The Global Economy

1
The Global Economy And Foreign Economic
Policy Where do the Candidates Stand?
2

• Todays Discussion
• Historical Context The Great Depression and
  American Leadership
• The Cause Absence of a Leader
• The Solution Global Financial Institutions
• The United States as Leader
• Globalization Unregulated markets
• Todays Crisis
• The candidates and their solutions

3
The Business Cycle

• Prosperity
• Transition
• Trough
• Recovery

4
The Big Contradiction

• Market Mechanisms vs.
• Societys needs
• the market threatens the very essential bonds
  that hold society together.

5
Globalization in Early 20th Century The
Prosperity Phase

• International Interdependence and the division of
  labor
• Credit and International interdependence
• Britain as the worlds creditor and lender of
  last resort in the through phase of the
  business cycle

6
A bit like the Clinton era.
7
Growth of production
8
Growth of consumerism
9
The Business Cycle with Britain as Global creditor
Britain is The Worlds Creditor
Great Depression
10
Hidden Problems

• Britain no longer able to provide credit
• Wages lagged behind profits, so that mass
  purchasing power could not absorb the vast output
  that it was technically possible to produce.

11
Crash and Spread

• The crash of 1929 and the spread of economic
  crisis
• Britain could no longer be the lender of last
  resort, the buyer of others exports, or infuse
  credit into the system
• The spread of the depression from finance to
  industry
• The internationalization of the crisis

12
Market solution purge rottenness out of the
system

•  After the 1929 crash, Treasury Secretary Andrew
  Mellon advised the government to cut spending to
  balance the budget, and leave desperate banks,
  businesses, and families to fend for themselves
  because the market alone would "purge the
  rottenness out of the system."

13
Government intervenes Smoot-Hawley Tariff
14
Dont Trade
15
Protectionism
16
The Global Response Protectionism

• . every country for itself
• Tariffs and qualitative restrictions
• Trade became bilateral
• Currency devaluations to stimulate exports

17
The end of international interdependence
18
Protectionism makes things worse.Unemployment 25
19
Then and Now.
20
Global Depression

• The combined output of the world's seven biggest
  economies declined nearly 20 from 1929 to 1932.
• The unemployment rate soared in the U.S. and
  Germany to a peak above 33.
• World trade collapsed by two-thirds, not least
  because of retaliation to the Smoot-Hawley
  tariff.

21
Depression and War
22
The Unemployed are Mobilized
23
Germanys debt exceeded its national income in
1923 and could not pay its international debts.
The government printed money which led to
hyperinflation
24

25
Germany invades Poland
26
Causes? Solutions? Leadership

• a central source of the Great Depression in the
  1930s was a lack of British leadership and the
  unwillingness of the U.S. to provide leadership
  in the world economy.
• Leadership is needed to stabilize the world
  economy
• leadership means three things1. providing a
  market for distress goods2. providing long-term
  lending 3. discounting in crisis

27
Leadership for Stability Post-war Global
Financial Institutions

• Market Anarchy caused the Depression
• Market can be tamed by government intervention
• Global Markets need global governance and
  intervention

28
IMF
29
World Bank Paul Wolfowitz he head of World Bank
(2005-07), visited a mosque during an official
visit to Turkey. Obeying local customs, he
removed his shoes and revealed two large holes in
his socks! 
30
WTO
31
American Leadership

• the United States assumed primary responsibility
  for the management of the world monetary system,
  beginning with the Marshall Plan and partially
  under the disguise of the IMF.
• The dollar became the basis of the international
  monetary system.
• The US took in the worlds distressed goods and
  began to build a trade deficit

32
Multilateralism, American style
33
Marshall Plan
34
Marshall plan in action
35
The U.S. market for worlds distressed goods,
source of credit, lender of last resort

• US becomes market for worlds distressed goods
• Source of credit
• Lender of last resort
• How?

36
European Cooperation
37
The US Trade deficit 1950-1973
38
Too many dollars
39
Vietnam war more inflation
40
War on Poverty
41
(No Transcript)
42
Value drops
43
Value drops
44
inflation
45
(No Transcript)
46
(No Transcript)
47
(No Transcript)
48
Free Trade
49
Casino Economy
50
The more free trade, the higher the income
51
(No Transcript)
52
(No Transcript)
53
(No Transcript)
54
Decline in real wages
55
Rise of Temporary workers
56
Growth of a low wage work force

• Between 1975 and 1990, the percentage of low wage
  employees in the total work force grew by 142 per
  cent, from 17 per cent to 40 per cent

57
Rise in unemployment
58
But No Capital shortages

• . Capital markets are grew more quickly than
  demand for capital, and new calculations show
  that Asia could very well finance much of its
  growth through savings.

59
(No Transcript)
60
Deregulation and corruption
61
(No Transcript)
62
Globalization Absence of Leadership and
Regulation. Govt private good, public bad
1945-73 U.S. Leadership International Financial
Institutions International Trade Organizations
1920s
1980s 1990s
1970s Recession
1930s Depression
63
Follow the crisis.

• 1. Housing values remain stable for 100 years to
  1995
• 1995-2005 Housing prices double
• 2. Wage stagnation and income inequality
• 3. Deregulation of financial markets
• 4. Easy money ? easy mortgages as bets on ? in
  housing prices Run of CDOs and derivatives
  borrowing to buy them (betting on ? in value)
  rating fraud easy insurance (AIG) ? highly
  leveraged banks
• ?
• Housing supply overwhelms demand ? housing prices
  fall mortgage defaults ? CDOs lose value
  Bank stock prices fall ? credit drys up ? Begin
  the bailout ? (hopefully) more credit ?
  (hopefully) save businesses and jobs ?
  (hopefully) economic growth

64
Fannie Mae Freddy Mac

• pened The Floodgates
• MISDIAGNOSING THE CAUSES OF THE CRISIS COULD LEAD
  BOTH TO REGULATORY OVERKILL AND TO MORE RECKLESS
  RISK TAKING.
• by Stuart Taylor
• Saturday, Oct. 18, 2008
• President Bush, his Securities and Exchange
  Commission appointees, other free-enterprise
  dogmatists who have stood in the way of
  regulating risky and opaque financial
  manipulations, and greedy Wall Streeters deserve
  the blame heaped on them for the financial
  meltdown that has so severely shaken America.
• But the pretense of many Democrats that this
  crisis is altogether a Republican creation is
  simplistic and dangerous.
• It is simplistic because Democrats have been a
  big part of the problem, in part by supporting
  governmental distortions of the marketplace
  through mortgage giants Fannie Mae and Freddie
  Mac, whose reckless lending practices
  necessitated a 200 billion government rescue
  last month. It is dangerous because misdiagnosing
  the causes of the crisis could lead both to
  regulatory overkill and to more reckless risk
  taking by Fannie, Freddie, or newly created
  government-sponsored enterprises.
• Fannie and Freddie aside, it's worth pointing out
  that many, if not most, of those greedy Wall
  Street barons are Democrats. And that the
  securities and investment industry has given more
  money to Democrats than to Republicans in this
  election cycle. And that opposing regulation of
  risky new financial practices by private
  investment banks and others has been a bipartisan
  enterprise, engaged in by the Clinton and Bush
  administrations alike.
• But the roles of Fannie and Freddie are my focus
  here. Powerful Democratic (and some Republican)
  advocates of affordable housing, including Senate
  Banking, Housing, and Urban Affairs Committee
  Chairman Christopher Dodd, D-Conn. Sen. Charles
  Schumer, D-N.Y. and House Financial Services
  Chairman Barney Frank, D-Mass., have been the
  GSEs' most potent and ardent champions in recent
  years. Meanwhile, the agencies and their
  employees have orchestrated a gigantic lobbying
  effort (costing more than 174 million between
  1998 and 2008). They have also made campaign
  contributions of more than 14.6 million between
  the 2000 and 2008 election cycles, with some of
  the largest going to Dodd and Barack Obama.
• A leading illustration of this Democrat-GSE
  symbiosis came in summer 2005. The Senate Banking
  Committee adopted a bill to impose tighter
  regulation on Fannie and Freddie, with all
  Republicans voting for it. But the Democrats
  voted against it in committee and killed it on
  the floor.
• Also in 2005, Fannie and Freddie began buying
  vast amounts of subprime and "alt-A" mortgages
  with, in many cases, virtually no down payments,
  that had been taken out by people with low credit
  scores and low incomes relative to their monthly
  payments. To finance more and more affordable
  housing, as leading Democrats, and some
  Republicans, had urged, the GSEs dramatically
  lowered their traditional underwriting standards.
• Between 2005 and 2007, Fannie and Freddie "sold
  out the taxpayers" by financing almost 1
  trillion in such highly risky mortgages,
  according to "The Last Trillion Dollar
  Commitment The Destruction of Fannie Mae and
  Freddie Mac," a carefully researched essay posted
  on the conservative American Enterprise
  Institute's website by Peter Wallison of AEI and
  Charles Calomiris of Columbia Business School.
• They base their trillion-dollar figure, which is
  much higher than most published estimates, on
  detailed analysis of what they call "accounting
  practices that made it difficult to detect the
  size of those exposures."
• Fannie and Freddie appear to have played a major
  role in causing the current crisis, in part
  because their quasi-governmental status violated
  basic principles of a healthy free enterprise
  system by allowing them to privatize profit while
  socializing risk. That is, their special
  privileges as GSEs -- created decades ago to
  promote homeownership by buying mortgages from
  banks, which could then use the cash to make more
  loans -- enabled them to lend at high rates to
  reap enormous profits for their private
  stockholders and executives and to borrow at low
  rates based on the government's implicit promise
  to rescue them from any failure, as it has now
  done.
• Unbeknownst to the investment banks, the experts
  at Fannie and Freddie knew very well that their
  bosses were taking reckless risks.
• Many conservatives have gone so far as to blame
  Fannie, Freddie, and their Democratic sponsors
  for the entire meltdown. Some (not including
  Wallison and Calomiris) also blame the Community
  Reinvestment Act of 1977, which forced banks to
  lend and invest more in minority and low-income
  areas.

65
(No Transcript)
66
British Leadership (again?)

• At a special European summit meeting on Sunday,
  the major economies of continental Europe in
  effect declared themselves ready to follow
  Britains lead, injecting hundreds of billions of
  dollars into banks while guaranteeing their
  debts. And whaddya know, Mr. Paulson after
  arguably wasting several precious weeks has
  also reversed course, and now plans to buy equity
  stakes rather than bad mortgage securities
  (although he still seems to be moving with
  painful slowness).

67
Global Leadership? Britain? G8? International
Organizations?
1990s Globalization No Leader!!!! No
regulation!!!! Private Good, Public Bad
Wage stagnation Housing Bubble Easy Money
Future?
2008
68
McCain solutions

• Sen. John McCain is proposing a new set of tax
  cuts aimed at helping investors weather the
  financial crisis. It includes temporary
  reductions on capital gains tax, on taxes paid by
  senior citizens when they withdraw money from
  retirement accounts, and on taxes paid on
  unemployment benefits.
• The total package would cost 52.8 billion,
  according to senior policy adviser Douglas
  Holtz-Eakin. All of the proposals would apply for
  2009 and 2010.
• The McCain campaign has struggled to figure out
  the best response to the economic crisis,
  suggesting a number of proposals over the last
  few weeks. None of them appears to have caught
  fire with the public, though, as polls show
  voters trust rival Sen. Barack Obama more on the
  economy. The Democratic nominee has been gaining
  in national and battleground state polls with
  Election Day just three weeks away.
• The Obama campaign called the McCain initiative
  a day late and 101 families short, saying it
  will not spur job growth for the middle class.
• His trickle-down, ideological recipes wont
  strengthen our economy and grow our middle-class,
  but Barack Obamas pro-jobs, pro-family economic
  policies will, Obama spokesman Bill Burton said
  in a statement. He added that a capital gain tax
  cut wont be very helpful in a year when people
  dont have many capital gains.
• The McCain plan would reduce the tax on long-term
  capital gains to 7.5 from 15 for 2009 and 2010.
  The campaign said this would strengthen
  incentives to save, invest and restore the
  liquidity of the markets. That would cost 10
  billion.
• He also wants to increase the amount of capital
  losses that can be used to offset ordinary income
  from 3,000 to 15,000.
• The most expensive part of the plan would lower
  the tax rate on money seniors withdraw from IRAs
  and 401(k) retirement plans to the lowest rate
  10. This would apply to the first 50,000
  withdrawn from these accounts each year. The
  campaign estimated it would help nearly 9 million
  Americans over age 60 and would cost 36 billion.

69
Obama solutions

• Obama proposed tax breaks for businesses that
  create new jobs, a freeze on foreclosures by
  banks that participate in the government's rescue
  program and a public-works fund to rebuild the
  nation's infrastructure while keeping people
  employed. He embraced McCain's proposal to
  suspend the rule that would require retirees to
  start liquidating their 401(k) holdings at the
  bottom of the stock-market crash. And he went a
  step further, proposing that Americans should be
  able to withdraw some of those retirement savings
  without penalty during the economic crisis.

70
Back in the USA Keynes Triumphs?
71
Times Square News Ticker