The financial crisis: European and US reactions

1. The financial crisis: European and US reactions Pasquale Tridico University Roma Tre

2. The sequence of the financial crisis • Background: household debt and bubble in the housing sector, low interest rates coupled with global imbalances and saving glut • Fall of 2007: US housing sector crisis and collapse of the sub-prime market. • Default correlations on mortgages spread to the world through the complex system of securitization. • MBS downgraded by CRA (some months before were giving artificially high ratings); nobody wanted them now. Lost value, poor returns (toxic assets) • Credit markets seized up, expectations worsened, interbank lending crunched, banks failed, Interest rates went up with more trouble for mortgage owners and increased default correlations. Bubbles burst! • Solvency problems and liquidity problems • Central banks liquidity injections.

3. Domino Effect of the Subprime Crisis (has hit the US economy and other economies)

4. Mortgages Commodityprice CDO Volumes Housingprice BUBBLES AND BURSTS

5. Mortgage Delinquencies Bank Failures

6. FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)

7. Post fordism Market Financialization 1988-2006 In GDP terms: 1ST UK, 2nd US, 3rd Australia: the same model In absolute terms: 1st US

8. Correlation between Labur Flexibility and Capital Financialization Source: World Bank 2010, online database

9. Briefdigression…before the crisis

10. Production of Scientific Books on Neoliberalism and Financial Crisis (key words: “neoliberalism”, “financial crisis”) Source: Google Labs, Books Ngram Viewer: http://ngrams.googlelabs.com

11. Production of Scientific Books on Labour Flexibility (key words “financialization” “labour flexibility” ) Source: Google Labs, Books Ngram Viewer: http://ngrams.googlelabs.com

12. Financialization + labor flexibility =Neoliberalism=> Inequality

13. The root of the crisis since the end of 1970 • Profit soar • Wages stagnated • Inequality increased • Consumption kept up thanks to financialization  private debt (financial innovation)  public debt (bonds China-US)

14. Correlation scatter Financialization and EPL 3 . Germany Luxembourg Belgium 2.5 Epl_2008 Poland Romania Slovenia France Austria 2 Finland Portugal Sweden Netherlands Czech Republic Slovakia Hungary Latvia Cyprus 1.5 Denmark Italy Lithuania Greece Bulgaria Spain Ireland Estonia 1 20 40 60 80 100 120 Financialization United Kingdom Source: own elaboration

15. Correlation scatter Financialization and Inequality 40 . Latvia Portugal 37 Lithuania Greece United Kingdom Poland Hungary Estonia 34 Romania Italy Spain Ineq 2007 Ireland Bulgaria Cyprus 31 Slovakia France Belgium Luxembourg Germany 28 Netherlands Finland Austria Czech Republic Sweden Slovenia Denmark 25 20 40 60 80 100 120 Financialization Source: own elaboration

16. Wage dispersion, selected countries Source: Euromemorandum 2010

17. Wage shares on GDP, selected countries Source: Euromemorandum 2010

18. Indebitamento delle famiglie e disuguaglianze di reddito (US, 1984-2008) Fonte: IMF, 2010

19. Disuguaglianze di reddito e dei livelli di consumo (US 1980-2006)

20. Eccessiva finanziarizzazione dell’economia Usa Grafico 3: Retribuzioni nel settore finanziario e negli altri settori economici Retribuzione media nel settore finanziario Retribuzione media negli altri settori economici Fonte: Financial Crisis Inquiry Commission (2011) Università degli Studi Roma Tre Marika Carboni

21. Rapporto tra i compensi dei manager e i salari medi dei lavoratori dipendenti Fonte: ILO 2010

22. Real Wage, Non-supervisor Workers (In 2007 $) Source: US Department of Labor, Bureau of Labor statistics

23. US Economy, Non-agricultural Sector (In 2007 $) Source: US Department of Labor, Bureau of Labor statistics

25. Financial crisis responses • Competitive Market Economy (CME) - US, UK, Ireland, Australia, Netherlands, Canada. • European Social model (ESM) - Eurozone17 (except Ireland) rather than EU27 At the G20 meeting in London in 2009, # models, # strategies: the Franco-Allemande (Sarkozy&Merkel) called for state regulation and financial restrictions. The Anglo-Saxon axe (Brown&Obama) aimed mostly to reach a consensus to provide monetary liquidity for the financial system.

26. Central Banks strong reactions: quantitative easing and zero interest rate • Posner (2009) estimates that the total amount of the spending of the Fed during the period 2007-2010 for the financial crisis was of $5.2 trillion. It is unclear however, how much and where exactly the Fed money went at the beginning of the crisis in the desperate attempt to save banks and financial institutions (Westbrook, 2010). • Similarly in Europe: ECB and Bank of England

27. Fed quantitative easing Reserve money 2008-10

28. Fed and ECB interest rates 2006-2010

29. Fiscal stimulus in US and EU 2007-10

30. Government rescuing banks US and EU

31. Financial Regulation in US and EU • US regulation (the “Frank-Dodd Act”) • new supervisory architecture system, major role of Fed in oversight large firms and involvement of the Treasury. A Council of Regulators is set up tocoordinate supervision with Fed. • EU regulation and responses • Contrary to the weaker reaction of ECB the EU regulation response was stronger. The De Larosière Report (2009) was absorbed by EU directives and regulations, declaration of support of the EU Commission (2009), the European Council (2009). However, the EU regulation is weakened by the fragmentation among the EU member states and their different national “operative” regulations in the financial markets.

32. US regulation: macro and micro “soft” oversight

33. A stronger EU regulation

35. Main divergences US-Eurozone • The most important disagreement concerns a financial transaction tax (FTT) • the FTT would serve to finance the huge costs of this crisis (German and France) • UK, US Congress and Canada strongly object it and the G20 Pittsburg meeting already rejected it. Bank lobbies are strongly against the FTT too. • The Obama administration would see as a good compromise a sort of Bank Levy which would have a more modest impact on tax collection • Other issues: hedge funds, Basel agreements, capital requirements, CRAs, etc

36. US and EU vulnerability • Beyond these differences, and despite the attempt to reform the financial sector, finance and economy still remain vulnerable, both in EU and US. This is due to a combination of 4 indicators in badly dangerous position: • 1) government deficits, • 2) unemployment, • 3) Current Account deficit (CA) • 4) slow recovery. • Out of these 4 variables the Synthetic Vulnerability Index (SVI) was calculated • For 2011: US -4.5 worse than Eurozone -3.72

41. Labour market: again US more vulnerable than Eurozone • Despite a lower recession in US in comparison with Eurozone (-2.6% against -4.2%) in US unemployment went from 4.6% to 9.8% (+5.2) and employment rate fell from 72% to 64.5% (-7.5) in 2010. • In the Eurozone the unemployment rate looks much better: it went from 8.6% to 9.6% (+1.2) and employment fell from 66.2% to 65.7% (-0.5%).

45. L’impatto sul mercato del lavoro: paesi dell’Unione europea Andamento del tasso di disoccupazione (2000-2010) Tesi di Laurea Università degli Studi Roma Tre Marika Carboni Fonte: (2010) e Istat (2010)

46. Public expenditure for labour market • Moreover, given the relatively lower percentage of US public expenditure for unemployment policies (passive and active measures) 0,49% of GDP against 2,8% of GDP on average among countries of the European Social Model, the human costs of US unemployment with respect to EU appear much bigger. • All this confirms our argument that the Eurozone and in particular the ESM is better able to cope with the crisis, allowing for less social costs and better social performance than US.

48. US and EU closer comparison