The limits of finance-led capitalism in the US
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The limits of finance-led capitalism in the US
Trevor EvansBerlin School of Economics and Law
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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
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The rhythm of growth
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-4
-2
0
2
4
6
8
10
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
US economic growth (change in real GDP over 4 quarters, %)
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Corporate profitability & investment
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0
2
4
6
8
10
12
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Total
Nonfinancial
Financial
US corporate profitability (pre-tax profits as % GDP)
Source: US Bureau of Economic Affairs, National Income and Product Accounts, Table 1.14
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2
4
6
8
10
12
14
16
18
20
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Total
Nonresidential
Residential
US private fixed investment (% GDP)
Source: Bureau of Economic Affairs, National Income and Product Accounts, Table 1.1.5
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0
200
400
600
800
1,000
1,200
2002 2003 2004 2005 2006 2007
Fixed investment Net purchase of corporate equities Net dividend payments
US non-financial corporations spending on fixed capital, share buy-backs and dividends ($ billions)
Source: Federal Reserve Board, Flow of Funds Accounts, Table F102
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Employment & income
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-3
-2
-1
0
1
2
3
4
5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Change in US employment over 12 months (millions)
Source: Bureau of Labour Statistics, Current Employment Statistics Survey, seasonally adjusted
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85
90
95
100
105
110
115
120
125
130
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
90th percentile
80th percentile
50th percentlie
10th percentile
$7.79
$15.11
$26.27
$35.23
Changes in US real hourly wages at percentile points, all workers (1979=100)
Source: The State of Working America, 2006/2007, Table 3.4 and 2008/2009, Table 3.5. Figures in dollars show income in 2007.
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Average annual increase
Fraction of total growth captured by top 1%
Average income
Top 1%
Bottom 99%
Clinton expansion 1993-2000 4.0% 10.3% 2.7% 45%
Bush expansion2002-2006 2.9% 10.9% 1.0% 73%
Source: Thomas Pickerty & Emmanual Saez, ‘Income inequality in the US’, Updated data, July 2008
Real annual income growth by groups
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7
9
11
13
15
17
19
21
23
25
1915 1925 1935 1945 1955 1965 1975 1985 1995 2005
Excluding capital gains Including capital gains
Share of top 1% in US national income, 1915-2006 (%)
Source: Thomas Pickerty & Emmanuel Saez, ‘Income inequality in the US’ Updated data, July 2008
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US indebtedness by sector (% GDP)
Source: Federal Reserve Board, Flow of Funds Accounts
20
40
60
80
100
120
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Financial business
Households
Non-financial business
Government
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The Crisis
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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
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-25
-20
-15
-10
-5
0
5
10
15
20
25
1990 200092 94 96 98 02 04 06 08
US house price inflation (%)
Source: S&P / Case-Shiller House Price Index
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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’
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0
1
2
3
4
5
6
7
1 month inter-bank rate
Overnight inter-bank rate
Fed funds target rate
Jan 07 Apr Jul Oct Jan 08 Apr Jul Oct
US inter-bank interest rates (%)
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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?
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International transmission
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Source: IMF, World Economic Outlook, Update, July 2009
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Economic Growth (%)
Source: IMF, World Economic Outlook, Update, July 2009
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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
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Euro area inter-bank interest rates (%)
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
1 month inter-bank rate
Overnight inter-bank rate
ECB main rate
Apr 07 Jul Oct AprJan 08 Jul Oct
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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
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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)
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Economic Growth (%)
2007 2008 2009 2010
Projections
Source: IMF, World Economic Outlook, Update, July 2009