Tag: recession

10 years after the financial crisis and its lasting effects on Americans

This year marks the 10th anniversary of the 2008 financial crisis. Although the crisis is remembered for foreclosures, bank failures and bailouts, many American citizens are still unaware of what caused it.

By Breshay Moore.

This year marks the 10th anniversary of the 2008 financial crisis. Although the crisis is remembered for foreclosures, bank failures and bailouts, many American citizens are still unaware of what caused it. Understanding this is important to prevent future crises and think about what kind of financial system we want to have: one that serves people and invests in communities, or one that enriches a handful of wealthy bankers and money managers while making our economy less fair and safe for the rest of us.

In simple terms, the financial crisis was a result of deregulation of the financial sector, and reckless and predatory practices by greedy financial players all across the board, from mortgage lenders to Wall Street traders to the largest credit rating agencies.

In the lead-up to the crisis, mortgage lenders were engaging in fraudulent and deceptive sales practices to make toxic mortgage loans to home buyers, which they knew the borrowers could not afford. Predatory lenders particularly targeted people of color, especially women of color, for these higher-rate loans. Meanwhile, these risky mortgages were packaged and sold to investors around the world, becoming implanted throughout the financial system. The economy went into a recession in late 2007, defaults on mortgage payments increased and housing prices plummeted, resulting in billions of dollars in mortgage losses. This had a chain reaction in the financial system because of the number of financial institutions that had stakes in the housing market. These string of events shook the entire economy, fueling the worst recession in the US since the Great Depression.

Millions of families lost their homes or jobs. Median wealth among households fell tremendously: From 2005 to 2009, median wealth among Hispanic households fell by 66 percent, by 53 percent among Black households, by 31 percent among Asian households, and by 16 percent among white households. Millions of people also suffered major drops in income, property values, retirement savings, and general economic well-being. The crisis produced lasting effects. Families are still struggling economically, especially in communities of color.

After all the damage was done, no one was held accountable. Financial players made billions of dollars in bonuses and profits. Instead of helping the communities that were most affected, Congress and The Federal Reserve began bailing out big banks with public money. We recently learned that 30 percent of the lawmakers and 40 percent of the top staffers involved in the congressional response to the crisis have since gone to work for Wall Street.

In 2010 President Barack Obama introduced legislation containing important reform measures in response to the crisis. The Dodd–Frank Wall Street Reform and Consumer Protection Act created rules to protect consumers and regulate the financial industry. This law created the Consumer Financial Protection Bureau (CFPB) to promote transparency and fairness in the consumer-finance industry, and to holding financial institutions accountable for engaging in predatory and discriminatory practices. This independent agency has done a lot for consumers, and has returned more than $12 billion in relief to more than 29 million cheated consumers.

In return for all the money that Wall Street has poured into political campaigns and lobbying, President Trump and Congress have been working hard to undo rules that  regulate the financial sector. Countless bills have been introduced and passed in Congress to deregulate banks and lenders. One of these bills, S. 2155, which became law in May, not only increases the risk of future financial disasters and bank bailouts, but makes it easier for mortgage lenders to discriminate on the basis of race, ethnicity and gender. Sixteen Democrats and an Independent supported the GOP in pushing this deregulatory bill. The vote did not go unnoticed and public sentiment is not on their side.  In fact, 88 percent of all likely voters — across party  lines — support holding financial companies accountable if they discriminate against people because of their race or ethnicity. And 64 percent of voters think big banks and finance companies continue to require tough oversight to avoid another financial crisis.  

The lack of restrictions on banks and other financial institutions put consumers and the economy at risk. The 10th anniversary of the financial crisis should encourage us to redouble our efforts to push for changes to our financial system so that it works for us not just for Wall Street.

 

Breshay Moore is a Senior at Towson University, studying Advertising and Public Relations. She was recently a Communications and Campaign intern for Americans for Financial Reform.

Brazil Suffers Under a Leader that Believes in Fairies

Brazil’s current economic policy follows the logic of a fairytale. And unless President Temer wakes up to reality, the Brazilian people will continue to suffer the consequences.

In conservative circles, the solution advocated for economic recovery is a reduction in government spending. The argument behind it is that a large government deficit lowers the market’s confidence in its ability to repay. This lower confidence then drives private investment away.

By the same logic, if the government cuts down the deficit, markets are reassured of its commitment to be a good payer. This newly gained confidence drives up private sector investment and the economy grows.

While this may sound like a great way to boost a struggling economy, it’s not. To expect that a reduction in public spending will lead to an increase in private spending in the middle of a recession is like believing in an economic “confidence fairy.” Picture a creature dressed in dollar bills, fluttering eyelashes at private investors while the government takes a step back. With enough fairy dust, investors regain confidence, and the economy turns into a sparkly paradise. It sounds nice, but it’s not real.

The idea of expansionary austerity is a dangerous one. While most of the arguments against government deficit rest upon flawed economic theory, the confidence fairy has its backbone solely on psychological factors that play into private investment decisions. However, what a depressed economy needs is a boost in aggregate demand, many times driven by public investment. Even fairy-enthusiasts, as the IMF, have expressed increasing skepticism towards the ability of austerity to expand an economy.

There are plenty of recent examples that cast doubt on the confidence theory. Take the low growth trap of the world economy, for instance. Several countries struggled with low growth for almost a decade despite their efforts to reduce their budget deficit. As monetary policy played an excessive role, fiscal policy ― and by effect aggregate demand ― was ostracized. New investments do not take place in a depressed economy regardless of the interest rates level or the government debt; in Minsky’s words, investment does not take place as long as the demand price of capital is lower than the supply price of capital.

Nevertheless, Brazil’s Michel Temer continues to be captivated by the fairytale. Amid continuous involvements in the corruption scandals, Temer introduced ambitious austerity measures to cut government spending and reduce the fiscal deficit. Placing his faith in the confidence fairy, he portrays his policies as the only path to recovery and growth ― as if there were a certain magic debt number to achieve.

But thus far, Temer’s policies have failed miserably. Expecting to see the fairy do wonders, 2016’s 3.6% decline in GDP was “unexpected” to Temer’s team. That’s a harsh reality to wake up to, especially since 2015 showed a similar decline in growth. For 2017, the economy is expected to grow 0.5 percent;  but growth projections keep getting adjusted downward, and a third year of recession is only half a percentage point away.

Brazil’s collapse in domestic demand is visible in the economy’s capacity utilization. Averaging 73.5 percent in 2016, it’s reached the lowest level since the early 1990s, when the country was plagued by hyperinflation. At this rate, Brazil will have to get through a long period of idle capacity until new private investments can foster demand. Furthermore, the efforts to reduce the government deficit seem to have been futile. The budget deficit has actually surged due to the reduction in tax revenues and the increasing burden of interest rate payments.

Despite everything, Temer isn’t giving up on the confidence fairy yet. Earlier last month, he announced a cut of $42.1 billion reais (approx. US $13.5) in the government budget, nearly a fourth of which on the Growth Acceleration Program for social, urban, and energy infrastructure investment. Other significant cuts were made to the ministries of defense ($5.7 billion reais), transportation ($5.1 billion reais), and education ($4.3 billion reais).

As you may expect, none of this helps to create jobs. On April 28, it became known that the unemployment rate reached a record-high 13.7% for this year’s first quarter. Since the last quarter of 2016,  2 million more people lost their jobs. The number of unemployed now adds to 14.2 million, and that’s more than double the record-low rate of 6.2% in 2013.

Unlike the President, the people of Brazil know they can’t count on fairy dust. Last week, workers went on a general strike, during which millions of Brazilians protested against the austerity agenda. As much as 72 percent of the population opposes the reforms that are being discussed today, and government approval rates are as low as 10%.

But Temer ignores all cries of concern and keeps going steady. Two of his the structural reforms have already been initiated. Real government spending is frozen for the next 20 years, and labor market is under flexibilization. A third, more complex one is the pension reform, whose main proposal is to increase the minimum retirement age and time of contribution. Although the subject is too extensive to be covered in here, it’s worth mentioning that the pension reform disregards some of the social inequalities in the country (e.g. conditions of rural and poor workers) and it solely focus on curbing the long-term system’s expenditure instead of dealing with the falling revenues that collapsed in recent years due to tax breaks and the crisis.

Together, these reforms dismantle any efforts at building a social welfare system in Brazil. Crucial areas for public investment such as education and health will suffer.

Right now, it’s more clear than ever that Brazil’s story is not a fairytale, but a living nightmare. And there’s no confidence fairy that can fix it. As Skidelsky puts it, “confidence cannot cause a bad policy to have good results, and a lack of it cannot cause a good policy to have bad results, any more than jumping out of a window in the mistaken belief that humans can fly can offset the effect of gravity.”