source: IMF, World Economic Outlook, Update, July 2009 Economic Growth (%) Source: IMF, World Economic Outlook, Update, July 2009 Transmission to W. Europe • Banking system – European banks investments in US mortgage backed securities – Huge bank losses (IMF estimate €737 bn) – Major contraction of credit • Trade – EU dependence on exports made it highly vulnerable to US recession – Germany most vulnerable of large economies Euro area inter-bank interest rates (%) 5.5 5.0 4.5 4.0 3.5 1 month inter-bank rate Overnight inter-bank rate ECB main rate 3.0 2.5 2.0 Apr 07 Jul Oct Jan 08 Apr Jul Oct Transmission to E. Europe • Financing current account deficits – Hungary – Baltic states (Estonia, Latvia, Lithuania) • Contraction of credit by W. European owned banks • Exports to W. Europe – Czech Republic – Slovakia – Slovenia Transmission to rest of world • Demand for manufactured goods in US and Europe (Japan, China, India …) • Primary commodity prices – Oil (Russia, Middle East, Venezuela) – Mineral & agricultural products (Latin America, Africa) • Remittances (Mexico, Central America, Indonesia, India) Economic Growth (%) Projections 2007 2008 Source: IMF, World Economic Outlook, Update, July 2009 2009 2010