US ECONOMIC CRISIS AND SYSTEMIC RISK

DONE BY ; ANJALI BALAN MLFS 1102

Introduction

The U.S. and the global economy have been and continue
to be in serious crisis, and the current global recession is the worst economic downturn since the Great Depression of the early twentieth century highs of 14,000 in late 2007 to below 6,500 in early 2009, with more than a trillion dollars of value lost in the stock market in little over a year little over two years after its worst decline, the recent turmoil on Wall Street over the past two weeks, which pushed the Dow down to the the 10,000 level could make things worse a double-dip recession turning into a depression

The Dow Jones plunged more than 50 percent from its

Although the Dow rose to around 12,500 a

 Clearly, the global capitalist economy is going

through its deepest crisis since the Great Depression of 1929, and this signals serious challenges for global capital over the next decade, especially for the United States

The best example of this impact, and what is in

store for us over the next few years, is what has been happening with the sovereign debt crisis in Greece, Portugal, Spain, Ireland, and Italy, as well as the United States (and with what has happened to the icons of U.S. big business General Motors, AIG, Citigroup, and other big corporations and banks) icons of the U.S. economy to assess the magnitude of the damage

Lets take a brief look at these once-powerful

Figure 1. Lehman Brothers stock, 2007-2011 (in dollars and volume traded)
$80

$18

4 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 2. General Motors Corporation stock, 2007-2011 (in dollars and volume traded)
$40

$5

$1 4 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 3. Citigroup, Inc. stock, 2007-2011 (in dollars and volume traded)
$55

$26

$2.68

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 4. American International Group stock, 2007-2011 (in dollars and volume traded)

$1,450

$1,000 0

$600

$22

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 5. Fannie Mae stock, 2007-2011 (in dollars and volume traded)

$50

$22

20 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

Figure 6. Freddie Mac stock, 2007-2011 (in dollars and volume traded)

$70 $63

$32

31 cents

Source: Yahoo Finance http://finance.yahoo.com retrieved August 19, 2011.

 The periodic crises resulting from the capitalist business cycle now
unfolds at the global level

Origins of the Crisis

The current crisis of the world economy is

an outcome of the consolidation of economic power that the globalization of capital has secured for the transnational corporations
banking, real estate, and productive sectors of the economy that have triggered the current economic crisis

This has led to a string of problems associated with the financial,

Nature of the crisis

The central problem of our present capitalist economic system is the recurrent business cycle which is now operating at the global level. It manifests itself in a number of ways, including:

The problem of overproduction/underconsumption Increasing unemployment and underemployment Decline in real wages and rise in super-profits The sub-prime mortgage and credit card debt

Speculative corporate financial activities

Increased polarization of wealth and income

Table 1. Share of Aggregate Income Received by Each Fifth and Top 5 Percent

of Households, 1975 to 2009 (in percentages)

_____________________________________________________________________

Lowest

Second

Third

Fourth

Highest

Top

Year

20%

20%

20%

20%

20%

5%

_____________________________________________________________________

1975

4.3

10.4

17.0

24.7

43.6

16.5

1980

4.2

10.2

16.8

24.7

44.1

16.5

1985

3.9

9.8

16.2

24.4

45.6

17.6

1990

3.8

9.6

15.9

24.0

46.6

18.5

1995

3.7

9.1

15.2

23.3

48.7

21.0

2000

3.6

8.9

14.8

23.0

49.8

22.1

2005

3.4

8.6

14.6

23.0

50.4

22.2

2009

3.4

8.6

14.6

23.2

50.3

21.7

Table 2. Distribution of Wealth in the United States, 2007, by Type of Asset (in percentages) __________________________________________________________________ Investment Assets Top 1% Top 10% Bottom 90% __________________________________________________________________ Stocks and mutual funds 49.3 89.4 10.6 Financial securities 60.6 98.5 1.5 Trusts 38.9 79.4 20.6 Business equity 62.4 93.3 6.7 Non-home real estate 28.3 76.9 23.1 __________________________________________________________________ Total for group 49.7 87.8 12.2 __________________________________________________________________ Source: Edward N. Wolff, Recent Trends in Household Wealth in the United States: Rising Debt and the Middle Class Squeeze, Working Paper No. 589 (March 2010), p. 51.

How Did All This Happen?

According to Prof. Richard D. Wolff
Department of Economics, University of Massachusetts at Amherst
Richard D. Wolff, Capitalism Hits the Fan, in Gerald Friedman et al. (eds.), The Economic Crisis Reader (Boston: Dollars & Sense, 2009).

From 1820 to 1970, every decade U.S. workers experienced a rising level of
wages

In the 1970s this came to an end; real wages stopped rising and they have
never resumed since

U.S. workers became more productive, but got paid the same; wages began
to stagnate and decline

The gap between labor and capital grew bigger

1859 69

79

89

99

1909 19

29

1939

1947

1955

1965

1975

1985

1995

2005

The large corporations made huge profits and had much money at their disposal They bought other corporations (mergers and acquisitions) and they put their money into banks The banks loaned that money (with interest) to workers who didnt have money to consume This was done to raise their purchasing power because their wages werent enough to buy things

Then What?
Since employers no longer raised workers wages, the workers had to go into debt to survive Debt went up and up and things got out of control The banks continued to loan money through new loans (secondary mortgages) at high interest rates, and this was a profit bonanza for the banks As corporations increasingly began to invest abroad (outsourcing production and services), U.S. workers lost their jobs, and this led to greater unemployment and underemployment

Unemployed workers with a lot of debt were unable to make their mortgage and credit card payments, and this led to foreclosures and bankruptcies This, in turn, led to the collapse of the banking system, necessitating a government bailout of the banks It is only through the nearly trillion dollar stimulus funds that the U.S. government poured into the economy to save the banks from default that a financial collapse was averted

Heres a view of the housing bubble in 2006 by looking at the stock chart of one home builder Hovnanian Enterprises (HOV)
Stock price: $70 per share in 2006; $1.30 per share in 2012.

$ 70

Source: http://finance.yahoo.com retrieved on December 28, 2011.

Extent of the Crisis

The current economic crisis has been deep and widespread on a global
basis, especially in the U.S.

In the epicenter of the crisis, in the United States, unemployment

increased from 7 million in December 2007 to 16 million in October 2010 reached 18% in 2010

Counting the discouraged and part-time workers, the unemployment rate

Foreclosures have been running over 1 million a year

Poverty is on the rise (now 44 million Americans

below the poverty line)

1 in 7 live at or

With the steady decline of the manufacturing sector in the United States through outsourcing of production to cheap labor areas abroad, 2.9 million well-paying manufacturing jobs have disappeared in the period 2005-2008 alone. And thats on top of a loss of more than 3 million jobs in manufacturing from 1998 to 2003, with millions more lost in the entire postwar period.

Long-term Unemployment and Underemployment

(as of January 2011)

The mean unemployment duration was 36.9 weeks, and the median was
21.8 weeks.

The share of unemployed workers who have been without work for
over six months was 43.8%, one of the highest on record. six months.

A total of 6.2 million workers have been unemployed for longer than
There were 25.1 million workers who were either unemployed or
underemployed.

Average Annual Unemployment Rate, 2007-2010 (in percent)

Source: Bureau of Labor Statistics.

 Today, the labor market remains 8.1 million jobs below where it was at
the start of the recession over three years ago in December 2007.

This number vastly understates the size of the gap in the labor market
because keeping up with the growth in the working-age population would require adding another 3.4 million jobs over this period.

Thus, with the above 9% unemployment rate today, the labor market
is now 11.5 million jobs below the level needed to restore the prerecession unemployment rate of 5.0% in December 2007.

 So, to achieve the pre-recession unemployment rate in

five years, the labor market would have to add 285,000 jobs every month for the next 60 months.

But, more importantly than that, beyond the impact of

the great recession and the slow recovery in the years ahead, the big issue is the impact of globalization on the labor force structure and job creation in the United States

And that will depend in large part how the problem of

outsourcing is addressed in conjunction with the role of the state in providing stimulus funds to create jobs in the public sector jobs that private industry is unable or unwilling to create in the era of neoliberal globalization.

Which Way Out of the Crisis?

Economic remedies to save the system from collapse are bound to fail
so long as they remain within the framework of the existing capitalist system around point to a redistribution of wealth and income to increase mass consumption

Changes that are required to revitalize the economy and turn things

This would increase demand for consumer goods, hence increase

production, and create jobs for the unemployed, as well as raising revenue for the state through corporate and individual income taxes

 All these would require a restructuring of the economy away from failed
neoliberal corporate capitalist policies and toward a new set of priorities that promote the interests of working people

Such restructuring requires the transformation of our current capitalist

economic system and the existing social order in the direction of providing greater rights and benefits to working people

And this would, in turn, benefit society greatly and set us on a prosperous
course that would vastly improve living standards and pull us out of the economic crisis

Thank You !