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The limits of finance-led capitalism in the US

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

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The limits of finance-led capitalism in the US

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  1. The limits of finance-led capitalism in the US Trevor Evans Berlin School of Economics and Law

  2. 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

  3. The rhythm of growth

  4. US economic growth (change in real GDP over 4 quarters, %)

  5. Corporate profitability & investment

  6. US corporate profitability (pre-tax profits as % GDP) Source: US Bureau of Economic Affairs, National Income and Product Accounts, Table 1.14

  7. US private fixed investment (% GDP) Source: Bureau of Economic Affairs, National Income and Product Accounts, Table 1.1.5

  8. US non-financial corporations spending on fixed capital, share buy-backs and dividends ($ billions) Source: Federal Reserve Board, Flow of Funds Accounts, Table F102

  9. Employment & income

  10. Change in US employment over 12 months (millions) Source: Bureau of Labour Statistics, Current Employment Statistics Survey, seasonally adjusted

  11. Changes in US real hourly wages at percentile points, all workers (1979=100) Source: The State of Working America, 2006/2007, Table 3.4and 2008/2009, Table 3.5. Figures in dollars show income in 2007.

  12. Real annual income growth by groups Source: Thomas Pickerty & Emmanual Saez, ‘Income inequality in the US’, Updated data, July 2008

  13. Share of top 1% in US national income, 1915-2006 (%) Source: Thomas Pickerty & Emmanuel Saez, ‘Income inequality in the US’ Updated data, July 2008

  14. US indebtedness by sector (% GDP) Source: Federal Reserve Board, Flow of Funds Accounts

  15. The Crisis

  16. 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

  17. US house price inflation (%) Source: S&P / Case-Shiller House Price Index

  18. 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’

  19. US inter-bank interest rates (%)

  20. 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?

  21. International transmission

  22. Source: IMF, World Economic Outlook, Update, July 2009

  23. Economic Growth (%) Source: IMF, World Economic Outlook, Update, July 2009

  24. 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

  25. Euro area inter-bank interest rates (%)

  26. 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

  27. 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)

  28. Economic Growth (%) Projections 2007 2008 2009 2010 Source: IMF, World Economic Outlook, Update, July 2009

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