Subprimes and the Credit Crisis PLSEC 480 Greed

Sub-primes and the Credit Crisis PLS/EC 480 Greed and Need Dr. Emerson 2010

The Great Depression Stock Market Crash n Bank capital reserve lost n Decline in market activity n Government inaction n Natural disaster (drought) n

Regulation n n FDIC Security & Exchange Commission Glass Steagall Freddie Mac/ Fannie Mae

Deregulation n n Deregulation of thrifts [Savings and Loans] No regulation of “derivatives” Mortgages sold in fractions- precursor of CDO. Gramm Leach Billey

Federal Reserve Bank Policies n n Low interest Sub primes unregulated No action on defaults Fed vs. Congress

EVIDENCE: Sub Prime Problem n Delinquency rate is 2 tenths of 1 % in 1979 n Today 2% (10 times higher): 2, 820, 000 households and rising.

Foreclosures and Sub Prime Rates of loss by mortgage type.

Default Consequences n GAO report: ¨ No piggyback and documentation 0% ¨ Piggyback OR little documentation 25 -31% ¨ Piggyback AND no documentation = 60%

Evolution of Crisis n Rotten apple parallel n Sub prime and impact on prime

Jobs in the aftermath n 2009, 0% job growth

OECD n Rate of US recovery versus other industrial democratic countries.

Cost of gambling n The Credit Crisis by J. Jarvis n http: //www. getrichslowly. org/blog/2009/02/25/the-credit-crisisvisualized/

Break n Be back in 10 minutes for the analysis

The Micro Economic and Political Consequences n Bill Moyer’s Report http: //www. pbs. org/ moyers/journal/071 82008/watch. html

1930 s SAME as today’s crisis n n n n Unregulated market Commercial and high risk intertwined Worldwide Downward spiraling Income disparities Weather and environmental factors And…

Differences? Starts as homeowner crisis n US a global power n US government reacts with TARP bailout n FDIC protects depositors n No tariffs n OTHER n

Inside the Meltdown: n Bush Administration, TARP 1 and Congress http: //www. pbs. org/wgbh/pages/frontline/meltdown/view/ Matrix of Events

Structure n n n n n Financial reporting No mart to marketing Accounting regulations No off shore companies Intelligible instruments Reinstate Glass Steagall Insurance reform Credit default swaps End “too big to fail”

JONCO and other reforms: --In Dodd We Trust http: //www. thedailyshow. co m/watch/tue-march-162010/in-dodd-we-trust (Firefox)

National Responsibility n Federal Government

What should States do?

Citations n Alford, Rob (2003). What are the origins of Freddie Mac and Fannie Mae. Accessed August 28, 2008 at http: //hnn. us/articles/1849. html. n Bitner, Richard (2008). Inside the Subprime Debacle. U. S. News and World Report. 145 (2) 12. n GAO Report (2007) Briefing to the Committee on Financial Service, House of Representatives. GPO: Washington, D. C.

Citations n Jost, Kenneth (2008). Financial Crisis. CQ Researcher 18(18), 409 -422 n Phillips, Kevin (2002). Wealth and Democracy. New York: Random House. n Stigliz, Joseph 2010. Freefall: America, free markets and the sinking of the world economy. New York: Norton Press.

Q and A