 In this section, we examine the severe financial crisis and the big recession called the Great Recession of 2008, along with the continuing stagnation of the economy since then. Deregulation of the financial sector played a major role in the big crisis that began in 2008. Before 1980, banks and other financial institutions in the United States were closely regulated by the government. This dated to a New Deal-era law in the 1930s, the Glass-Steagall Act. Starting in the early 1980s, these controls were first loosened, then largely eliminated. In 2000, the last bank regulatory law from the 1930s, the Glass-Steagall Act, was effectively repealed. Banks and other financial institutions had been freed to pursue whatever would bring them the highest rate of profits. They were very enthusiastic about this new freedom they faced, and they found that high-risk activities were much more profitable than making traditional loans to businesses and homeowners. What followed was new practices by the banking sector. Financial institutions made mortgage loans, the name for loans for buying a home or other property, to people with bad credit ratings, some even with no job, no income. These were called subprime mortgage loans. Subprime derives from the term the prime interest rate, which is the rate big banks charge to their very best credit-worthy customers. So subprime loans are loans made to customers with bad credit ratings. Subprime mortgages outstanding rose from near zero, and really existed in the late 90s, all the way up to one trillion by January 2008. The financial institutions created new securities based on subprime mortgages and other risky loans, which means they created pieces of paper, if you will, figuratively speaking, that they would sell, which gave the holder income based on these subprime mortgages. Such securities are called derivatives because the flow of income that they bring to its holder is derivative. It derives from something else, from the subprime mortgage loans that were made. This was a very profitable business for the financial institutions, the creation and trading of these subprime mortgage backed securities. Warren Buffett, a Maverick U.S. investor, warned in March of 2003, five years before the crisis, that financial derivatives were, in his words, financial weapons of mass destruction. But this warning was ignored. During the early 2000s, housing prices began to rise totally out of proportion to previous experience. However, people were persuaded that they would rise forever. And this played a key role in the financial practices of the time. As long as home prices were rising, the derivative securities based on housing loans seemed safe, because the holder could always foreclose on the property if there was a default, and if housing prices were always rising, they'd foreclose on a very valuable property. However, what goes up must come down, a simple truth that was forgotten. In 2006, housing prices in the U.S. stopped rising, and in 2007, they began to fall. Once housing prices started to fall, all of the securities based on home mortgages were endangered. This shows the estimated house price by calendar quarter. In this period, you can see they go up and up and up. Then in 2006, they stopped rising. In 2007, they began to fall. With the collapse of home prices, suddenly trillions of dollars in assets on the books of banks and other financial institutions in the U.S. and in other countries dropped sharply in market value. No one wanted to buy them. Now, the biggest U.S. banks, including Bank of America, Citibank, suddenly became insolvent, which means the value of their debts were greater than the value of their assets, what they held. But the government rode to the rescue. The biggest banks were bailed out by the taxpayers in 2008-2009. A similar financial meltdown and government bailout happened in the United Kingdom and several other countries. The banks basically would have failed and gone out of existence, but they were saved by the government. This is dubbed a financial crisis because the financial system essentially stopped working for a while. In order in its actions to resolve this financial crisis, the U.S. government eventually made commitments to spend, lend, invest, or guarantee $12.1 trillion, 85% of GDP, that's how big it is, to financial institutions, although only in quotes $2.5 trillion was actually used. That was the financial side of this crisis. The other side of this crisis was the sharp fall in GDP, dubbed the Great Recession. A big recession started at the beginning of 2008. In the fourth quarter of 2008, the recession accelerated. This shows the declines. In the fourth quarter of 2008, the last three months of 2008, GDP fell at a 6.8% annual rate of fall. The goods consumption by households fell at 10.8%. Business fixed investment fell by almost 23%, residential investments by almost a third at an annual rate. The unemployment rate, which had been 4.9% in January of 2008, rose to 10% in October of 2009, a huge increase. 8.3 million jobs were lost from December of 2007 through October of 2009. The recession lasted until the summer of 2009, when the economy began to recover. It was the most severe recession since the Great Depression of the 1930s. Now, in order to understand how these events arose, I will look at first the way neoliberal capitalism promoted expansion, and then you can see how that contained the seeds of a huge crisis. The features of neoliberal capitalism gave rise to three developments. First, growing inequality that we've seen. Second, a financial sector involved in increasingly speculative high-risk activities. And third, a series of large asset bubbles culminating in the massive housing bubble of the early 2000s. An asset bubble. An asset bubble is a sustained continuing rise in the price of an asset, such as land or corporate securities, due to purchases of the asset that are motivated by an expectation that the price of the asset will rise in the future. The aim of buyers is to obtain capital gains from the further increase in the asset price. They'll become richer. An asset bubble thus is a continuing, self-sustaining rise in the price of an asset, without any relation to the true economic value of the asset. As the rising price draws in more investors, their increased demand pushes the price further, and more people decide to buy it. It's a self-sustaining upward spiral. The roots of these three developments are found in the features of neoliberal capitalism. The growing inequality was a result of all of the features of neoliberal capitalism. The speculative high-risk financial sector was mainly a result of financial regulation, but also was encouraged by the unrestrained competition among firms in this period. The banks felt they had to engage in these risky activities, or they would be overtaken by their rivals. The market-incorporate CEOs that arose in this period, the practice began of the head corporate official being hired not from within, but from outside. In a market for CEOs, CEOs began to move around from one company to another. They stopped caring about the long-run fate of their company, and they approved measures which would increase profits in the short run, even if it created dangers in the long run. The big asset bubbles were a result of the first two developments. This shows that contrary to what you read in the media, you can see an asset bubble when it's happening. This shows the ratio of the home price index, an index of the average price of housing in the U.S., to homeowner's equivalent rent, what you could get for renting a property. That's a measure of the economic value of owning a home. And you can see that in starting in 1982, that ratio was relatively stable. It rose in expansions. It declined in recessions and rose again. But in the early 2000s, it rose to a sharp peak in 2007. How did neoliberalism promote long expansions? The rapid growth of profits produced a strong incentive to increase production. With growing profits, the capitalists were enthusiastic about investment. However, there was a problem concerning how they would sell the rising volume of output that results from a high level of investments. With wages stagnating or falling, who would buy the growing output since wage earners' households provide most of the demand in the economy? Someone had to spend more than their income. And asset bubbles provided the collateral that enabled households to spend a growing amount relative to their income. The banks would lend money because of the rising, seeming paper wealth of households due to asset bubbles. Asset bubbles were key to this whole process of solving the demand problem. The speculative financial sector provided the supply of loans. And inequality guaranteed a demand for the loans as those in the bottom half of the income distribution felt increasingly pressed and were desperate to maintain their living standards and so they borrowed based on their home values. However, while this worked for several decades and produced three long economic expansions, it over the long run created unsustainable trends. And the way to see these trends is through looking at key variables. This figure shows household debt as a percentage of disposable personal income which means after tax income. It was about 60% in the early 80s. Total household debt was about 60% of household income and the regular payments on the debt were quite manageable. However, over the course of the neoliberal era because the expansions were driven by rising debt, debt rose over time. It reached 77.5% in 1990. Then it grew further to 91% in 2000 and then sharply increased to almost 129%. It had more than doubled over the course of this period. Household debt could not rise indefinitely so this process could not continue. By 2007 it reached a level at which households could not manage it if the value of their homes fell and they had to start repaying their debt. At the same time, the banks that were making these loans became increasingly fragile as the term is used because their assets were increasingly risky. As the size of asset bubbles grew, the potential impact of the deflation of the bubble grew larger. Every bubble eventually deflates. The deflation of the housing bubble was the final act destroying the financial system. The Great Recession was the immediate consequence of the collapse of the housing bubble. The collapse of the housing bubble not only caused the financial crisis but also set off the Great Recession. As the housing bubble deflated, consumer spending and residential investment contracted and this had a secondary impact on business fixed investments. As tax revenues declined, state and local tax revenues declined that forced cuts in public spending at that level where state and local governments have to run a balanced budget. The global spread of the recession at the same time reduced export demand. The 2008 crisis was not just a financial crisis and not just a big recession. It marked the beginning of the crisis phase of the neoliberal SSA. According to SSA theory, normal economic expansion cannot resume again unless or until a new SSA is constructed. Now, what was the government's response? It was remarkable. In 2008 to 2009, Keynesian ideas and policies suddenly returned. People spoke of a Keynesian moment. The government bailed out the banks, something that was contrary to neoliberal theory which said you should rise or fall on your own merits and actions. The Federal Reserve pursued super expansionary monetary policy driving interest rates to zero effectively for certain kinds of loans. Congress passed a $787 billion economic stimulus bill in early February with a big spending increases and tax cuts over two years. These measures worked as designed. They helped to resolve the financial crisis and turn the economy back toward expansion. However, there were problems with these measures. The bank bailout was a problem. It would have been better if many analysts agreed had the government bailed out the banking system rather than the bankers who were left without any consequence for their profligate activities. The fiscal stimulus, the increase in spending, was too small to fully reverse the downward impact on the economy from the bursting of the housing bubble. The stimulus, the increase in spending should have been about three times as large as it was if the necessary level of demand was to be reached. If this is a crisis of the SSA, as SSA theorists argue, then a few policy changes while they can help are not sufficient to restore normal economic activity. A new SSA must be created. The return of neoliberal policies followed quickly. The period of Keynesian interventionist policies was brief. In 2010, the government stopped using spending to promote recovery. In the European Union, there was a decisive turn from Keynesian stimulus policies to neoliberal policies, meaning balancing the government budget, cutting spending, and raising interest rates. What we have seen since the Great Recession ended in 2009 was stagnation, that is, very slow GDP growth. The average GDP growth rate as of 2018 has been only 2.2 percent per year since the bottom of the Great Recession. This is the slowest expansion of any recovery from a recession since the end of World War II. And in Western Europe, economic growth performance has been even worse where there has been lingering, very high double-digit unemployment. This figure shows the annual rate of growth of GDP from the bottom of a recession to the following business cycle peak. And you can see that the rate has normally been quite high from four, five, five-and-a-half percent per year. But after 2009, it's only 2.2 percent per year. And by far the slowest. We are stuck in economic stagnation. The increase in employment during the current recovery has been the slowest of any recovery since the end of World War II. Today, in 2018, the unemployment rate is relatively low at 4 percent, but not because of a vigorous expansion. The unemployment rate finally fell to 4 percent because of three factors. First, millions of workers dropped out of the labor force because they couldn't get a job and gave up. And that lowers the measured unemployment rate. Second, labor productivity growth has been very slow in this expansion, particularly since 2015. And that means that more workers had to be hired because there was less growth in output per worker. Third, the recovery has lasted a very long time. So the low unemployment rate does not show a healthy economy yet. Thank you.