Upload
mitch-green
View
1.733
Download
0
Embed Size (px)
Citation preview
Did Greenspan “Blow” It?
The Economic Meltdown
and
The Prospects for Recovery in Kansas City and Beyond
Stephanie Kelton
Associate Professor of Economics
University of Missouri-Kansas City
February 2009
1Stephanie Kelton, Associate Professor, UMKC
Where Are We Today?Nationally
Massive solvency problems in banking system
Most severe contraction since the Great Depression
U.S. economy is shedding 600,000-700,000 jobs per month (5 million since recession began)
8.9% unemployment rate
Consumer confidence at an all-time low
2 million home foreclosures
2Stephanie Kelton, Associate Professor, UMKC
Protests & Riots From Iceland to China
Stephanie Kelton, Associate Professor, UMKC 3
“By far the deepest global recession since the Great
Depression” (IMF, 4/22/09)
5 Distinct Regions
Below Nat’l Average◦ Great Plains◦ Northeast
Above Nat’l Average◦ South◦ Great Lake States◦ West Coast
KC Metro vs. Rest of Nation
Unemployment Rate, February 2009
4Stephanie Kelton, Associate Professor, UMKC
Over 520,000 in Services
171,659 in Government
146,000 in Retail
All other sectors have less than 10%
Employment in the KC Economy
5Stephanie Kelton, Associate Professor, UMKC
Children’s Mercy Hospital – 3,602
KCK Public Schools – 3,500
AT&T – 3,435
North KC School District – 3,200
U. of Kansas Hospital – 3,020
Black & Veatch – 3,012
Truman Medical Center – 3,063
General Motors – 2,900
UMKC – 2,885
Applebee’s International – 2,744
Blue Valley School Dist. – 2,717
Lee’s Summit School Dist. – 2,642
Honeywell – 2,604
Selected Major Employers
Federal Government – 25,004
Sprint Nextel Corp. – 16,403
HCA Midwest Health – 7,320
Mc Donald’s USA – 7,111
State of Missouri – 6,078
Ford Motor Co. – 5,453
DST Systems – 5,200
St. Luke’s Health Sys. – 4,808
Hallmark Cards – 4,500
City of Kansas City, MO – 4,400
KCMO School Dist. – 4,399
Cerner Corp. – 4,309
State of Kansas – 4,115
Olathe School District – 3,980
Johnson County, KS Govt – 3,774
6Stephanie Kelton, Associate Professor, UMKC
Used to measure the strength of each industry, relative to the national average
Score > 1 indicates higher than average concentration of that type of employment and likely exporter
7Stephanie Kelton, Associate Professor, UMKC
Economic Outlook in the KC Metro Area
8,900 jobs lost between Nov. ‘07 and Nov. ’08◦ 4,900 on the Missouri side◦ 4,000 on the Kansas side◦ Most losses in construction, mfg and trade, transportation and utilities◦ Modest gains in educ and h/care
8.4% unemployment rate (highest since ‘90)
Sprint-Nextel to eliminate 8,000 jobs (2,000 in the KC area)
Forecast to lose 20,100 jobs in ‘09 (2% of all jobs)
Regional Foreclosures were up 35% in ’08
13,609 properties in some stage of foreclosure (1.56% of all property in metro)
New housing permits at lowest point since tracking began in ‘85◦ Only 136 new permits issued metro-wide in Dec. ‘08◦ Average in Dec. since 2000 over 730
Better Off, Not Well Off
8Stephanie Kelton, Associate Professor, UMKC
◦Did Greenspan’s policies cause the housing bubble and ensuing meltdown in financial markets?
◦Did Greenspan mishandle the situation once the bubble emerged?
Did Greenspan “Blow” It?
9Stephanie Kelton, Associate Professor, UMKC
Beating Up on ‘Easy Al’ Easy money following
the 2001 recession◦ John Taylor
Fleckenstein and Canterbery
◦ Baker, Palley, and Liu◦ Poole and Parry◦ Ron Paul
Lax Regulatory Stance◦ Harry Reid,
Christopher Dodd◦ Edward Gramlich
(2000)
10Stephanie Kelton, Associate Professor, UMKC
Fed Reserve Chairman, Federal Reserve System’s Fourth Annual Community Affairs Research Conference, Washington, D.C. April 8,
2005
11Stephanie Kelton, Associate Professor, UMKC
Correct to keep rates low in post-bubble economy
Risk Premiums, not interest rates, were too low◦ Berlin Wall, Soviet Union, China on property
rights, export-led growth in Asian Tigers, free trade agreements
◦ Developing world growth rates◦ Shift in share of world GDP◦ Increase in global savings◦ Decline in risk premiums◦ Fueled housing demand worldwide
Greenspan on Low Interest Rates
12Stephanie Kelton, Associate Professor, UMKC
Housing Boom was Global
13Stephanie Kelton, Associate Professor, UMKC
Greenspan On Regulation and Subprime Lending
On Subprime Lending:
The “retraction”
Favorable remarks were aimed at those who would move or refinance
Low rates had little impact on use of ARMs
Gramlich’s letter
On Regulation:
“There is no way to prevent how innovative markets will develop. All
you can do is set a general strategy. [Deregulated
markets are] highly competitive, innovative,
and dynamic—but periodically visited by
wrenching crises. [Regulated markets are] more stable, but slower
growing.”
(Greenspan, 2008)14Stephanie Kelton, Associate Professor, UMKC
Did Greenspan “Blow” It?
He has said:
◦ It is impossible to spot a bubble until after it bursts
◦ It is dangerous to ignore an emerging bubble
◦ It is dangerous to address a bubble
◦ The best strategy is to focus on the post-bubble economy
15Stephanie Kelton, Associate Professor, UMKC
Is It Really Impossible to Identify an Emerging Bubble?
Early warning signs:
◦ Buying driven by anticipation of rising prices ◦ Home sales increase sharply◦ Numbers of resort buyers, trade-up buyers and first-time
buyers all increase◦ Houses purchased as “investments” ◦ High percentage of exotic loans◦ Residential construction activity booms◦ Expected rates of return based on recent experience not
historical norms◦ Transactions costs not a deterrent ◦ Market was extremely liquid
16Stephanie Kelton, Associate Professor, UMKC
“There are people making real estate investments
for residential and other purposes in the
expectation that prices can only go up and go up
at accelerating rates. Those expectations
ultimately become destabilizing to the economic
system”
(Jordan, February, 1999)
17Stephanie Kelton, Associate Professor, UMKC
He argued that:
◦ It was difficult to speculate in housing
◦ Housing markets are local
◦ National housing bubbles are nearly impossible
Greenspan Disagreed
18Stephanie Kelton, Associate Professor, UMKC
Greenspan Says There’s “a little froth” (May, 2005)
19Stephanie Kelton, Associate Professor, UMKC
Froth was “a euphemism for a bubble . . . all the froth bubbles add up to an aggregate bubble” (2007)
So why didn’t he target it?
He targeted the stock market bubble in 1987◦ DOW lost 508 points (22.5%) but rebounded by early 1988
He targeted the stock market again in the mid-1990s◦ First with rate hikes (1994) then with “irrational exuberance” (1996)◦ Goal was to create uncertainty (certainty→euphoria)◦ “when things get too good, human beings behave awfully”
Beginning in June 1999, the Fed raised the ffr 175bp◦ This was probably done in order to let some air out of the stock market
Greenspan Recants
20Stephanie Kelton, Associate Professor, UMKC
Why Not This Time?
21Stephanie Kelton, Associate Professor, UMKC
We Tried! Greenspan now
claims that the Fed did act against the emerging housing bubble
But long-term interest rates were falling as the Fed raised short-term rates
22Stephanie Kelton, Associate Professor, UMKC
“It is household consumption or household demand more generally
that clearly is the source of strength holding this economy together . . . I
suspect that without that support, we would be observing much lower
levels of economic activity” (Greenspan, August, 2001).
The Importance of Consumer Debt
23Stephanie Kelton, Associate Professor, UMKC
Don’t Rain on MY Parade
When he resigned on Jan. 31, 2006, he was widely hailed the most successful central banker of all time
Perhaps he was more concerned with his legacy than with the stability of the system
24Stephanie Kelton, Associate Professor, UMKC
The Importance of Ownership
“I was aware that the loosening of mortgage
credit terms for subprime borrowers increased
financial risk . . . But I believed then, as now, that the benefits of broadened home ownership are worth
the risk. Protection of property rights, so critical
to a market economy, requires a critical mass of owners to sustain political
support”
(Greenspan, 2007)
25Stephanie Kelton, Associate Professor, UMKC
An Unwavering Faith in Free Markets
Greenspan is a self-described libertarian
He counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals
He was deeply committed to the belief that those participating in financial markets would act responsibly
He tethered the health of our nation’s economy to this faith
26Stephanie Kelton, Associate Professor, UMKC
Greenspan’s Mea Culpa
Greenspan has conceded that the meltdown revealed a flaw in a lifetime of economic
thinking:
“Those of us who have looked to the self-interest of lending institutions to
protect shareholder equity (myself especially) are in
a state of shocked disbelief.”
27Stephanie Kelton, Associate Professor, UMKC
Complacent
and
Complicit
Not The Root Cause
28Stephanie Kelton, Associate Professor, UMKC
An Epidemic of Accounting Fraud
Modern compensation systems did not “align” interests◦ Current system not only allows but
encourages fraud
◦ Made possible by decades of deregulation
Profit margins on prime loans are extremely low
Requires CEO to maximize growth through “adverse selection”◦ Unregulated nonprime sector◦ Liar’s loans, NINJAs, etc.
Synthetic Derivatives that were impossible to value properly
Aided by the rating agencies that gave AAA ratings to CDOs without sampling loan files
In a sampling of files, Fitch found:
66% Occupancy fraud 51% Property value or condition issues —
Materially different from original appraisal
48% First Time Homebuyer 44% Questionable stated income or
employment 22% Hawk Alert — Fraud alert noted on
credit report 18% Credit Report — Questionable
ownership of accounts (name or social security numbers do not match)
16% Credit Report — Based on “authorized” user accounts
16% Straw buyer/Flip scheme indicated based on evidence in servicing file
16% Identity theft indicated 10% Signature fraud indicated
(Fitch Ratings, Special Report, Nov. 2007)29Stephanie Kelton, Associate Professor, UMKC
Stephanie Kelton, Associate Professor, UMKC 30
Ignored By Those at the Very Top
“The potential impact of mortgage fraud on financial
institutions and the stock market is clear. If fraudulent
practices become systemic within the mortgage
industry and mortgage fraud is allowed to become
unrestrained, it will ultimately place financial
institutions at risk and have adverse effects on the
stock market.”
-Chris Swecker, former FBI Assistant Director, Criminal Investigative
Division, Introductory Statement: House Financial Services
Subcommittee on Housing and Community Opportunity, 7 October
2004
So Where We Are Today?Globally
◦ Worst economic downturn since WWII◦ Protests, riots, suicides, civil unrest◦ Protectionism◦ Anti-Semitism
Nationally
◦ Will probably take 5 years to recover◦ Fiscal stimulus is too small ◦ Bailouts have done little (if anything) to
shore up confidence◦ Monetary Policy has nowhere to go◦ States are slashing spending to deal with
budgets gaps of about $120 billion
Regionally and Locally
◦ Helped by large share of jobs in federal government, health care and education
◦ Large employers in some industries will cut 25% of labor force
◦ Serious concerns about state funding in KS and MO
31Stephanie Kelton, Associate Professor, UMKC
A New Wave of Border Wars?
Regional Decline
Will set off intense competition and beggar-thy-neighbor policies
Time-honored tradition: pay-to-play
◦ MO: $170M on historic preservation tax credits (more than total for 19 CCs)
◦ IA: $302M in ‘07 and ‘08◦ MN: proposing $50M in new tax
credits and reduction in business tax rate over next 6 yrs
◦ OH: Lt. Gov. looking to use tax breaks to create/save jobs
◦ KS: $1.3B over last 5 yrs and some legislators pushing for more
Stephanie Kelton, Associate Professor, UMKC 32
Long-term perspective 10-year transportation plan? Saudi-Arabia of wind? Area development?
◦ Casinos, water park, aquarium, etc.◦ JoCo Education Research Triangle Authority ◦ NBAF◦ $200M “Green Impact Zone” in KCMO
Stephanie Kelton, Associate Professor, UMKC 33
Better to Compete on Basis of Comparative Advantage