After the Financial Crisis: How to Tell the Forest from the Trees

well welcome it's my distinct pleasure to welcome my friend and colleague mark Blythe from Brown University to speak to us today one of my favorite mark blye stories is when he tells on himself and the beginning of his fabulous book great transformations where he talks about sitting I think in a car with his father who had been a butcher and and they were talking about economic ideas in Thatcher's UK where Mark grew up from Scotland and the great thing about the story was sort of the confusion between mark and his father over what ought to be done in the British economy at a time when it wasn't performing well and Mark had one set of ideas and his dad at under set of ideas and that resonated so deeply with me because I come from a family that has a good number of crazy economic ideas to which they subscribe as articles of faith and and whenever we talk about economic policy there's sort of a dice of dialogue of the Deaf in some ways and and I think that one of the reasons that people are attracted to certain economic ideas is just because of the simplicity and beauty of the ideas the parsimony as we say that they really sort of they get right to the point quickly and efficiently and one of the great things about Mark's book is the way that he shows how important this is for the success of any kind of economic idea that people can understand it and can begin to hum the tune a little bit a lot of his work has tried to explain how and why certain ideas succeed where other ideas that might have been just as plausible or even more plausible fail and I think it's a very very powerful important message that he sends out author of a number of books a handbook of international political economy beyond the great transformations book that I have already mentioned teaches at Brown University where he's closely associated with the Watson Centre for international studies which appears to consume an inordinate amount of his time these days gave a fascinating paper in the poly SCI department today on the current economic crisis and I've asked him today to to sort of tell undergraduate students what they know about the situation that we're in right now as you can tell from the title of his talk his worry is that we are in fact not yet out of the woods and I'm very happy to in Douce mark and have him explain why he thinks that so please join me in welcoming mark Blythe to BYU so as we didn't explained I'm from Scotland as you can hear from this accent which is actually exactly the same as Shrek I will prove this to you with one word donkey now how weird is this because basically I am actually Scottish and the guy who did this Mike miles is not and I spent 20 years in the United States I didn't originally sound like that this is what happens when you live in the United States for 20 years and eventually I end up sounding like a frictional character that he made up a make up voice for something very strange going on I studied non-linearity's that's an example of one of them anyway further onto this the crisis it's an interesting thing there's an idea though that essentially we're out of it or rather it's change so we had the financial crisis here in 2008 and then the Europeans have gone into trouble because they spend all this money and they now have this big sovereign debt crisis right and that's it and then all yeah this China over there so I'm going to tell you the story that tries to link them all together because it's actually this same crisis it actually hasn't changed it hasn't gone away it's still linked together and although the American economy is actually remarkably resilient and recovering far better than the Europeans for reasons I'll be happy to go into there's this whole fascination we have with China and the rise of China etc and I want to make that part of the story because I think there's something non-obvious and interesting going on here as well so anyway on with the slides as they do so it ain't over until what the fat lady sings that's exactly correct now what's the fat lady singing in this course well here's the crisis and the problem of the crisis is it's over determined and over explained and what I mean Bellas it's a guy called Justin Lin who runs the MIT finance lab and he just did a piece in one of the big economics journals where he randomly sampled 21 books on the financial crisis sat down and read them I don't know where he found the time and he found out that no one can agree on what caused it now in the one hand you could say that's a terrible failure for all these academics I meant to figure things out just be that the world is astonishingly complex that is lots and lots of different things push in the same direction so let's run through a few of them right well we all know it was something about subprime mortgages right so there's Fannie and Freddie and giving people who can't afford houses houses another and that's popular particularly among people with sort of right-wing politics right well there's another one complex instruments derivative so the CD s CD you all that sort of develop bad technical stuff and that's kind of popular with academics because it shows them there's shows people they can be very clever because they understand all these complex technical things that normal people don't so that gives them a bit of a premium another one excessive leverage that's a fancy way of seeing there's too much debt right now leverage is also a technical thing inside banks is about how you structure your balance sheet and so on and this is popular amongst regulators because it gives them something to do so if the cause is excessive leverage then you give regulators the room to regulate whether it gives them something to do so they like that one you'll notice a lot of the aftermath of the crisis is exposed and I'm going to show you some slides on this that a large parts of America haven't been doing so well if you take away the supply of credit over the past decade and those are the left-wing persuasion kind of like that one because it basically says there's something bad going on in capitalism is evil or something like this then is the Greenspan put the idea that Alan Greenspan when he was running things essentially kept interest rates too low for too long and this became effectively asset protection for banks which is to say they could buy something and hold it even if they thought it was a bad investment because at the end of the day things went bad they'd be super cheap money lying around cuz Alan would never raise interest rates and given the fact that Alan Greenspan looks like Yoda it was easy to blame him for everything and the finally does if you put them side-by-side on a slide it's really weird and the other one of course is you know that bankers are greedy well bankers have always been greedy so you can't explain variation with a constant and the crisis seems to be with us in a new forum here's the National Bank of Greece now written is the National Bank of Berlin this obviously speaks to the euro crisis and then we have the 99% 1% Occupy movement here in the United States so this thing that began mortgages and all this stuff has spilled out and to basically riots of huge proportion in Greece in the impoverishment of millions of people in the European periphery and the whole sort of strong Sturm and Drang of you will of the Occupy movement so I'm going to try and put all this together with a metaphor and the metaphor is imagine the global economy is a subprime CD or so what okay so here's the whole idea that goes on the trouble how many of your parents have mortgages lots there are lots of people in United States who have lots of mortgages in fact there are more mortgages in the United States than there are people for reasons I can explain if you really want me to but nonetheless most of our tight the houses most of them get paid most of them are really safe bets when you have the phrases safe as houses you're talking about the income stream attached to a mortgage and it used to be the case that bankers knew the people that were given the money to because they had a credit history with them so there was an idea of this asset called a house and not really safe so how could we juice to the tons and make it more safe well imagine if we had a phenomena called uncorrelated assets what does that mean well in New York imagine New York economy goes but uh-huh that means there'll be more people in New York who can't pay about the mortgage right okay fine I'm with you how's that going to affect Baltimore nope is that going to affect Utah nope so if we took mortgages from Utah and Baltimore and Miami and different places and kind of pooled them all together then that would in a sense make things that are already uncorrelated even less correlated yes it would okay I've got a really good idea my don't we put all these different mortgages or all these different risk premia together and then what we'll do is slice them up according to how much risk you're willing to hold so let's say that you really want lots of yield you're in it for the money and you can afford to take a loss what are you going to buy you're going to buy let's say big glass condos in Baltimore because it's a bit of a risk involved here but let's say you're a pension fund you've got long term liabilities and you're willing to wait for the long term what are you going to do well let's see houses belonging to Thai schoolteachers in Utah they're going to pay back there may be a slightly higher default rate than the average because they don't get paid too much and the asset doesn't increase in value because it's not on a course or City but that's a pretty safe bet but let's say you'll really want to be safe what about Manhattan penthouses you can bet that they always get paid back so the idea was by creating these different tranches with different risk premia associated to them you can buy the risky asset you want but at the same time it doesn't affect anyone else because all the stuffs uncorrelated right now who else does this work with the global economy well imagine that the equity tranche to the riskiest bit is the United States imagined in the nares of mezzanine tranche the next less risky bit is Europe and who's the bet of the global economy no that's regard that as the one that's growing the fastest and has all those cash reserves and trillions of dollars of t-bills China explanation by metaphor let's see how it worked so here's the equity tranche the United States great picture isn't it so we had a housing bubble is a big one so imagine I flew let me use my laser as my is this my laser here's my where's my late oh I killed it how did I get it back they fix it I honestly given a Scotsman technology it's a really bad idea gonna can I please get this back hello what do you do all I wanted was the laser whoo too much to ask for the laser Laura I'm gonna continue anyway right can you still see this right okay right fine there's my laser look so basically if you follow the green line this is the trend rate of growth of GDP right basically it's meant to just track oh yeah yes almost thank you Microsoft I promise I won't do it again Hey all right great don't ever do that again price one and one that's it right so this is the trend rate growth the GDP it goes up at about two to three percent a year well look what happens starting in about 2000 we beyond us now this is a classic bubble up a little bit of a respite and then down to the bottom market bottom 2009 maybe yes maybe no when your housing bubble burst all of those mortgages the risky ones the subprime stuff all the sort of stuff this impacts the real economy now why does it impact the real economy what's it got to do with anything with us well basically all those banks are using those assets to trade with each other and the world wants to hold lots of assets which are high-value triple-a rated and give you a positive return but if you get freaked out about holding an asset and you don't think it's worth what it says on the book anymore what do you do you dump it on the market what happens if everybody dumps it on the market all at once you can't find a price for it it falls through the floor so suddenly your banks are under water because that heavily leveled that means that for every dollar they have in reverse they have $30 out there in the world playing trying to make yield so all you need is a 3% return McTernan against your assets and your bank is under war if your banks on the ward they stop lending to everyone else and that immediately impacts the real economy that's why they call it liquidity crunch so what you see here is a decade of returns in the stock market wiped out now why is it gone back up here be happy to get to that in the Q&A because if you think about it is weird every other economic indicator is flat and the stock market's going up bit strange now why did this happen because of this thing called a liquidity crunch this is what happens when banks freak out and stop lending to each other so what you have here you can just see it is the premium that you pay in what are called credit default swaps these evil technical instruments they're basically insurance policies so if you don't think something very remote things going to happen what's the odds on Lehman Brothers going bust you're like forget about that'll never happen great I'll write a contract insuring anything you've got this laymen and you give me a premium just like an insurance policy back so usually CDs prices are very very low then people start to get nervous then Lehman goes bust then we bill them or rather we let them fail and we start to build the system but still basically the price that you pay is very very high for any type of credit protection so this is why you get this real economy crunch now next there we go here's what I see when the real economy contracts jumping around nice average into a filter 5% and then bang that's the big contraction this is what generates the next slide which is unemployment now here's the one you got on the news here's the fun one the United States is unique amongst developed nations and the way that it calculates unemployment because what you do to find out the unemployment rate in United States is the most insane thing I can possibly think of you for not three and a half thousand people in the middle of the afternoon and ask them if they have a job in the one country where if you don't have a job you are seen as someone less than normal do you think there might be a bias and the underreporting if you're going to do that so what you do instead is you look at a measure that looks at all the people that were on w-2s they were paying taxes they came off payroll and they didn't show up on payroll again but they were on benefit at one point if you do that you get the u6 measure that's currently sitting at 15% that's the real effect of unemployment rate the United States this has heart but it's hot certain people more than others they're going to go I hate clickers come on there we go right all the way through a rather different America one made up of falling savings in debt driven consumption remember that bet with the real economy fell off a cliff here you're looking at personal consumption expenditures this is basically how much we're spending so we're having a real old time here's personal savings look what happens to savings done it's six percent five percent four percent three percent by the just before the housing bubble burst we were taking so much money out of our houses we gave up on saving well actually the negative savings rate in the United States has always had a positive savings rate and yet we're still consuming look at the same thing we're not saving we're consuming so where's the money coming from well if you start using your houses an ATM with home equity loans if you start taking the tons out of the stock market which is super inflated that's what's going to happen what is this actually masking something else has been going on rising income inequality this is the 99% 1% claim here is what's happened to the income of the 99% it's flat here's what's happened to the income of the 1% it's gone up quite considerably and so long as everyone else has access to credit that doesn't matter so what happens if you have a credit crunch there's a nice phrase for this you figure out who's swimming naked when the tide goes out so falling income is also at the same time rising poverty here's media and US household income falling from 52,000 don't know fifty to fifty thousand up again and barked down again this is over a decade so basically it's been stagnant at best here's what's happened the number of Americans living in poverty forty six point two million in a population of three hundred thousand three hundred million that's astonishing and erectus country in the world what master why will we not aware of that because of the availability of credit it made it look a lot better than it was so when the credit bubble pops suddenly you see a very different world I hit this clear good quick thank you right and this is true for everybody except the financial sector here's a wonderful slide so if you look on the bottom here here you have 1910 1920 all the way through 30 2010 heels incomes as multiples of the median income in the financial sector so guess what you make a lot of money until basically you have the Great Depression The Wall Street Crash and then you fall to still higher than the median income but look what happens beginning in 1980 bang through the floor or through the roof I should say now this gets interesting for the politics because of course if you have to bail all these banks oh and we did have to build all the banks so it's bad news I had to tell you this here's why how many people live in the United States three hundred thousand right three hundred million what's the working population how many Americans get up every day and actually work and register and get a w-2 158 million how many handguns are there in the United States 55 million what would happen if there was no money in the ATMs because 72 percent of Americans have no savings and left paycheck to paycheck so if you didn't be all the banks and there was no money in the ATMs and you couldn't buy groceries and you couldn't couldn't put gas in the car and you couldn't take yourself to work and you couldn't put the kids in school what do you think would happen before the handgun started coming out so unfortunately you had to do it and when you did it you discovered how much it cost which is this line so this is how much your budgets in balance which will actually last happened under Bill Clinton thought of like two seconds and then this is the all after 911 then the recovery and then the cost of Bill in a box around nine to 10 percent of GDP globally what happens you get the Tea Party because the one thing that these guys know is the puts on them they understand that ultimately when you build Wall Street you're actually taking the money to do so over the pockets of Main Street it's gotta come from somewhere and you gotta pay it back so they look at that increase in debt and quite reasonably in my opinion see hang on a minute I'm a normal jewel why am i billing out Wall Street well you can run through the argument that you know handguns fifty five million it's all going to end badly but they still know the pits on them because they're terrified of future inflation here's the American money supply relatively constant ish bang now if you believe that an increase in money has to be met by an increase in goods otherwise as inflation on a standard econ 101 then that's something to be worried about and of course this is the net cost of then bailing those bunks here's the average public debt of the advanced economy it's the opposite of the fiscal balance goes up to 100% in most cases now this results in this nonsense America is drowning in debt now see it's nonsense having been quite sympathetic about it for a moment because of this reason American debt is actually quite moderate have a look at this so here's the US here's government debt let's have a look at Japanese government debt shall we does anyone think Japan's going to go bankrupt any time soon the Japanese ten-year bond trees at a 0.9% hours trades at about one point eight so they have three times the debt and yet none of that seems to matter if I were a country and I wanted to be worried I'd be really worried about Brent look at financial institution debt that's how much debts in their banks now look at their household non financial institution and they're worried about government there David Cameron's cutting the government debt that's the one part that they shouldn't be worried about so look at Germany that paragon of fiscal austerity and virtue it's basically the same level of debt as the United States so why are we panicking about this well remember that Tea Party politics Amanda we got gridlock and because it got gridlock and the Democrats want to do one thing the Republicans want to do something else it meant then the only guy who could do anything was Ben Bernanke and Ben Bernanke went to the banks and said you know all these really crappy mortgages you've got on your books gimme them and I'll give you some money back instead and then what you can do is start the real economy again get over the credit crunch so the Federal Reserve Kim boss we all known is a bad Bank basically here's its normal liquidity operations and then here's all the special programs it starts to do and this is billions of dollars thousands of billions of dollars to soak up all the bad assets in the box and this is what they're called so very transparent so Maiden Lane 3 LLC no one know what that is I don't think anyone knows of those nonetheless cost you about four eight billion dollars given the politics it stays that way so the Federal Reserve has become a global bad bank because what we also found out was a lot of these mortgages and a lot of these banks that were taking money from the Fed well even American because you've got this thing called Broker Dealer licenses which means that you can be a big bank and do lots of things very cheaply in New York 14 of the broker dealer licenses belong to European banks this is why Europe starts to get into trouble don't get there fairly shortly so anyway the Federal Reserve is basically the only thing that can do anything which is why Ben Bernanke's got all these copy mortgages sitting in the Federal Reserve which brings me to Europe Europe is not in great fiscal health let's have a look here's the US we're worried about our debt levels let's have a look at Ireland there's Japan again Greece Italy Ireland Portugal what do you call that the pegs of Europe so they already start off with a much higher load of debt now the weird thing is at the perception of debt before the Euro came and in 1999 Italian debt to GDP was 121 percent nobody killed today when we're freaking out about Italian there it's 119 percent everybody cares so what's happened is the perception of the debt the shear amount but it's true that they definitely cut in more debt now where does this come from cotton account imbalances big squiggly lines here's the really important one the red one is Germany Germany is the biggest economy how many of you or your parents drive a German car surprisingly few I thought they were very popular they're on their way to become Volkswagens owners we're becoming the biggest automaker in the world they basically sell globally they make high quality products Germans talk about Deutsche quality right you make things that last that's why if you buy a meal a washing machine is three times as expensive as anything else all the rest of it they're an export powerhouse the problem was when you join everything together in one currency that makes the Germans more competitive and they already make really good stuff so what happens they start to export like mod unfortunately countries like Greece and others don't really have an end to export so they start to export less why because the Germans are giving them free money what why would the Germans be giving them free money what this you've got lacks public finances which is to say you're not bringing in as much taxes as you can as lots of loopholes so you end up january and lots of deficits so what if you got here annual growth of government expenditure so the IRS you're growing the government how much the government spends on social programs under than at 10% Spain's doing 7% Greece's doing nearly 7% Portugal again all this excessive expenditure Germany the one who is actually making the money they're not spending so how can you spend money they don't have well part of this is about wages follow me unless it all makes sense what has it got to do with wages well then get Ireland again Ireland over this period seven years gave itself I thought it near 30% wage increase how did you do that we established that Greece doesn't make anything they've given themselves a 20 percent wage increase where are we getting the money from well if you go back here to this one notice that here there's an interesting date 2000 at 2000 everybody except the French stops exporting what happens in 2000 2001 the Euro comes in and when the Euro comes and it makes the Germans artificially cheap and it makes everybody else artificially dear in terms of what they can export and that's why you start to see all this stuff now the clencher hardness is I'm married to a German right that's not the clincher but I have a German father-in-law and he is a phrase he says if you have two marks you spend one very German now he says how come my banks ended up in trouble in Greece because you know I didn't buy Greek bonds and the answer is yeah you didn't but your banks did because when the Euro came in what's called the yield curve collapsed so all the differences in rescue pricing between buying Greek bonds and nice safe German bonds disappeared so all the big core banks and the Netherland in France in particular in Germany decided hey why are we carrying around all those Greeks are always safe German stuff let's buy Greek stuff there's still a slight spread if we buy a lots and lots of it we'll make lots of money so they dead to the dump all the safe debt buy all the crap debt now if I'm buying a shoe of I'm a huge country like Germany I'm buying lots and lots of Greek debt what's happening is essentially I'm giving the Greeks my money to spend what did they spend on BMWs why are the Germans running a surplus because they gave them the money to buy the stuff from them that was the bit that nobody saw coming in the euro it was meant to make the lower countries more competitive and the top countries less it had the exact opposite effect because when buying their bonds you gave them free money to buy good stuff who makes the good stuff the chairman's not the greeks but of a problem so what this means is all the core banks in France and Germany in these places are filled with crappy assets have you had that before did that happen to a place called America yes only this time you've got a problem because you don't have a Ben Bernanke in Europe who's going to take all those crappy mortgages and stuff with them in a place called the Federal Reserve and hope the problem goes away you ever think called the European Central Bank which is a fake central bank why is it a fake central bank because it has no lender of last resort function so what you have is 30% of French GDP tied up in crappy assets on their banks balance sheets you have the same in the Netherlands you have 25% in Portugal you have 20% in Germany this is the UK now these are 2009 fourth-quarter data so they've shoved this down a little bit but nonetheless you still have literally a trillion dollars in bad debt sitting in the core banks in Germany in front why do you think the Germans won't let the Greek go because if they do and they default on the debt that's what it's going to cost them this isn't a sovereign debt crisis it's a banking crisis the same thing happened to America with crappy mortgages is now happening not with crappy mortgages but with crappy government bonds that seemed to be artificially cheap because the Euro give banks an incentive to dump the safe there and build up all of the bad debt from the periphery which allowed the periphery to over-consume so when the Germans are shouting down the phone at the Greek saying you guys have spent too much the German the Greek can quite rightly turn around and say yes and you gave us the money you idiot what did you expect us to do with it we bought BMWs fun isn't it so you end up with the euro which is great politics but lousy economics nor do lender of last resort there's no Ben Bernanke they just turn on the money tubs no unified bond market so you have the problem of worrying about if the Greeks default then the Portuguese default and if the Portuguese default then the irish default and everybody goes crazy you can't bail out your own banks why because you don't run the currency the currency is run by these guys in Frankfurt so French banks get into trouble the French government can't print any money the reason the Britain looks good these days is because it still has its own Bank it can print money to bail its box the European banks can't do this and at the end of the day you stock up political parties who are responsible to those electorates those electorates our national and the Germans don't want to give the Greeks any more money so you gotta have a problem the austerity problem what is the accellerate problem well we can't all basically save at once somebody has to be spending for somebody to be belt-tightening we can't all make BMWs and there's no way that we can all tighten our pants when everybody's wearing different parts which is to say if I'm a rich country I can afford to cut more I'm a poor country and I'm being asked to cut the same amount it cuts much deeper and it makes it almost impossible to get out of debt so given the Greeks more money won't do anything other than kick the can down the road they don't have any assets to grow back with now here's the proof of this here's a couple of the pegs this is Portugal Greece in Ireland they've all been doing a started April started in policies for the past two and a half years here's where they started off in terms of debt it's gone up in every single case they've generated more debt by cutting things rather than you would expect they would have less debt at the end of it why because your own employments going on as your unemployment goes up you pay more benefits when you pay more benefits people consume less because it's less than your wages consumption goes down so you can't tax people so your tax receipts go down at the same time as your deficits go up so you end up with more debt rather than less it's a fallacy of composition what's rational for any one country a person to do is nuts if we all try it because there's no one buying anything which is why the American economy is recovering and European economy is going from bad to worse now how did all this public private mortgage debt become European sovereign debt very simple one bailing out the banks here's the costs globally of billing at the banks you know the stimulus the thing that drives the Tea Party mad is 12% of all spending over ha almost half of it is revenue loss but between 2000 2007 40% of corporate taxes were coming out the financial sector in the US so when those taxes dry up what happens to the deficit exports so how do you plug that deficit you can either shut down the federal government including the armed services or you can issue bonds that's where the debt comes from so most of it isn't stimulus problems it's actually increasing interest payments and plugging fiscal gaps the other part of it is European banks this is the scary bit so when the Euro comes in suddenly everybody is in a national bank you can be whatever bank from Portugal you know trade in euros so you don't have to play in your local locker anymore you can go global so they did they went to America and they bought every piece of subprime garbage they could find here's how it worked European banks set outside of the standard u.s. sector so US households get money in the banking sector that gives it to us borrowers very simple European side of this but they have those broker-dealer licenses this gives them access to what's called the wholesale funding market they are able to go to the very short-term money markets bottle overnight 0% almost and then lend it to their customers in Europe for 30 years a positive curry so you're borrowing overnight to fund 30 years you're making a 30-year bet in the future that nothing will change do you think you'll be different in 30 years I think you'll be different in 30 years this was insanity as a business model but it kept working so they kept doing it on the other side seen is that we're getting free money from the Americans they might as well use it to buy the stuff the Americans are making which is called a setback commercial paper otherwise known as crappy mortgages euro banks are now cut off from the short-term funding markets which is why they now have the only source of liquidity come to the European Central Bank 70% of the what are called the SIV is the special investment vehicles that were trading mortgages turned out to be European they weren't American at all you know banks have periphery debt is what's called the tier 1 capital that's the cushion for when it all goes wrong Greek bonds and the Euro banks are basically on life support from what's called the long-term record operations of the ECB so they're not looking to well let's go to the super senior tranche China China's going to save us right ok let's go first of all here's the assets and liabilities of Chinese balance sheet first one three point four trillion and to us cut debt and cash well let's think about this for a minute people tell me that the Chinese economy is more robust in the unit than the American economy their major asset is American paper therefore the Chinese economy is only as good as American paper so let's think about that one we've been on the best scum forever for the past 20 years we've been Chinese have been given us televisions and we've been given them paper that bails 2 percent and a positive inflationary environment I mean we think this is bad this is the best deal we've ever done it's true the economy is growing at 10 percent is the second largest economy in the world and 400 million people will be brought over in 20 years but let's think about the lot liabilities sailors the EU in the u.s. is 70% consumption driven that's where all their exports go only 38% of the Chinese are confident is actually consumption they can't consume what they make we need to buy it 38 percent national savings we're at 2.5 that's a lot of saving where does all that savings go not into domestic consumption the 40 percent dependent on exports going somewhere else they have a huge domestic housing bubble why because they don't trust their own banks so what do they do they buy real things well if your economy is growing at 10 percent a year then you got a lot of foreign exchange lying around you put it in real assets they have whole cities with no one in them I'm not making this up you can go online look at on YouTube it's amazing they've built a hundred million apartments in ten years hardly anyone lives in them they're all real estate hedges large-scale domestic unrest a huge inequality coefficient oops on a comeback 1 the Gini coefficient 0.47 this is the same as the US but the US has a safety net there is no safety net in China so nice way of thinking about China is if you're in Shanghai you're in Belgium in terms of inequality if you go 50 miles outside bail outside of Shanghai you're in Zimbabwe in terms of inequality and if people aren't consuming enough then what are the Chinese going to do with all those exports because at the end of the day when you add together the EU in the US it's 70% of global consumption China's ten percent so it's China going to save us probably not the case what's going to happen instead well think about it simply if you're ten percent twenty percent the world economy even and you're 70 percent isn't consuming there's nowhere for Chinese exports to go if China's major asset is u.s. t-bills then it's only as good as the value of the table so China can't bail us so just like that old subprime thing the super senior is an isolated as correlated same with the mezzanine same with the equity it's all part of the one's story it starts off with American bucks it goes to European banks and it's ending up in a balance tree of China in the weird form of guess what a housing bubble how did all that start here a housing bubble so what could happen well you could get some obvious triggers European seed or monetarism as I like to call it everybody trying to slash themselves to growth doesn't work when you all do it once one of the pegs defaults already go it's called CDO contagion and talked about that a large you know bank collapses or the CDs market collapses and all the yields go up so the global economy looks like a big sub down CDO the junior has infected the mezzanine the senior tranche is not secured take-home result the crisis begins and ends with the banks the sovereign debt crises are transmuted the banking crisis but for some reason we still be upon sovereigns it really has nothing to do with States a nice way to think about it is the following imagine your house is on fire and someone run out of the house and they had a big a big tin of kerosene only it was called mortgages and they bumped into you and you're the fireman and you see all of that sit there and you take it and you put it down you run it in a house and you basically put it all out in all the rest of it well you'd think what would happen is the guy with the matches in the mortgages would go to jail but we don't do it that way in fact what we do is we blame the firemen we see that we shouldn't have been involved in the market we say that the government has bailed out the banks and that's the problem which is true and it has a problem because we've got all this debt now but really what was the alternative let the host bottom down and at the end of the day this starts with banks it's still about banks in Europe and at the end of the day China doesn't have a banking system that can bill us so it's the same prices hasn't gone away still with us you got all that to look forward to I'm a very hot person I took slightly longer than I anticipated sort of a hi I'm Lindy I'm studying social sciences teaching um you mentioned earlier that everything else in the economy is flatlining but the stock market is going up could you briefly explain that yeah it's actually really simple there's nowhere else to put your money right it's really that simple if you think about it so you're a small investor right you could take it to a local bank and they will give you point five percent interest for a year and a positive inflation environment so they'll just reppin your money off you can put it in a tea bowl which will give you the rate of inflation you could put it in European equities you could put it in China or you can stick it in a stock market because at least that's real and that's pretty much was heartening it's the last refuge there's nowhere else to put your money now if enough money pushes into a market it's a simple demand and supply thing if you have more demand than available supply will Hartman's the price econ 101 folks that's I'm Emily kind I'm studying history teaching and you mentioned that Ben Bernanke of the Federal Reserve bought all of the bad mortgages to try to kick-start the economy do you think that's going to be effective it would be effective if we could actually clear the mortgages that remain on the banks balance sheets off the bank's balance sheet here's that here's the really simple way think about it if you've got bad assets on one side a balance sheet the ledger of what the bank's got you have to think about how banks water banks would work very differently from normal people for you and a set would be money in your pocket for a bank and a set as money that's out being loaned it's the other way around so the more debt that they're in the more they counter as an asset I know it sounds weird but that's how balance sheet double accountant actually works so what does this mean it means that the assets that they've got out there those loans need to be reduced to a price that will actually sell and the problem is to do that you need to take a massive hit on the mortgages that are the remaining there so obviously if you do that you're going to drive these banks to the brink of insolvency Citibank is basically insolvent it's true right and how do we stop this because of the collapse that'd be terrible well you have to get growth going in the economy again so how do you get growth going again you will get lending going and you give it to companies and entrepreneurs and they set things up and all the rest of it yeah but I can't do that why because I'm a bank and I'm stuck with all these crappy mortgages so what I do I give them to mr. Bernanke and he gives me a pile of cash I'm then meant to lend but I don't banks are no sir no more cash companies are certainly more cash than any time in American history now why are they also in there with cash because they're afraid they don't want to put out there and if we're individually afraid that doesn't matter but if we're collectively afraid what happens nobody invests and if nobody invest you bring about the very outcome you're afraid of so that's where we are we're stuck so Bernanke shouldn't have done a Congress should have had the responsibility of taking care of it but it couldn't agree on anything Bernanke takes the mortgages away leave some throw some cash at them and says get going in the banks go no thanks we won't bother and that's pretty much where we are the European story is exactly the same not Hubbard I'm studying econ just a couple of questions the first one is what your Greg Smith Goldman Sachs he had an article yesterday and then kind of blown up today I'd like to know your thoughts on that and I guess the second question is these banks they have proper trading desk where they're trading their own capital do you think the new Basel regulations are going to be effective because I mean now the banks they're coming more like Corp Commercial Bank yes Marshall much less and so I just kind of hear your thoughts on that because it seems like the banking systems really there's some imperfections in the foundation in that market it's really the problem and what what could we do to fix that the on the first one and the guy who'd all the op ED etcetera right you know so banker resigns in disgust is you know a bit sort of like war criminal goes to Hague and finds out he's going to be prosecuted shock you know so just put that to one side the interesting one and there's a longer version of this talk indefinite version this talk actually talks about the real problem here and the real problem and all thing is the business model of Investment Banking is bust right that's really pump so what I mean by this how do banks make money banks make money by sitting in the middle of a trade right so you've got you've got excess money you need money i hook you up that's basically what I do and I take a cut that's classic banking right now in the sixties and seventies he used to call this 363 banking you borrowed a three length it's sexy were on the golf course for three it was very straightforward and very boring you ever seen Mad Men that was the world actually in Mad Men there's an episode where they start complaining about how high income taxes were because under Eisenhower there were 87 percent of the top marginal rate think about that he was a Republican nice a very very different world for banking right now what happened in the 1980s with deregulation and all this stuff was the bank's got to do whatever the hell they wanted and then had a bunch of people called economists who also told them whatever they did was good so that was a bit of a conflict of interest problem but there we go so anyway they start to do whatever they want it's not to invent all these interesting instruments and stuff and lever up what does that mean they take on a hat load an awful lot of debt why do you want to do this right imagine the following imagine I know that a stocks going to go up by 10 percent I can take my actual cash and I can buy the stock and wait for the appreciation or I can buy what's called an options contract which costs me 10 cents to buy those stocks are a certain time for a certain price because somebody on the other side of the trade is well in a bet that those stocks aren't willing to go up so you can invent a market in what's called derivatives and if that 10% gain is amplified by taking on a hundred times debt that one trade can make me a billion dollars you can't do that in a neither of 3630 banking but you can't know if you want to do that however you don't need customers customers don't have enough money we need our other banks you need counterparties so you get the customers you get counterparties instead beg banks doing lots of trade you do what's called fattening up the trading book you do lots and lots and lots of trades with lots and lots and lots of leverage now here's the thanks brilliant it's all wonderful right no problem is you need some kind of asset in the base there let the fuel in the car the gas in the tank to make the whole thing go and what was that well from 87 until 2007 American equity markets went up at about 7 or 8 percent a year the underline area of growth in the American economy is about three or four percent a year this is true in the British economy went up by six when it was an order of magnitude different - etc so what you have is a huge run through equities the smart money goes this can't continue I need a hedge if you're not investing in equities what do you invest in real estate so you have a ten your run-up in housing 2005 2006 people start to think this is getting a bit nuts I don't want to go into equities I don't want to go into housing what's the only thing left commodities do you remember oil burn up to 135 dollars for no apparent reason that was the smart money looking for a note but those markets were too small and they went pop so if you basically cycle through equities that as hires are going to go if over if you've over built real estate you're not going to get that going for another 10 years or so and commodity markets are too small to pump and dump you don't have any fuel for the machine which means that the whole business model of Investment Banking is done and that's why the turnin and commercial banks I'm Scotty Fleming I'm a biotech major I had a question about the comparison between this recession and the Great Depression sort of what would you say we're the main causes or how do they differ in the biggest aspect and does the solution if it was a solution that we had then offers some insight into how I can get ourselves out of the mess now well I hope the solution is not the case because it was called World War two so I'd hope we don't have to have World War three you know that ago but we've learned something here's an interesting way to think about the product the base of the mechanics of it exactly the same right you basically have an enormous asset bubble in the banking sector it goes bang this cocktails international landing the global economy is really fragile at this point different from now Europe's basically living on short term the receipts from the United States the United States get spooked after the wall street crisis this is why the German economy contracts Germany contracts at a time when it's already went through hyperinflation has super high unemployment there's no welfare state the fascists come to power all gets ugly right history doesn't repeat itself so you don't get quite the same outcome but it's definitely the same trigger what do we have this different we have welfare states even the United States as a big welfare step think about people who are in the military after 20 years of service what do you get a pension is about 80 percent your income that's like Germany for goodness sake and you got 2 million people under arms that means that when does a recession those people are still spending because the federal taxation pump keeps kicking in the United States spends 25 percent of its GDP at the federal level but it only taxes 18 I hate to tell you this you're one of the lowest tax societies in the world and you have horribly irresponsible politicians who tell you otherwise because that is not sustainable in the long run if you want it you gotta pay for it and we've been living far too long by basically saying we'll borrow the money from someone else either from abroad or through pretend assets such as houses so there's a lot we can do to make ourselves more robust just by better public policy there's a really simple way to think about this is why it's not the same as this into 1931 the British economy was night the British government spent 9% of GDP so if they had doubled their expenditure they still wouldn't have been able to stimulate the economy out of a slump it's just not big enough these days average OECD economies to 35 to 40 percent of GDP so even if you cut 5% you're still spending 36% of the economy it's still huge so the cushion we've got is actually much bigger the problem with it is we've also become much more unequal so who pees becomes the question so if you've been making out like a bandit for the past 15 years only money in the financial sector and you've been sensible and banked it you'll find that make a difference but if you're a teacher in provo who's relying on a state budget that's in deficit because it doesn't raise enough taxes in the first place that's going to hit them not the guy who's got the big ski charlie somewhere up in the hills so there's an inequality here and that's what's the the bursting of the credit bubble has really revealed up so we're not on another Great Depression we're not going to go there simply the size of governments asset that means that that's not going to happen we're going to go through another banking crisis that could certainly happen are things going to be worse before the bar that might be particularly for the Europeans but it's different it's really really different the pool the struggle this time is about the pot going to be about the politics of inequality so one example that you know that Google tool you can do where you can basically track the usage of a watt all right if you go back two years and you look in news articles for the most popular economic term its debt after Occupy start coming out it becomes an equality changes okay my name is Paul bales I'm studying English and sociology and I was just noticing if it's more an equal if the people at the top are making more and more and if it's the banking and not the government is there anything that private people who own their own money can do or could do to help change this like outside of government if they could do anything personally because they have so much money and they're making so much more well it depends whether you really want to change it or not I mean you know if you if you're already if you already live in its dr. Pangloss right so let's ease Candide right if it is the best of all possible worlds why we want to change it so if you can convince enough people that it's the best of all possible worlds then you don't change it and then you still got a problem but then you blame something else I mean one of the reasons the United States economy it is a micro example is I'm absolutely convinced of this is surah busting dynamic isn't the level of entrepreneurship isn't the technological training because frankly you're losing that so I'm glad there's one biotech person here but nonetheless is not those factors it's the fact that when you're unemployed you think it's your fault you get up and move Europeans don't do that you born in Dusseldorf you die in this sort of you don't go anywhere else there may be a free movement of capital all over the EU people slightly different it's the talented tenth and last time I don't mean african-americans who made under the repressive regime in the south I mean the people who are born bilingual the ones who have got internationally recognised degrees they are the ones you find in London yes I'm French but I'm Swiss and I speak seven languages that a tiny percentage most Europeans don't move and when they are unemployed they blame the government they don't blame themselves so that makes a huge difference in the way that you can react to economic shocks so United States has an inbuilt advantage that way now you then there's a question of interesting question of Justice that comes in here because you can answer but is it really your fault I mean you know the banks blow up and then your firm's shut down and you're unemployed that's not your fault that would be the way European looks are them an American but unknown and say well that might be true but I'm going to California and off you go and you adjust so another way to think about this right when remember the whole thing about Hurricane Katrina and New Orleans right yes right okay now in Europe that was huge and it was huge for one reason because we hated Bush right so that we just put that don't know so this is anything to beat bush with right this this reached it's in the deal when we give Obama a Nobel Peace Prize for just not being Bush right that's pretty much what that was for it was kind of ridiculous but true right we were so happy he wasn't Bush we gave him a Peace Prize even though he hadn't done anything right if we could have given him a faster-than-light price but we'd have given him that too just for not being but anyway I'm digressing what the hell was a tournament Americans being known unemployed and a flaw he went homes what was it oh Katrina that was it great thank you right basically by the way I used to be a stand-up comedian anyway so Katrina happens now Katina happens you guys are amazing in this one because you have disposable cities right I mean you basically allowed the city to be wiped off the map you know under some Cooper came down cried you know then everybody forgot about it right and basically you don't do big infrastructure investment you know could you imagine if Milan disappeared the Nath quake right the entire Italian state would be mobilized they'd rebuild everything exactly as it was down to the last brick because they have this concept of history and importance and if Rome fell down did rebuild the Coliseum New Orleans falls down we don't care Detroit is literally cannibalizing its housing stock because it is cheaper to destroy it than it is to rebuild it you are literally wiping a city off the map street by street in the price you don't care in Los Angeles there's a thing called the historic district no one can find it because there's no such thing as history in LA it's all disposable that makes you incredibly resilient to shocks it makes for a society that can be hit and it just picks up and go somewhere else and that is a unique micro sociological difference that I think really makes a difference and why America responds different to these things than the Europeans the European solution of this is typical let's have more rules the American response is let's make more rules okay you briefly Oh I'm Kimberly Austen I'm a humanities major you started talking about welfare and and how we were spending more than we were taxing what part does welfare play in that and just taking off more welfare is that going to affect it in any way thank you for asking that question this is one of my favorites right so I'm going to ask you to figure this out I'm going to define welfare in the following terms actual cash transfers from the federal government to individuals to spend as they like as a percentage of the federal government's budget go get me an estimate what do you think I mean we're always we're so concerned about welfare or spending million billions of welfare mean come on what is it as a percentage of the federal government's actual budget to you spend as much on parks and recreation it's a political myth and talking and defining it very narrowly right cash transfers from the central state to individuals no you do more at the state level you raise more taxes at the state level but it was the big thing about the federal government spending all this money on welfare Clinton killed it he signed this bill that basically ended welfare as in you and it really did ended it there is no more free money it doesn't look like that anymore the reason you have such a high degree of inequality is you've got so many people working for the minimum wage that's why you've got the income skew people work here you've got an awful lot of people the labor the number of people who actually work here has been falling and you see this in the unemployment figures over time because people aren't coming back in the labor market but when it was humming along you have one of the highest labor force participation reason well if you have full employment who the hell are all the people on welfare and it's a simple question right if 97% of people have jobs who the hell is claiming all the welfare it's a myth it's simply not true so what do we actually spend our money on guess what the biggest item is Social Security it's pensions those pensions are form of welfare that depends on how you define it because if you think that it's an entitlement that you've paid into then that's not welfare that's a cash transfer but from an investment all right so let's take this off what's the next one healthcare so should we start taking people's health care or will well we kind of do because we have a private system but it's actually hugely public subsidized so what's after that is defense now if you want to take any of those items out in fact if you add all of those items together right and then cut every other piece of discretionary spending you will not be able to balance the federal budget it has nothing to do with welfare it is a complete myth thank you

Channel: BYU Kennedy Center

Views: 63,424

Rating: 4.8802085 out of 5

Keywords: BYU, Brigham Young University, Kennedy Center, International Relations, International Economics (Field Of Study), Financial Crisis (Literature Subject)

Id: V3FPmu2_J_0

Length: 56min 51sec (3411 seconds)

Published: Tue Jun 09 2015

Reddit Comments

[u/zethien]

Absolutely a great talk. This tidbit at about 17:00 in particularly struck me:

We did have to bail all the banks out. Here's why: how many people live in the United States? 300 million. Whats the working population? How many Americans actually wake up everyday and work and register and get a W2? 158 million. How many handguns are there in the United States? 55 million. ( This site actually reports upwards of 310 million firearms in the US, 114 million handguns) What would happen if there was no money in the ATMs? Because 72% of Americans have no savings and live paycheck to paycheck. So if you didn't bail out the banks, and there was no money in the ATMs, and you couldn't buy groceries, and you couldn't put gas in the car, and you couldn't take yourself to work, and you couldn't put the kids in school. What do you think would happen?"

[u/tedemang]

This guy's pretty good. Has a bit of a strong Scottish accent, but if you can deal with that, it's a solid presentation.