Did Greenspan ―Blow‖ It?   The Economic Meltdown                  and The Prospects for Recovery in    Kansas City and Bey...
Nationally   Massive solvency problems in    banking system   Most severe contraction since the    Great Depression   U...
“By far the deepest global recession since the Great                                              Depression” (IMF, 4/22/0...
5 Distinct Regions               Unemployment Rate, February 2009   Below Nat‘l Average    ◦ Great Plains    ◦ Northeast...
   Over 520,000 in    Services   171,659 in    Government   146,000 in Retail   All other sectors    have less than   ...
Federal Government – 25,004              Children‘s Mercy Hospital – 3,602Sprint Nextel Corp. – 16,403             KCK Pub...
Used to measure the strength of   Score > 1 indicates higher thaneach industry, relative to the    average concentration o...
Economic Outlook in the KC Metro Area   8,900 jobs lost between Nov. ‗07 and Nov. ‘08    ◦   4,900 on the Missouri side  ...
◦Did Greenspan‘s policies cause the housing bubble and ensuing meltdown in financial markets?◦Did Greenspan mishandle the ...
   Easy money following    the 2001 recession    ◦ John Taylor      Fleckenstein and      Canterbery    ◦ Baker, Palley, ...
Fed Reserve Chairman, Federal Reserve System’s Fourth AnnualCommunity Affairs Research Conference, Washington, D.C. April ...
   Correct to keep rates low in post-bubble    economy   Risk Premiums, not interest rates, were too    low    ◦ Berlin ...
Stephanie Kelton, Associate Professor, UMKC   13
On Subprime Lending:                   On Regulation:                                 ―There is no way to prevent   The ―...
He has said:◦ It is impossible to spot a  bubble until after it bursts◦ It is dangerous to ignore  an emerging bubble◦ It ...
Early warning signs:◦ Buying driven by anticipation of rising prices◦ Home sales increase sharply◦ Numbers of resort buyer...
“There are people making real estate   investments for residential and otherpurposes in the expectation that prices canonl...
He argued that:◦ It was difficult to  speculate in housing◦ Housing markets are  local◦ National housing  bubbles are near...
Stephanie Kelton, Associate Professor, UMKC   19
Froth was ―a euphemism for a bubble . . . all the froth    bubbles add up to an aggregate bubble‖ (2007)                 S...
Stephanie Kelton, Associate Professor, UMKC   21
   Greenspan now    claims that the Fed    did act against the    emerging housing    bubble   But long-term    interest...
―It is household consumption or  household demand more generally that clearly is the source of strength holding this econo...
   When he resigned on    Jan. 31, 2006, he was    widely hailed the most    successful central    banker of all time   ...
―I was aware that the  loosening of mortgagecredit terms for subprime    borrowers increased   financial risk . . . But I ...
   Greenspan is a self-described    libertarian   He counted among his formative    influences the novelist Ayn Rand,   ...
Greenspan has conceded    that the meltdown   revealed a flaw in a  lifetime of economic         thinking: ―Those of us wh...
Complacent                                  Not The Root Cause  andComplicit             Stephanie Kelton, Associate Profe...
   Modern compensation systems did not    ―align‖ interests                            In a sampling of files, Fitch foun...
“The potential impact of                          mortgage fraud on financial                          institutions and th...
Globally   ◦     Worst economic downturn since WWII   ◦     Protests, riots, suicides, civil unrest   ◦     Protectionism ...
    Regional Decline    Will set off intense competition     and beggar-thy-neighbor     policies    Time-honored tradi...
   Long-term perspective   10-year transportation plan?   Saudi-Arabia of wind?   Area development?    ◦   Casinos, wa...
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Did Greenspan "Blow" It?

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  • Lincoln, Omaha, New Orleans and Salt Lake City have some of the lowest rates.
  • Finance, insurance and real estate
  • Info Sector is dominated by the region’s largest private employer Sprint-Nextel, and Federal is dominated by location of KC Federal Reserve bank and regional offices for several Federal programs.
  • Suspicious activity reports (SARs)
  • Did Greenspan "Blow" It?

    1. 1. Did Greenspan ―Blow‖ It? The Economic Meltdown and The Prospects for Recovery in Kansas City and Beyond Stephanie Kelton Associate Professor of Economics University of Missouri-Kansas City February 2009 Stephanie Kelton, Associate Professor, UMKC 1
    2. 2. Nationally Massive solvency problems in banking system Most severe contraction since the Great Depression U.S. economy is shedding 600,000-700,000 jobs per month (5 million since recession began) 8.9% unemployment rate Consumer confidence at an all-time low 2 million home foreclosures Stephanie Kelton, Associate Professor, UMKC 2
    3. 3. “By far the deepest global recession since the Great Depression” (IMF, 4/22/09)Stephanie Kelton, Associate Professor, UMKC 3
    4. 4. 5 Distinct Regions Unemployment Rate, February 2009 Below Nat‘l Average ◦ Great Plains ◦ Northeast Above Nat‘l Average ◦ South ◦ Great Lake States ◦ West Coast Stephanie Kelton, Associate Professor, UMKC 4
    5. 5.  Over 520,000 in Services 171,659 in Government 146,000 in Retail All other sectors have less than 10% Stephanie Kelton, Associate Professor, UMKC 5
    6. 6. Federal Government – 25,004 Children‘s Mercy Hospital – 3,602Sprint Nextel Corp. – 16,403 KCK Public Schools – 3,500HCA Midwest Health – 7,320 AT&T – 3,435Mc Donald‘s USA – 7,111 North KC School District – 3,200State of Missouri – 6,078 U. of Kansas Hospital – 3,020Ford Motor Co. – 5,453DST Systems – 5,200 Black & Veatch – 3,012St. Luke‘s Health Sys. – 4,808 Truman Medical Center – 3,063Hallmark Cards – 4,500 General Motors – 2,900City of Kansas City, MO – 4,400 UMKC – 2,885KCMO School Dist. – 4,399 Applebee‘s International – 2,744Cerner Corp. – 4,309 Blue Valley School Dist. – 2,717State of Kansas – 4,115 Lee‘s Summit School Dist. – 2,642Olathe School District – 3,980 Honeywell – 2,604Johnson County, KS Govt – 3,774 Stephanie Kelton, Associate Professor, UMKC 6
    7. 7. Used to measure the strength of Score > 1 indicates higher thaneach industry, relative to the average concentration of that typenational average of employment and likely exporter Stephanie Kelton, Associate Professor, UMKC 7
    8. 8. Economic Outlook in the KC Metro Area 8,900 jobs lost between Nov. ‗07 and Nov. ‘08 ◦ 4,900 on the Missouri side ◦ 4,000 on the Kansas side ◦ Most losses in construction, mfg and trade, transportation and utilities ◦ Modest gains in educ and h/care 8.4% unemployment rate (highest since ‗90) Sprint-Nextel to eliminate 8,000 jobs (2,000 in the KC area) Forecast to lose 20,100 jobs in ‗09 (2% of all jobs) Regional Foreclosures were up 35% in ‘08 13,609 properties in some stage of foreclosure (1.56% of all property in metro) New housing permits at lowest point since tracking began in ‗85 ◦ Only 136 new permits issued metro-wide in Dec. ‗08 ◦ Average in Dec. since 2000 over 730 Stephanie Kelton, Associate Professor, UMKC 8
    9. 9. ◦Did Greenspan‘s policies cause the housing bubble and ensuing meltdown in financial markets?◦Did Greenspan mishandle the situation once the bubble emerged? Stephanie Kelton, Associate Professor, UMKC 9
    10. 10.  Easy money following the 2001 recession ◦ John Taylor Fleckenstein and Canterbery ◦ Baker, Palley, and Liu ◦ Poole and Parry ◦ Ron Paul Lax Regulatory Stance ◦ Harry Reid, Christopher Dodd ◦ Edward Gramlich (2000) Stephanie Kelton, Associate Professor, UMKC 10
    11. 11. Fed Reserve Chairman, Federal Reserve System’s Fourth AnnualCommunity Affairs Research Conference, Washington, D.C. April 8, 2005 Stephanie Kelton, Associate Professor, UMKC 11
    12. 12.  Correct to keep rates low in post-bubble economy Risk Premiums, not interest rates, were too low ◦ Berlin Wall, Soviet Union, China on property rights, export-led growth in Asian Tigers, free trade agreements ◦ Developing world growth rates ◦ Shift in share of world GDP ◦ Increase in global savings ◦ Decline in risk premiums ◦ Fueled housing demand worldwide Stephanie Kelton, Associate Professor, UMKC 12
    13. 13. Stephanie Kelton, Associate Professor, UMKC 13
    14. 14. On Subprime Lending: On Regulation: ―There is no way to prevent The ―retraction‖ how innovative markets will develop. All you can do is Favorable remarks set a general strategy. were aimed at those [Deregulated markets are] who would move or highly competitive, refinance innovative, and dynamic— but periodically visited by wrenching crises. Low rates had little [Regulated markets are] impact on use of more stable, but slower ARMs growing.‖ Gramlich‘s letter (Greenspan, 2008) Stephanie Kelton, Associate Professor, UMKC 14
    15. 15. He has said:◦ It is impossible to spot a bubble until after it bursts◦ It is dangerous to ignore an emerging bubble◦ It is dangerous to address a bubble◦ The best strategy is to focus on the post-bubble economy Stephanie Kelton, Associate Professor, UMKC 15
    16. 16. Early warning signs:◦ Buying driven by anticipation of rising prices◦ Home sales increase sharply◦ Numbers of resort buyers, trade-up buyers and first-time buyers all increase◦ Houses purchased as ―investments‖◦ High percentage of exotic loans◦ Residential construction activity booms◦ Expected rates of return based on recent experience not historical norms◦ Transactions costs not a deterrent◦ Market was extremely liquid Stephanie Kelton, Associate Professor, UMKC 16
    17. 17. “There are people making real estate investments for residential and otherpurposes in the expectation that prices canonly go up and go up at accelerating rates. Those expectations ultimately become destabilizing to the economic system” (Jordan, February, 1999) Stephanie Kelton, Associate Professor, UMKC 17
    18. 18. He argued that:◦ It was difficult to speculate in housing◦ Housing markets are local◦ National housing bubbles are nearly impossibleStephanie Kelton, Associate Professor, UMKC 18
    19. 19. Stephanie Kelton, Associate Professor, UMKC 19
    20. 20. Froth was ―a euphemism for a bubble . . . all the froth bubbles add up to an aggregate bubble‖ (2007) So why didn‘t he target it? He targeted the stock market bubble in 1987 ◦ DOW lost 508 points (22.5%) but rebounded by early 1988 He targeted the stock market again in the mid-1990s ◦ First with rate hikes (1994) then with “irrational exuberance” (1996) ◦ Goal was to create uncertainty (certainty→euphoria) ◦ “when things get too good, human beings behave awfully” Beginning in June 1999, the Fed raised the ffr 175bp ◦ This was probably done in order to let some air out of the stock market Stephanie Kelton, Associate Professor, UMKC 20
    21. 21. Stephanie Kelton, Associate Professor, UMKC 21
    22. 22.  Greenspan now claims that the Fed did act against the emerging housing bubble But long-term interest rates were falling as the Fed raised short-term rates Stephanie Kelton, Associate Professor, UMKC 22
    23. 23. ―It is household consumption or household demand more generally that clearly is the source of strength holding this economy together . . . Isuspect that without that support, wewould be observing much lower levels of economic activity‖ (Greenspan, August, 2001). Stephanie Kelton, Associate Professor, UMKC 23
    24. 24.  When he resigned on Jan. 31, 2006, he was widely hailed the most successful central banker of all time Perhaps he was more concerned with his legacy than with the stability of the system Stephanie Kelton, Associate Professor, UMKC 24
    25. 25. ―I was aware that the loosening of mortgagecredit terms for subprime borrowers increased financial risk . . . But I believed then, as now, that the benefits of broadened home ownership are worth the risk. Protection ofproperty rights, so critical to a market economy,requires a critical mass ofowners to sustain political support‖ (Greenspan, 2007) Stephanie Kelton, Associate Professor, UMKC 25
    26. 26.  Greenspan is a self-described libertarian He counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals He was deeply committed to the belief that those participating in financial markets would act responsibly He tethered the health of our nation‘s economy to this faith Stephanie Kelton, Associate Professor, UMKC 26
    27. 27. Greenspan has conceded that the meltdown revealed a flaw in a lifetime of economic thinking: ―Those of us who have looked to the self- interest of lending institutions to protect shareholder equity(myself especially) are in a state of shocked disbelief.‖ Stephanie Kelton, Associate Professor, UMKC 27
    28. 28. Complacent Not The Root Cause andComplicit Stephanie Kelton, Associate Professor, UMKC 28
    29. 29.  Modern compensation systems did not ―align‖ interests In a sampling of files, Fitch found: ◦ Current system not only allows but encourages fraud  66% Occupancy fraud ◦ Made possible by decades of  51% Property value or condition issues — deregulation Materially different from original appraisal  48% First Time Homebuyer Profit margins on prime loans are  44% Questionable stated income or extremely low employment  22% Hawk Alert — Fraud alert noted on Requires CEO to maximize growth credit report through ―adverse selection‖  18% Credit Report — Questionable ownership of accounts (name or social ◦ Unregulated nonprime sector security numbers do not match) ◦ Liar‘s loans, NINJAs, etc.  16% Credit Report — Based on ―authorized‖ user accounts Synthetic Derivatives that were  16% Straw buyer/Flip scheme indicated impossible to value properly based on evidence in servicing file  16% Identity theft indicated Aided by the rating agencies that gave  10% Signature fraud indicated AAA ratings to CDOs without sampling loan files (Fitch Ratings, Special Report, Nov. 2007) Stephanie Kelton, Associate Professor, UMKC 29
    30. 30. “The potential impact of mortgage fraud on financial institutions and the stock market is clear. If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.” -Chris Swecker, former FBI Assistant Director, Criminal Investigative Division, Introductory Statement: House Financial Services Subcommittee on Housing and Community Opportunity, 7 October 2004Stephanie Kelton, Associate Professor, UMKC 30
    31. 31. Globally ◦ Worst economic downturn since WWII ◦ Protests, riots, suicides, civil unrest ◦ Protectionism ◦ Anti-SemitismNationally ◦ Will probably take 5 years to recover ◦ Fiscal stimulus is too small ◦ Bailouts have done little (if anything) to shore up confidence ◦ Monetary Policy has nowhere to go ◦ States are slashing spending to deal with budgets gaps of about $120 billionRegionally and Locally ◦ Helped by large share of jobs in federal government, health care and education ◦ Large employers in some industries will cut 25% of labor force ◦ Serious concerns about state funding in KS and MO Stephanie Kelton, Associate Professor, UMKC 31
    32. 32.  Regional Decline Will set off intense competition and beggar-thy-neighbor policies Time-honored tradition: pay-to-play ◦ MO: $170M on historic preservation tax credits (more than total for 19 CCs) ◦ IA: $302M in ‗07 and ‗08 ◦ MN: proposing $50M in new tax credits and reduction in business tax rate over next 6 yrs ◦ OH: Lt. Gov. looking to use tax breaks to create/save jobs ◦ KS: $1.3B over last 5 yrs and some legislators pushing for moreStephanie Kelton, Associate Professor, UMKC 32
    33. 33.  Long-term perspective 10-year transportation plan? Saudi-Arabia of wind? Area development? ◦ Casinos, water park, aquarium, etc. ◦ JoCo Education Research Triangle Authority ◦ NBAF ◦ $200M ―Green Impact Zone‖ in KCMO Stephanie Kelton, Associate Professor, UMKC 33

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