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The 2007/8 financial crisis

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The Bailouts

Director's Chair: Yanis Varoufakis - The Global Minotaur and The True Origins of the Financial Crisis. In this four-part INET “From the Director’s Chair” interview, INET Executive Director Robert Johnson talks with Greek economist Yanis Varoufakis about Varoufakis’s new book The Global Minotaur: America, The True Origins of the Financial Crisis and the Future of the World Economy. “The Global Minotaur” is Varoufakis’s metaphor that tells the story about “what went wrong in 2008 and why the world economy is finding it so hard to rediscover its poise after the debacle in 2008.” After refusing a multilateral, more democratic exchange regime post-WW II, the US eventually became the world’s buyer of last resort.

But how to finance America’s growing trade deficits? Feed the beast, says Varoufakis, drawing parallels to the story from Greek mythology about the Minotaur who had to be fed human sacrifices as tribute. Part 1: The Global Minotaur Part 2: Bankruptocracy Part 3: The Two Faces of the Crisis Part 4: Europe by (Mis)Design Click here to order Varoufakis's book, The Global Minotaur. About Repo. April 7, 2011 (last updated January 3, 2013) From the editor: When Treasury Secretary Henry Paulson said in September 2008 that he needed nearly $1 trillion to fix the financial markets, I knew subprime mortgages alone could not have done that kind of damage. Didn’t banks pool those loans and sell slices of the pools to investors? Don’t investors make and lose billions of dollars on the financial markets every day? Why were their losses suddenly landing in the taxpayers’ laps? Something else had to be involved, something hidden, something I wasn’t aware of, something dangerous.

Here it is. What follows are (1) a definition, (2) a short article for beginners and (3) a story with much more detail. Thanks for your interest. Mary Fricker Editor, RepoWatch (1) A definition: The repurchase (“repo”) market is where large financial institutions borrow trillions of dollars from each other and from central banks every day, using securities as collateral. . (2) A short article for beginners: Very little.[7]

Understanding the crisis

Bill Moyers interviews James K. Galbraith about John Kenneth Galbraith Part 1. The Recession of 2007–-2009: BLS Spotlight on Statistics. February 2012 A general slowdown in economic activity, a downturn in the business cycle, a reduction in the amount of goods and services produced and sold—these are all characteristics of a recession. According to the National Bureau of Economic Research (the official arbiter of U.S. recessions), there were 10 recessions between 1948 and 2011. The most recent recession began in December 2007 and ended in June 2009, though many of the statistics that describe the U.S. economy have yet to return to their pre-recession values.

In this Spotlight, we present BLS data that compare the recent recession to previous recessions. Unemployment One of the most widely recognized indicators of a recession is higher unemployment rates. Compared with previous recessions, the higher proportion of long-term unemployed (those unemployed for 27 weeks or longer) in the recent recession and its post-recession period is notable. Source: Current Population Survey | Chart Data Unemployment Demographics Mass Layoffs.

Repairing the Damage of “Fraud as a Business Model” Matt King had it right in 2008, joins Gorton, Milne.

Subprime

The US Follows Japan Into A Balance Sheet Recession: What Do Investors Know and Why Is It That Policymakers Appear Clueless? BoomBustBlogger and Director of Research at Paisley Financial, Mario Ricchio, writes on the abject futility of QE during a balance sheet recession. That is where I, and he, believe the US and Japan are right now. See my video take on this from a real estate perspective here. You can download Mr. Ricchio's report via this link, but in the mean time I would like to highlight some of the not so common sense remarks that I came across in such.

When the U.S housing bubble burst, the effects reached far beyond the decline in home prices and in construction-related employment. A debt-financed asset bubble precedes a balance sheet recession. Since asset prices decline (eg. house prices) well below the value of corresponding liabilities (eg. mortgages), balance sheets become impaired (eg. negative equity or negative net worth). On this very salient point, I must chime in with my own analysis and opinion...

Thoughts on the US Publicly Traded Homebuilders - BoomBustBlog Reggie's grassroots analysis:

To sort...

Readings on the Financial Crisis. The following reflects my personal views. The two best treatments of the financial crisis are both free for the reading, courtesy of the U.S. government. The first to hit the press, the 600-page Financial Crisis Inquiry Report, is the product of a year and a half of work, seven hundred interviews, over a dozen hearings, and millions of pages of documents. The report is not as tome-like as it appears. It is a 400 page book (albeit one with small print) followed by 200 pages of references, appendices and dissents.

Don't let the dissents bother you -- they are dealing with second-order issues. What is most remarkable about this report is that it is written like a best-seller. The second work is the Anatomy of a Financial Collapse, a.k.a. the Levin-Coburn Report of the Senate Permanent Subcommittee on Investigations.

2007/8 financial crisis - resources....

Al Jazeera interview on Rating Agencies. EmailShare 0EmailShare I’ve done numer­ous inter­views on Al Jazeera’s news and busi­ness pro­grams over the last 5 years; this is the first one I’ve been sent a clip of–and I’ll try to keep get­ting them now that the Prof­Steve­Keen YouTube Chan­nel is up and running. The topic was the role of the Credit Rat­ing Agen­cies and their role in the cri­sis. Though the inter­views are short new pieces and don’t leave time to get into top­ics in any great detail, the fact that Al Jazeera cov­ers top­ics like this in some crit­i­cal detail puts it sev­eral steps ahead of the media pack, espe­cially in the US and Australia.

I am a professional economist and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. Banks’ Self-Dealing Super-Charged Financial Crisis. Employees walk past a sign at Merrill Lynch headquarters in New York on Oct. 30, 2007. (Emmanuel Dunand/AFP/Getty Images) They created fake demand. A ProPublica analysis shows for the first time the extent to which banks -- primarily Merrill Lynch, but also Citigroup, UBS and others -- bought their own products and cranked up an assembly line that otherwise should have flagged.

The products they were buying and selling were at the heart of the 2008 meltdown -- collections of mortgage bonds known as collateralized debt obligations, or CDOs. As the housing boom began to slow in mid-2006, investors became skittish about the riskier parts of those investments. Individual instances of these questionable trades have been reported before, but ProPublica's investigation, done in partnership with NPR's Planet Money [2], shows that by late 2006 they became a common industry practice. ProPublica also found 85 instances during 2006 and 2007 in which two CDOs bought pieces of each other. Senate's Goldman Probe Shows Toxic Magnification. Fault Lines... Getting Away with It by Paul Krugman and Robin Wells. The Escape Artists: How Obama’s Team Fumbled the Recovery by Noam Scheiber Simon and Schuster, 351 pp., $28.00 Pity the Billionaire: The Hard-Times Swindle and the Unlikely Comeback of the Right by Thomas Frank Metropolitan, 225 pp., $25.00 The Age of Austerity: How Scarcity Will Remake American Politics by Thomas Byrne Edsall Doubleday, 256 pp., $24.95 In the spring of 2012 the Obama campaign decided to go after Mitt Romney’s record at Bain Capital, a private-equity firm that had specialized in taking over companies and extracting money for its investors—sometimes by promoting growth, but often at workers’ expense instead.

So there was plenty of justification for an attack on Romney’s Bain record, and there were also clear political reasons to make that attack. Yet as we were writing this review, two prominent Democratic politicians stepped up to undercut Obama’s message. What was going on? When Obama was elected in 2008, many progressives looked forward to a replay of the New Deal. The Ruinous Fiscal Impact of Big Banks. Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.” The newly standard line from big global banks has two components – as seen clearly in the statements of Jamie Dimon of JPMorgan Chase and Robert E. Diamond Jr. of the British bank Barclays at Davos last weekend. Simon Dawson/Bloomberg NewsJamie Dimon of JPMorgan Chase at the World Economic Forum in Davos.

First, if you regulate us, we’ll move to other countries. This rhetoric is misleading at best. On Tuesday, in testimony to the Senate Budget Committee, I had an opportunity to confront this myth-making by the banks and to suggest that the bankers’ logic is completely backward. No one forced the banks to take on so much risk. The mega-recession, which is starting to look more like a mini-depression in terms of employment terms for the United States (which lost 6 percent of employment and is still down 5 percent from the pre-crisis peak), caused a big decline in tax revenues.

No Jail for Economic Crisis May Mean No Crimes Committed: Roger Lowenstein. “Forgive me,” began Charles Ferguson, the director of “Inside Job,” while accepting his 2011 Oscar for best documentary. “I must start by pointing out that three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail, and that’s wrong.”

The audience erupted in applause. Ferguson isn’t the first to express outrage over the lack of criminal cases to spring from the financial crisis, and his speech triggered a wave of similarly prosecutorial sentiments, Bloomberg Businessweek reports in May 16 issue. Since that February night, financial journalists, bloggers and who knows how many dinner party guests have debated the trillion-dollar question: When will a Wall Street executive be sent to jail? There are those who have implied that prosecutors are either too cozy with Wall Street or too incompetent to bring cases to court. No Public Accounting Harmful Assumptions Multi-Causal Meltdown As this list suggests, the meltdown was multi-causal. Housing booms, capital inflows, and low interest rates. The run-up to the recent global financial crisis was characterised by an environment of low interest rates and a rapid increase in housing market activity across OECD countries.

Some scholars argue that expansionary monetary policy was responsible for the low level of interest rates and the subsequent house price boom (see for example Hume and Sentence 2009 and Taylor 2009).Others contend that the low degree of financial development in emerging market economies led to capital inflows to developed countries, depressing long-term interest rates and stimulating an increase in the demand for housing (see for example Caballero et al. 2008, Warnock and Warnock 2009, and Bernanke 2010). Figure 1 provides support for the second hypothesis, showing that in the period from 1999 to 2006 house prices rose by more in countries with larger current-account deficits.

Figure 1. House prices and the current account Notes: Data are averages over the period 1999 Q1 to 2006 Q4. Our results suggest that: Examining the big lie: How the facts of the economic crisis stack up. Examining the big lie: How the facts of the economic crisis stack up Barry Ritholtz Washington Post, November 19 It’s fair to say that our discussion about the big lie touched a nerve. The big lie of the financial crisis, of course, is that troubling technique used to try to change the narrative history and shift blame from the bad ideas and terrible policies that created it.

Based on the scores of comments, people are clearly interested in understanding the causes of the economic disaster. I want to move beyond what I call “the squishy narrative” — an imprecise, sloppy way to think about the world — toward a more rigorous form of analysis. Unlike other disciplines, economics looks at actual consequences in terms of real dollars. So let’s follow the money and see what the data reveal about the causes of the collapse. Rather than attend a college-level seminar on the complex philosophy of causation, we’ll keep it simple.

Consider the causes cited by those who’ve taken up the big lie.