Buried in the various campuses of the vast University of California System are a plethora of Centers of one type or another. Rarely are they visible to the public through the news. Maybe they are only recognized by other Center-ists and a few seem to exist only to enhance the c.v. of the Executive Director.
These Centers are capable of producing new ideas and new ways of looking a current problems. I follow the blogging of Matthew E. Kahn, Professor of Economics at UCLA's Institute of the Environment. The advantage of Centers like IOE is that they can together expertise from a range of disciplines to address a given task. The cross fertilization of ideas is considered a plus and restructuring even office locations tends to destroy it.
It was through Kahn's post today that I was introduced to Gary Dymski and the Center for Sustainable Suburban Development at UC Riverside. I had always thought that Sustainable Suburban Development was an Oxymoron. However, where there is rampant sub-urban development, it pays to study it.
More to the point of this, Kahn posted the contents of a UCLA newspaper article on a lecture / discussion between Dymski and UCLA Economist Robert Brenner that explained their ideas as to why the U.S. economy is in a free fall.
The roots of the crisis, however, lie in the creation of a shadow banking system that began in the decades leading to the 1970s. With the end of the U.S.-sponsored Bretton Woods initiative, which created the International Monetary Fund and established the postwar global economic order in 1944, American banks were in deep trouble because of increased competition and high interest rates.Click Read more! to the entire report.
Economists explain why U.S. economy is in free fall
Inflated real estate prices trigger a subprime lending crisis leading to the collapse of banks and a global recession. That, broadly speaking, is how our current financial crisis occurred. But just how did we get into this mess — and can we really spend our way out of it?
A recent discussion between two noted economists, UCLA’s Robert Brenner and UC Riverside’s Gary Dymski, shed valuable light on the underlying causes of the worst economic slump since the Great Depression and the challenges for recovery. Titled “Economic Meltdown: Causes and Consequences,” the March 9 public event was hosted by the Center for Social Theory and Comparative History, with the Center for European and Eurasian Studies as a cosponsor.
Three narratives, not mutually exclusive, have been shaping understanding of the subprime crisis, said Dymski, an economics professor at UC Riverside and the director of the UC Center at Sacramento, which promotes the policy-research efforts of the UC community and provides policy advice to California’s decision-makers.
“The first narrative is this idea that there’s something wrong with borrowers who got into subprime loans and an overextension of the housing market,” said Dymski. The second narrative alludes to the “greed and overreach of megabanks,” and the third refers to the well-known theme of “U.S. profligacy coming to roost.”
The roots of the crisis, however, lie in the creation of a shadow banking system that began in the decades leading to the 1970s. With the end of the U.S.-sponsored Bretton Woods initiative, which created the International Monetary Fund and established the postwar global economic order in 1944, American banks were in deep trouble because of increased competition and high interest rates. “Their well-off customers were flying to money market mutual funds and other instruments, and they were losing their blue chip customers,” Dymski explained.
While the banks managed to maintain their viability as credit-making and holding institutions, the savings and loans system was in jeopardy, Dymski
Gary Dymskinoted. As a result, the banks tried to reinvent themselves by creating the mortgage-backed securities system, which guaranteed loans and placed limits on the interest carried by borrowers. “These mortgages were as safe as houses and were backed by pension funds and securities funds that, in a time of global crisis, looked like a very safe bet because in the end everyone understood that Uncle Sam stood behind these protocols,” explained Dymski, adding that this market became the biggest in the world by the end of the 1980s, and eventually a safe haven for capital fleeing the Latin American and Asian financial crises of the 1990s.
“Subprime loans were seen as a necessity because house prices were rising and, in some cases, incomes were falling,” Dymski said, adding that about half the loans were made with zero down payment. But by the time the subprime crisis hit, the growth of mortgages exceeded the growth in national GDP, undermining the entire economic system.
“Another component was racial inequality and its march from exclusion to exploitation,” said Dymski, referring to federal laws passed in the 1970s in response to the civil rights movement’s demand for extending credit to low-income minority groups that had historically been denied loans, especially to buy homes.
“A term was coined in geography — financial exclusion — and banks wanted to get into the lower-end [remittances] market and payday loans, debit cards and subprime loans,” said Dymski, adding that the subprime lending market became a “business in the ’hood.” In fact, by 1998, one-third of all mortgage loans were being made to African Americans and a fifth to Latinos and other lower-income communities, resulting in a dramatic 900 percent growth in this business from 1993 to 1999, he said.
Indeed, the collapse of Wall Street, where the troubles began, has dealt a devastating blow to the global system. “But, from Fed chair Ben Bernanke, former Treasury Secretary Hank Paulson to Timothy Geithner on down, economists have, with few exceptions, denied the need to look beyond finance to diagnose the catastrophe,” said Brenner, director of the UCLA’s Center for Social Theory and Comparative History and a noted authority on economic history. “They insist, even now, the real economy is strong, the so-called fundamentals beyond question.”
In reality, “advanced capitalist economies have been experiencing steadily declining economic vitality over the past three decades, business cycle by business cycle, right into the present, with the important exception of the bubble years of the second half of the 1990s,” said Brenner, whose 2006 book, “The Economics of Global Turbulence,” was hailed by the New York Times as “the best financial history of the period yet.”
The basic source of the crisis is low-priced manufacturing goods and the “systemwide fall and failure to recover the rate of profit” by U.S. corporations, a development that, from 2000 to 2007, was accompanied by virtually no increase in either employment or real GDP or wages, Brenner said. The major reason for this decline, he explained, is a persistent overcapacity in global manufacturing, especially since the 1950s and 1960s, when one manufacturing power after another entered the world economy and produced the same goods that were already being produced by the earlier developers — only cheaper.
“Historically, problems of profitability were dispersed by the least productive firms falling by the wayside, leaving strong firms to pave the way for a new boom,” Brenner said. “But this outcome was prevented throughout the postwar period, especially from the late 60s to the early 70s, by ever-greater borrowing, public and private, sponsored by the government.”
So, what to make of the Obama administration’s deficit-financed stimulus package aimed at reviving the global economy? Given the dire economic climate, consumers are saving rather than spending — if they aren’t also paying off debts — and companies would be “crazy to invest,” assuming banks gave them credit in the first place, said Brenner.
In any case, there’s a “huge irony — a paradox” in trying to revive a global economic system that continues to rely on an indebted nation like the U.S. as the “buyer of last resort,” said Brenner, adding: “This is one of the key underlying problems in the development of the world economy.”
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