Professor levy ok. In our lecture on the Great Depression, i talked about the origins of any financial crisis, it is always important to look at the resolution to the last crisis. When we think about the Great Recession, we have two moments of origin. First is the 1970s, the crisis of industrial capitalism and thinking about whether or not the American Economy has gotten out of that crisis. We have been talking about this. The second point of origin i think is the late 1990s, the new economy, and how the bubble crash sets a pattern that goes across the 2000s. So we ended our last lecture with Alan Greenspan before congress in 1998. It is in the midst of the new economy euphoria. Here is what he said. You read this, but i will read it out loud. In short, our economy is still enjoying a Virtuous Cycle, in which, in the context of subdued inflation and generally supportive Credit Conditions, rising equity values are providing impetus for spending and in turn the expansion of output, employment and productivity enhancing capital investment. The hopes for accelerated productivity growth has been bolstered expectations of future corporate earnings and thereby fueling the further increases in equity values. This is his Virtuous Cycle, describing an economy in which low Interest Rates, what he calls generally supportive Credit Conditions, which the fed controls. He sets the Interest Rates. As well as abundance finance capitals in the u. S. Market which has been seen since the early 1980s, the inflow of capital from around the world into the u. S. , as well as what i called on monday, the wealth effect. The soaring stock market prices, the creation of more wealth and asset appreciation. That dynamic channeling and bill investment into the new i. T. Investments and fixed capital, information technology, which will then, greenspan expects, will lead to higher business productivity, higher output, higher profits, which will then justify the high stock market valuations to begin with, therefore fueling this Virtuous Cycle. So drawn from the literature i , will call this an asset price keynesianism. You are raising aggregate demand, because of the website of these rising the wealth effect of these rising values in the stock market. This is not the kind of classic keynesianism of raising through public debt and public spending or even public investment, but rather raising aggregate demand and therefore output as greenspan explained through asset appreciation and Financial Markets. Fueled by what greenspan again calls generally supportive Credit Conditions. Which is another way of saying, debt. But greenspan believed in the new economy. He believed that this cycle would be virtuous instead of vicious. All right switching gears. , 1998, there is another context of his remarks before congress. He is justifying to congress why at the fed, the fed is sponsoring Credit Conditions and greenspan mentions before Congress Financial disturbances over the globe economy. That is because a crisis had broken out in east asia in 1997. Many east asian economies, thailand and indonesia, singapore, south korea, they had developed rapidly throughout the 1980s and 1990s and they were hot on the heels of japan and germanys postwar industrial takeoff. Same model, export led growth, fueled by exports and manufacturers. Except now with this system over, there is virtually no controls on Global Capital movement. In 1997, and 1998, for various reasons Global Finance capital became suspicious of the east asian economies and they fled. On a computer screen virtually overnight. There is panic in the Global Financial markets and the Financial System seizes up. And Financial Markets in the u. S. Were also rattled. I think this is a big pivot and there are two things that happened. As a consequence the east Asian Financial crisis, which would have enormous consequence, first was china was paying attention. Communist china during the 1990s, they were in the midst of their own manufacturing, export led industrial takeoff and they looked around in 1998 and looked at places like indonesia, the gdp in indonesia was plummeting by 25 , there were riots, political turmoil, and the rulers in china say, how do we avoid Something Like this from ever threatening the legitimacy of our regime . The answer was to horde a lot of u. S. Dollars. Like a gold before, now it is a safe harbor, the worlds reserve currency. And greenspan controls the supply of dollars. The way to get dollars, if you are a country like china, is to buy dollar denominated financial assets, like u. S. Debt, public debt, u. S. Treasuries. So foreign countries, especially china, realized we need to get our hands on a lot of u. S. Debt, a lot of assets. It is a way of hoarding dollars and remaining liquid even when a crisis strikes. That leads to a surge here of even more inflows of Global Capital into u. S. Financial markets. Same pattern we have seen the last 20 or 30 years since 1980, capital running uphill to the u. S. , to the most developed country in search of security and stability. In 1998, because of the east Asian Financial crisis, the fed really comes to the rescue of the global economy. So greenspan, before congress, is explaining why, with the u. S. Economy booming, he is still cutting Interest Rates and throwing dollars into the Financial System. He is doing it for two reasons. One, keep the Global Financial system from seizing up, given the east asian crisis. Related, cutting rates, maintaining that the u. S. Consumer market, which are already battered producers, the east asian economies were export economies. So we have another pattern, which is set in place by the end of the 1990s, which is that American Consumers have become sort of that last resort. We will buy your flatscreen tvs, if no one else will. So in the late 1990s, you can see that the u. S. Trade deficit, which is financed by the Global Capital inflows, the u. S. Trade deficit really explodes. Now, greenspan reasons, think about his reasoning, he said i can do this because of this Virtuous Cycle. The u. S. Stock market, driven by new economy stocks was in orbit, you can see it here. Again, greenspan believed in the new economy. There is one problem here, which you can think about as rather obvious. This Virtuous Cycle was premised upon future expectations as greenspan put it, of future profits being realized because of these i. T. Investments, but how long . How long can the stock market levitate in the air without the realization of actual profits, actual earnings . You can see here they share the share price ratio really going up across the 1990s. The ratio of the price of the stock to the actual earnings of the company. The answer turned out to be a few years. The u. S. Stock market tanked in 2000. A lot of studies came out after, i will cite a couple of them. The oecd did a study after the popping of the bubble of the 242 leading internet companies, of those 242, only 37 of them made profits in the Third Quarter of 1999. And of those 242 companies, two of them accounted for 60 of the profit of all 242 companies. Of the 205 companies that lost money during that quarter, they lost 12. 5 billion. Those companies had a market capitalization at the height of the bubble of six and 21 billion. 621 billion. This gives you a sense of all corporate profit, you can see a flat lining in the late 1990s. So what is going on . Between 19941998, 50 of all purchases of stock were simply buybacks, Companies Buying their own stock. So a lot of the activity, the bubble, is corporations purchasing their own stock, executives giving themselves Stock Options, watching the stocks go up, even though the businesses were not actually making profit, then cashing out the Stock Options before the music stopped. There is no other way to describe this. This, to me, there is no other way to describe this, it is massive looting. I will give you one more statistic. From 1995 to 2000 u. S. , Investment Banks organized 167,000 mergers and acquisitions inued at 1. 3 trillion telecommunications. And Investment Banks earned a total of 13 billion in fees from those mergers and acquisitions. In 2001, the utilization rate in telecommunications, the amount of infrastructure actually used was 2. 5 . That is bad. I mean, that is a sign of real illness in the underlying dynamics of the economy. The corporations often times are going into debt to buy their own stocks as part of the bubble. It is also true that families, households and individuals had gone on a binge of debt during the late 1990s, to purchase, to make the stock market purchases. Because if you own stock, they keep going up and up, in your private account or your pension or 401k, why save . You see the u. S. Savings rate really just plummet in this time as well. And volcanic, unprecedented volcanic growth in household debt. Another metric of it right here. The stock market bubble pops in 2000 and 2001, technically the u. S. Entered into a recession. Actually, gdp growth, not much a not much of it, but gdp growth reappeared in 2001. What happens after 2001 is essentially the Housing Market replaces the stock market. The dynamics look very, very similar to me. It is true after 9 11, military spending increased. So you get the return of a classic keynesianism. Bush also cut taxes, you can see the u. S. Budget going into surplus in the late 1990s, back into debt after the recession of 2001 and after 9 11. So public debt is now back. And it is also true greenspan famously slashed Interest Rates again, three times between 2001 and 2003. It was known as the greenspan put. So greenspan was not going to let u. S. Asset prices free fall, he was going to provide credit to keep the value of assets up, because as ive explained the value of assets are the hinge through the wealth effect, at this point, of the entire global economy. It is also true it was a miserable recovery after the 2001 recession. It was a jobless recovery. You can see the red line. Inflation however remained low. Greenspans injecting more credit, more dollars into the economy to try to stimulate a sluggish recovery. Still not getting much bang for the buck. Again, very troubling dynamics. You can debate it, but i think if you want to date the Great Recession, arguably, you can say it goes back to 2001. We have troubling signs of over all macroeconomic health coming out of the stock market bubble. The same time, during the 2000s, with the greenspan put, you can see the capital, still running uphill from around the world into the u. S. Capital markets. The u. S. Financial system is awash in liquidity and credit and capital. Credit, capital, Interest Rates are low, and Credit Capital is cheap. It is at this moment that the Financial System in the u. S. , it really takes off. And again, it did not have to, but it centered on the Housing Market. This is the u. S. Housing price index. So now housing, residential housing, is going to become the asset class that will drive the asset price keynesianism which i was describing across the 1990s. How did this work . Basically to fund consumption, consumer demand with wage growth, this is debt again. Where is my, where is the slide i want . I want this one. With wage growth, you can see real median Family Income flat across the 1990s and 2000s. Households begin to withdraw stupendous amounts of cash from their homes. Values are going i will go all the way back. Up, up, up, with home equity loans, cashing up the value of the rising market price of your home as a loan. Mortgage equity withdrawals, home equity loans accounted for 27. 1 of gdp growth between 2001 and 2007. That is more of the wealth effect, credit sponsoring increases, and asset prices. Again coming out of the Housing Market. Greenspan, you look at his comments, he is not stupid. He knew that, he knew about this, he knew there was a housing bubble. And he is still running around in the 2000s talking about productivity growth. And you see it across the 2000s, productivity growth is still high. And you can save rising rates of investment and information technology. And unlike across the late 1990s, across 2000s you see the uptake in corporate profits. So greenspan is actually arguing the new economy is realizing itself finally. You got a problem though. You have housing prices going through the roof. And you cannot get around this slide. Right . You cannot get around flat, Median Income growth. Because without growth in incomes, with negative savings, people cannot pay back their mortgages, pay off the home equity loans, and buy all the worlds stuff, unless u. S. Housing prices continue to soar to infinity. It is that simple. Ok, there is a housing bubble, but what im try to argue is, the possibility of the bubble, just like the stock market bubble before, is sort of hardwired into the Global Political economy. Into the kind of finance driven capitalism of our age of chaos. The wealth effect of rising u. S. Asset prices, 1990 stocks, 2000 houses, raising the aggregate demand in the u. S. Economy. Which has become the Consumer Market of last resort. For the global economy. For all Global Manufacturing producers. That debt is sustained by the Global Capital inflows into the u. S. Financial system, because the dollar has become, it is, still is the worlds leading reserve currency, if there is a crisis, everybody wants handson dollars. To sustain this dynamic the federal reserve, which controls the money supply essentially for the world, is holding Interest Rates low to provide those Credit Conditions that greenspan referred to in 1998. Ok, so now i will shift gears and scales a little bit. The Housing Market was bound to cool off to some degree. And it did in 2007. You can see the little blip. And now we have a different question, which is why, by the fall of 2008, there is a cooling off of the Housing Market which leads to, i am not exaggerating, utter financial apocalypse . September 2008, the u. S. Financial system, let me be clear, it imploded. It ceased to function. So why . Here again, we need to change scale and go from the big picture of political economy, including the Global Political economy, and get nittygritty into how finance worked, until it stopped working. Right . Ok, you can see it on the handout, but in the postwar era there was 363 banking. In which bankers took deposits, paying depositors 3 interest. They lend out money to customers at 6 interest. And they hit the golf course by 3 00 p. M. Very simple. 363. During the 1970s, this model was disrupted. Inflation that came about in the 1970s ate into the value of those loans. And with manufacturing profits falling and the international competition, many corporations, including banks, started to do more Creative Things financially. Banks began to create new Financial Products. Instead of taking deposits, loans, waiting for repayment, they began to originate and distribute. Originate and distribute. You do not make a loan and hold the loan. You originate the loan and then you sell the loan, and you make money that way. You originate a derivative and you sell the derivative and make money that way. So the derivative is a Financial Product whose price which is derivative of an underlying asset. You do not buy the house, the bushel of wheat, the derivative is simply a bet on the price movement. It is a bad on the bet on the price fluctuation of something. You do not have to buy the thing itself. And what wall street did, since the 1980s, was to find new Something Elses to bet on. All kinds of stuff. Different types of loans, mortgages being credit cards one, loans, student loans. You could mix different loans together, chop them up, securitize them into a new synthetic derivative. To do that, you need complex mathematical formulas. So wall street banks start minting these new Financial Products and selling them to one another, but also to their clients. It is not regulated. It is outside the framework of the new deal financial regulatory architecture. So this is sometimes called shadow banking. All right, so stay with me. A bank, a Business Needs cash from time to time. To pay the workers, to pay the debts, and in an old world you have cash on deposit in a bank and you draw from it. Now you dont so much have cash on deposit in the shadow banking world. You can get cash through the repo market. The repo market, this is a m