Monday, February 9, 2015

What Caused the Recession and Are We Still In It?

          What Caused the Recession                   
         and Are We Still In It in 2015?                

Debt caused the Recession. 
From 1996 to 2008 outstanding financial debt increased by 162%
and the economy's growth per capita grew by 24%
Creating debt at a rate almost 7 times faster than real growth is disastrous. I calculated from the Federal Reserve's Flow of Fund report, Table D3, and then adjusted for inflation. This Federal Reserve Graph shows the growth of the financial system outstanding debt, numbers unadjusted for inflation. And this one shows the growth of household debt.
Here's another comparing financial debt with non-financial corporate debt.
I also used the Measuring Worth web page where they calculate GDP per capita growth between 1996 and 2008.

There's a chart tucked away in Bailout Nation by Barry Ritholtz showing that GDP growth during the pre-crash 2000s was generated by home loan mortgage borrowing, called 2nd mortgages. 

Here's a graph of total private debt as a percentage of GDP. We are still around double the historical average. Between 1946 and 1976 the economy grew at a rate of 

Chart- US Private Debt as a Percent of GDP

Here's a video about the drag of private global debt from the Guardian newspaper. 

The U.S. economy grew at half its normal rate between 2000 and 2010. From Wikipedia and  
"US real GDP grew by an average of 1.7% from 2000 to the first half of 2014, a rate around half the historical average up to 2000.[84]"

Here's an article about the failure of the Obama Administration effort to save homeowners (from a recent American Prospect issue). This is an example paragraph from the article:

                 "The most direct and effective policy solution to stop foreclosures is to allow bankruptcy judges to modify the terms of primary-residence mortgages, just as they can modify other debt contracts. This is known in the trade as “cramdown,” because the judge has the ability to force down the value of the debt. The logic of bankruptcy law reduces debts that cannot be repaid in order to serve a broader economic interest, in this case enabling an underwater homeowner to keep the house. Liberal lawmakers believed the threat of cramdown would force lenders to the table, giving homeowners real opportunities for debt relief. Wall Street banks were so certain they would have to accept cramdown as a condition for the bailouts that they held meetings and conference calls to prepare for it."

Here are the Ten Myths from Jennifer Taub's book Other People's Houses from the last chapter :

1. There has been no official bipartisan consensus on the causes of the financial crisis.

2. The financial crisis was an accident without human causes.

3. The financial crisis was brought about because he Community Reinvestment Act of 1977 forced banks to lend to people with low incomes who could not afford to pay back their mortgages. 

4. The giant government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, caused the financial crisis because he government pushed them to guarantee mortgage loans to people with low incomes as part of their public housing mission.

5. Mistakes were made, but there was not widespread fraud and abuse throughout the financial system.

6. The financial crisis was caused by too much government regulation.

7. Nobody saw it coming.

8. The financial crisis ws unavoidable.And financial crises of this magnitude are inevitable.

9. The Dodd-Frank Act has ended "too big to fail". 

10. The bankers are the victims of greedy homeowners who borrowed money and did not pay it back. 

It is a masterful book. It is also very complicated and detailed. 

Paul Buchheit has been writing the best journalism I've encountered. He explains in this February 2015 article the endemic poverty in the wealthiest nation. He cites a study showing that "almost two-thirds of Americans didn't have savings available to cover a $500 repair bill or a $1,000 emergency room visit."
The average household income, pre-tax and pre-transfer, is $93,000 a year. The average savings per household is around $650,000 -- and almost 2 in 3 live in households that cannot pay a $1,000 emergency room visit. !!!

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