THE FINANCIAL CRISIS RECONSIDERED The Mercantilist Origin of Secular Stagnation and Boom-Bust Cycles Daniel Aronoff The Financial Crisis Reconsidered The Financial Crisis Reconsidered The Mercantilist Origin of Secular Stagnation and Boom-Bust Cycles Daniel Aronoff THE FINANCIAL CRISIS RECONSIDERED Copyright © Daniel Aronoff 2016 Softcover reprint of the hardcover 1st edition 2016 978-1-137-55368-3 All rights reserved No reproduction, copy or transmission of this publication may be made without written permission No portion of this publication may be reproduced, copied or transmitted save with written permission In accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages First published 2016 by PALGRAVE MACMILLAN The author has asserted their right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988 Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire, RG21 6XS Palgrave Macmillan in the US is a division of Nature America, Inc., One New York Plaza, Suite 4500, New York, NY 10004-1562 Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world E-PUB ISBN: 978-1-349-57547-3 E-PDF ISBN: 978-1-137-54789-7 DOI: 10.1057/9781137547897 Distribution in the UK, Europe and the rest of the world is by Palgrave Macmillan®, a division of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS Library of Congress Cataloging-in-Publication Data Aronoff, Daniel, 1961– author The financial crisis reconsidered : the mercantilist origin of secular stagnation and boom-bust cycles / Daniel Aronoff pages cm Includes bibliographical references and index Global Financial Crisis, 2008–2009 Financial crises Business cycles Mercantile system I Title HB37172008 A76 2015 330.9Ј0511—dc23 2015027275 A catalogue record for the book is available from the British Library Contents List of Figures and Tables vii Preface xi Acknowledgments Part I The Current Account Deficit and the US Housing Boom: Establishing the Connections The Metamorphosis of China’s Trade Policy xvii The Current Account Deficit and the Housing Boom 15 Mercantilism and the Current Account Deficit 39 The Current Account Deficit: A Necessary Condition for the Housing Boom 55 Part II The Capital Flow Bonanza, the Credit Explosion, and the US Housing Boom: Channels of Transmission 67 A Review of Explanations for the Housing Boom 69 Decision-Making during the Housing Boom 81 The Capital Flow Bonanza and the Housing Boom 99 The Role of Policy during the Housing Boom Part III Accumulation and Secular Stagnation: Identifying the Underlying Malady Accumulation and Secular Stagnation: Part I, Theory 10 Accumulation and Secular Stagnation: Part II, Application 127 131 133 147 vi ● Part IV Contents The Financial Crisis, I: The Meltdown and the Successful Initial Policy Response 165 11 Descent into the Abyss 167 12 The Initial Policy Response 181 Part V The Financial Crisis, II: The Limits of Conventional Policy in a Balance Sheet Recession 201 13 The Dilemma of Policy in a Balance Sheet Recession 203 Part VI Policy Options: How to Exit the Balance Sheet Recession and End Secular Stagnation 219 14 Policy Options 221 Notes 239 Index 279 Figures and Tables Figures 1.1 1.2 1.3 1.4 2.1 2.2 2.3 2.4 Total current account balance for China, 1998–2008 China/US foreign exchange rate, 1990–2008 Saving and investment in China, 1992–2008 US China bilateral trade in goods, 1999–2014 Home mortgage liability levels, 2000–2008 Home price and CPI growth, 2000–2008 Mean leverage of broker-dealers, 1996–2009 BAA corporate bond yield relative to yield on ten-year treasury, 2000–2008 2.5 Household leverage versus household price change, 1997–2007 2.6 Total current account balance for the United States, 1960–2014 2.7 Capital mobility and the incidence of banking crises, 1800–2008 2.8 Real estate appreciation and change in current account, 2000–2006 2.9 (a) Southeast Asian and other flows into US government bonds, 1984–2005 (b) Southeast Asian and other flows on ten-year treasury yield, 1984–2005 2.10 US corporate business: profits before tax, 1996–2008 3.1 10-/30-year treasury constant maturity rate, 1996–2008 3.2 US productivity growth, 1996–2008 3.3 Balance on current account and Federal government budget, 1990–2008 3.4 Foreign holdings of US securities, 2007 3.5 Crude oil prices, 2000–2008 3.6 Global imbalances (in percent of world GDP), 1997–2009 3.7 China’s stocks of bank reserves, forex reserves, and PBOC bills, 2002–2008 3.8 China’s monetary base and international reserves, 1998–2007 3.9 Real trade weighted US dollar index: major currencies, 2000–2008 4.1 Residential construction and mortgages as percent of GDP, 2000–2008 10 11 13 16 16 17 19 22 23 28 30 32 35 40 41 42 45 47 48 51 52 53 56 viii 4.2 4.3 4.4 4.5 5.1 5.2 5.3 5.4 6.1 6.2 6.3 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 9.1 10.1 10.2 10.3 11.1 11.2 11.3 11.4 11.5 11.6 11.7 11.8 11.9 12.1 12.2 12.3 ● Figures and Tables US unemployment, natural rate, 2003–2008 57 Expenditure growth, 2003–2008 57 Gross capital flows and current accounts, 1995–2010 64 Gross capital flows by region, 1995–2010 65 Mortgage origination by type, 2001–2007 70 MA LTV DTI subprime, 1999–2006 71 House price index rate of change, 1975–2009 77 HPI and subprime lending MA, 1988–2007 78 Broker-dealer leverage and VaR, 2001–2012 89 Shadow bank, commercial bank liabilities, 1990–2011 91 Market-based, bank-based holdings of home mortgages, 1980–2010 92 Not enough banks to source safety for cash pools 103 Asset-backed securities issuance, 2000–2008 105 Institutional cash pools, 1997–2013 106 Shadow banking diagram 110 Ten-year treasury constant maturity rate, 2000–2008 112 Actuarial ratio for public pensions, 1992–2013 113 Annual return for state and local pensions, 1992–2013 114 Net interest margin for large US banks, 2002–2008 115 Households and nonprofit organizations—net worth level, 2000–2008 119 MA foreclosures versus defaults, 1990–2008 123 MA foreclosures versus home price, 1990–2008 124 Home vacancy rates and home prices, 2000–2010 125 Margins offered (down payments required) and housing prices, 2000–2009 125 Fed funds rate, ten-year treasury yield, 2004–2007 135 (a) Top percent and 0.1 percent income share, including capital gains, 1980–2013 (b) Average, top percent and 0.1 percent income, including capital gains, 1980–2013 153 Real median household income, labor force participation rate, 1984–2013 157 Regression tests ten-year treasury yields on Fed funds rate, 1985–2006 164 Subprime ABX indices by vintage, 2006–2009 168 Output gap, 2007–2015 169 Household, corporate net worth, 2003–2010 170 Leverage Venn diagram 173 Home equity example 174 MPC based on housing leverage ratio 175 Spending in small versus large net worth decline countries 176 Bank balance sheet example 178 Broker-dealer balance sheet example 179 Thirty-day commercial paper and treasury rates, 2007–2009 182 Fed assets, 2007–2009 183 Fed liabilities, 2007–2009 184 Figures and Tables 12.4 12.5 12.6 12.7 12.8 12.9 13.1 13.2 13.3 Bank balance sheet example Bank C&I loans, 2008–2011 Bank loan losses, 2005–2011 Loan rate spread versus loan volume example (a) Bank loan financing—cost, 1998–2010 (b) Bank loan financing—total amount, 1998–2011 Nonfinancial corporation bond issuance, 2005–2011 Civilian labor force participation rate, 1990–2014 Bank and household credit, 1990–2014 CBO 2014 budget outlook ● ix 184 188 189 190 192 193 204 205 214 Tables 5.1 5.2 7.1 Merril Lynch 2007 AR—residential mortgage Mortgage related losses to financial institutions from the subprime crisis—June 18, 2008 Subprime mortgage exposures, 2008 73 74 112 Preface T his book attempts to explain the broad features of the US housing boom of the 2000s, the subsequent financial crisis and the slow recovery that followed Every acre of this territory has been surveyed by the most eminent contemporary economists, historians, and journalists The reader must be provided a good reason to spend her time and attention (and money) on yet another tome on the subject In this preface I shall attempt to pique her interest Disagreement with the “Conventional Wisdom” In this book I present and substantiate a hypothesis that the mercantilist policies of China and other Southeast Asian countries created a capital flow bonanza1 in the United States that set off an unsustainable housing boom, which was followed by a catastrophic financial crisis from which the United States has still not fully recovered, seven years after the event Many of the conclusions I reach in this book differ from commonly held views on the housing boom, the financial crisis and its aftermath (relevant sections are in parenthesis) ● ● ● ● ● ● Most people believe the housing boom was primarily caused by a reckless increase in financial sector and household leverage and a decline in loan underwriting standards—I disagree (part I) Most people believe reckless lending during the housing boom was perpetrated by unscrupulous bankers—I disagree (part II) Most people believe that housing investors, lenders, and borrowers were motivated by irrational beliefs during the boom—I disagree (part II) Most people believe policymakers should have acted to slow the credit expansion during the housing boom—I harbor some doubts (part II) Few people (if any) see the current account deficit and income concentration as essentially similar phenomena in terms of impact on the US economy—I propose a theory that explains why they are similar and why they cause secular stagnation and boom-bust cycles (part III) Many people (particularly policymakers) believe it was prudent for the government to shield bank bondholders from loss and banks from bankruptcy during the financial crisis—I disagree (part IV) Notes ● 277 17 For a discussion of the Fed’s approach, see Jeremy Stein, Regulating Large Financial Institutions, 2013, comments at the “Rethinking Macro Policy II” conference of the IMF 18 FDIC insurance on deposits, up to a limit of $250,000.00, mitigates the risk of depositor runs But the volume of uninsured time deposits and short-term wholesale loans comprise a sizeable portion of liabilities of large banks, and are vulnerable to runs 19 The reason for protecting the payments system in all future states of the world is because a malfunctioning of that system would be catastrophic The reason for tolerance of future states where credit might contract is in recognition of the potential existence of a risk-reward tradeoff between an efficient credit system and a stable credit system A temporary collapse of credit is not catastrophic and it may be worthwhile taking some risk in order to promote the financing of risky ventures that increase trend growth 20 This does not mean the individual banks should be insured against these risks On the contrary, in a competitive market it is normal that individual banks would frequently fail 21 The design of rules allowing adjustment of bank capital in systemic crisis can be accomplished in other ways as well Some proposal have addressed the incentive issues in a more nuanced way See, for example Ricardo Caballero, “Sudden Financial Arrest,” Mundell-Fleming Lecture delivered at the Tenth Jacques Polak Annual Research Conference, IMF, 2009 22 This does not imply that there are no guideposts to evaluate risk Without such guideposts, all planning for future activity would be useless Rather, the idea (as Keynes described it; see discussion in chapter 6) is that there are certain types of social and economic activities who’s outcomes become difficult to define in terms of probabilities the further out into the future one tries to forecast 23 See “Regulatory Capital Rules: Regulatory Capital, Revisions to the Supplementary Leverage Ratio,” Federal Register, Vol 79, Number 187 (September 26, 2014): 57725–57751 24 The Dodd-Frank requirement that systemically important financial institutions be required to hold more capital is equivalent to my recommendation for leverage limits 25 Some critics of a simple leverage rule make the risible claim that such a rule might induce banks to take on more risk They argue that a reduction in leverage will reduce expected equity returns—while ignoring that it would also reduce the risk of loss—and thereby induce managers to take on more risk in order to maintain returns at preexisting levels They also claim that a leverage rule that does not discriminate between the relative risks of different activities will incentivize bankers to increase lending to riskier areas But have we not recently experienced the consequences of the high leverage, risk-based leverage rules they advocate? Surely, the financial crisis should have put an end to the nonsensical argument that high leverage will cause banks to take on less risk 26 It is vitally important that derivatives contracts allowing traders to short position be included in the set of standardized contracts Shorting provides a mechanism for contrarians to express their views and counter the tendency for asset prices to become over-valued when animal spirits are high I mentioned in chapter that the inability of housing contrarians to short housing securities prior to late 2005—when AIG expanded its issuance of CDS on subprime ABS and shorting contracts were initiated for the ABX.HE subprime index—may have resulted in home prices and home construction increasing more than would have been the case if the infrastructure for shorting was in place at an earlier date 27 To be fair, economists have occasionally withheld unfettered support for free trade Economists have, on occasion, recommended that home economies offer subsidies to attract global industries with large economies of scale, since these natural oligopolies earn large profits out of which they can confer benefit on the home economy in excess of the subsidies offered Likewise, economists have sometimes recommended that less developed economies offer subsidies to attract investment that can effectuate a transfer of knowledge of advanced technologies into the home economy through the training and experience 278 28 29 30 31 32 33 34 35 36 37 38 39 40 41 ● Notes gained by its workforce Also, trade can adversely affect certain groups Notably, the shift in labor intensive manufacturing from the United States to China in the 2000s reduced the wages of unskilled US workers, while enriching the percent who own shares in corporations that have profited from the decline in costs But set against the gains from trade, as economist have measured them, these are caveats; exceptions that prove the rule Correspondingly, the currencies of deficit countries will depreciate, which promotes exports Correspondingly, the deficit countries will experience deflation, which will effectuate depreciation in their real exchange rate, just as in the flexible exchange rate regime Recently the IMF backed off from its long standing support for open capital flows and opined that capital account restrictions may be desirable in some instances See “The Liberalization and Management of Capital Flows—An Institutional View,” IMF, November 14, 2002, available at http://www.imf.org/external/np/pp/ eng/2012/111412.pdf J M Keynes, “Proposal for an International Clearing Union,” The International Monetary Fund 1945–1965 Volume III: Documents (1969 [1943]), pp 19–36, available at http://imsreform.imf.org/reserve/pdf/keynesplan.pdf Ibid., p 27; emphasis in the original Ibid., p 28 Ibid., p 25 Even though capital mobility is not yet an issue with China, since it currently maintains a relatively closed capital account, it will become an issue over time as China’s capital account eventually opens up Keynes, The General Theory, pp 376–377 Raj Chetty, Nathaniel Henderson, Patrick Kline, and Emmanuel Saez, “Is the United States Still a Land of Opportunity? Recent Trends in Intergenerational Mobility,” American Economic Review: Papers and Proceedings, Vol 104, Number (2014): 141–147 David Autor, David Dorn, and Gordon H Hanson, “The China Syndrome: Local Labor Market Effects of Import Competition in the United States,” American Economic Review, Vol 103, Number (2013): 2121–2168 US Census Bureau 2012 Statistical Abstract of the United States, available at http:// www.census.gov/compendia/statab/cats/labor_force_employment_earnings/compensation_wages_and_earnings.html One large obstacle to comprehensive education reform is that K-12 education is primarily financed at the state and local level and operates under state law Index Page numbers in italics refer to tables and figures AAA, 44–6, 70, 159, 167 Abacus deal, 72–3, 249n15 ABN AMRO, 72–3 absorption, 59 ABX.HE, 87, 198, 241n1, 251n25, 256n35, 259–60n78, 261n14, 278n26 Accumulation, xii, xv, 131, 133, 264n35, 266n23, 266–7n28, 267n35, 274n9 and animal spirits, 144, 146, 211–12 and booms, 141 and current account deficit, 147–56 defined, 137, 239n2 and deflation, 137–41 and employment, 136–41, 144–6, 149–50, 156–60 and income concentration, 152, 154–5, 235–6 and Keynesian unemployment, 144–6 market perceptions of, 156 and mercantilism, 238 and productivity growth, 146 reduction of, 219, 221, 235–6 and safe asset shortage, 159–62 and Say’s Law, 141–4 and secular stagnation, 156–8 and spending, 136–46, 155, 158, 160–3, 235 and wealth, 137, 139–40, 145, 148, 155–6, 159, 162, 219–20, 263n21, 264n30, 266–7n28 accumulators, 137, 140–1, 143–5, 147, 149, 155, 161–3, 268n42 Acharya, Viral V., 110, 114 adjustable rate mortgage (ARM), 79, 122 Adrian, Tobias, xiv, 191, 254n10, 272n27 agents, 58–61, 82–98, 131, 206–8, 213 aggregate demand, 55, 143, 152, 156–7, 157, 159, 162, 186, 199, 217 AIG, 27, 44, 108, 169, 177, 181, 183, 194, 197, 223, 275–6n4, 278n26 Allen, Franklin, 95 Alt-A mortgage, 15, 26, 69, 123, 248n3 animal spirits, xiv, 89–96, 121, 124, 208, 262n6, 278n26 and Accumulation, 144, 146, 211–12 defined, 89–90 and employment, 144, 146 appraisals, 86 appreciation, 21, 29, 34, 40, 49, 77, 79, 87–8, 118, 124, 250n32 real estate appreciation and change in current account, 2000–2006, 30 Aronoff, Daniel, 265n8 Asia See China; Southeast Asia Asian financial crisis, 12, 22, 31, 40–1, 46–9, 60–1, 147–8, 233–4, 239n4 asset backed securities (ABS), 16, 26–7, 30, 43–4, 69, 79, 102, 182–3, 185, 188–9 asset-backed securities issuance, 2000–2008, 105 and decision making, 94–5, 97–8 and policy, 223, 225 and shadow banking, 102, 104, 107–10 subprime, 44, 65, 69, 75, 87–8, 102, 104, 108, 111–20, 160–1, 167–8, 170, 177–9, 208, 245n14 280 ● Index asset prices, 27, 36, 43, 62, 82, 171–3, 199, 203–8 booms and bubbles, 157, 173, 255n11, 269n12 and capital flow bonanzas, 34 and deflation, 139–41 and economic equilibrium, 171–2 and Fed’s liquidity programs, 261n10, 270n9 and the Great Moderation, 18–20 and leverage, 94, 180 and monetary policy, 206–8 and VaR, 19–20, 88 assets and Accumulation, 139, 147–8, 156–7, 266–7n28 and AIG, 275n4 asset deflation channel, 271n11 bank balance sheet example, 178 broker-dealer balance sheet example, 179 and broker-dealers, 199, 255n13 and commercial banking sector, 177–8 and current account balance, 24 dollar assets, 40, 42, 46–7, 49, 147–8, 156 Fed assets, 2007–2009, 183 and the Great Depression, 276n7 and income concentration, 151, 152, 235 and policy, 206–8, 226, 229, 230, 231 pseudo-safe assets, 159–61 safe asset shortage, xiv, 43–6, 100–2, 106, 110–11, 126, 159–62, 226, 243n35–6 safe assets, 245n13–14, 268n41 and shadow banking sector, 179–80 See also liquidity asymmetric information, 71–4, 79, 249n20 Attanasio, Orazio, 266n25 Autor, David, 37, 156 bailout, 18, 116, 165, 177, 194, 197–8, 222–3, 226, 236, 273n47, 275–6n4 balance sheet recession, 205, 212, 217, 219, 263n20, 275n30 and policy, 221–5 Bank for International Settlements (BIS), 64, 222, 260n4 bankruptcy, 9, 27, 47, 69, 138, 167, 169, 177, 181, 190, 197, 222–5, 227, 275n3 and AIG, 275–6n4 Chapter 11, 222 Chapter 13, 225 law reform, 219, 236 of Lehman Brothers, 181, 183, 194, 270n5, 275–6n4, 276n5 banks and banking and aftermath of financial crisis, 203–6 bailout, 18, 116, 165, 177, 194, 197–8, 222–3, 226, 236, 273n47, 275–6n4 bank and household credit, 1990–2014, 205 bank balance sheet, 16, 20, 30, 63, 88, 104, 109–10, 114, 116, 129, 172–9, 195, 197 bank balance sheet examples, 179, 184 bank financing, 90, 190 bank lending channel and monetary policy, 206–7 bankers, 15, 18, 72, 81, 167, 194, 227, 241n2, 273n48, 277n25 and debt overhang, 188–9, 194, 197, 199, 201, 204–5, 207–8, 212–13, 217–18, 221, 224 lending, 129–30, 169, 178, 180, 187–97 and policy, 217, 219, 221–31, 236, 238 See also shadow banking BBB, 88 Bear Stearns, 26, 74, 116, 167–8, 197, 198, 241n1, 258n54 Becker, Bo, 113–14, 190 behavioral economics, 80, 81–98 Beijing (Peking), China, Bernanke, Ben S., xiii, xiv, 9, 39–40, 65, 99, 121, 127–8, 157, 178, 180, 186, 195, 207–8, 246–7n30, 260n1, 260n4, 263n20, 271n11 bilateral trade imbalance, 12–13, 24–5, 46–8, 50, 150, 156, 231, 242n20, 254n8 bond investors, 101–2, 107–11, 119, 126, 179, 256n35 booms, 129, 134, 147, 157–8, 164 and Accumulation, 141 and current account deficits, 26–34, 60–3, 66 and decision making, 82–98 and leverage, 20–6, 63–6 See also US housing boom Borio, Claudio, 64, 260n4 Bretton Woods, 28, 219, 234 Britain See Great Britain Index broker-dealers, 15, 44, 63, 73, 74, 88, 167, 173–4, 179–80, 183, 186, 198–9, 254n10, 255n13, 256n29, 256n32–3, 257n39–40 broker-dealer balance sheet example, 179 broker-dealer leverage and VaR, 2001–2012, 89 mean leverage of broker-dealers, 1996–2009, 17 and policy, 219, 227–31 role as matched book money dealers, 107–8 and shadow banking, 102, 104, 106–11, 115–16 budget constraint, 158, 162–3 budget equation, 142–3, 264n25, 264n30 Buffett, Warren, 252n38 Bush, George, 181 Bush administration, 42, 116, 169 business cycle, 134, 239n7 Caballero, Ricardo, xiv, 43–4, 161–2, 245n13–14, 263n21 Calomiris, Charles, 75 Calvo, Guillermo, 46 Campbell, Doug, 37, 53 capital account, 48, 186, 278n30, 278n36 capital flow bonanzas, 23–31, 162, 172, 254n8, 268n46 and Asian financial crisis, 239n4 capital mobility and the incidence of banking crises, 1800–2008, 28 and China, 25–6, 41, 46, 49, 51, 66 and current account deficits, 246n29 defined, 25–6, 239n1, 242–3n25 and dot-com boom, 40 and financial crises, 27–31, 33–6, 38, 39–41, 232, 243n34 and housing boom, 29–34, 39, 41–6, 49, 51 and Keynes Plan, 233 and mercantilism, 147, 149–50, 156–8, 215 and safe asset shortage, 43–6 capital flows, 23, 28–9, 31, 64–6, 231–4, 243n36 gross capital flows and current accounts, 1995–2010, 64 gross capital flows by region, 1995–2010, 65 capital markets, 35–7, 64, 66, 119, 121, 249n22, 257n40 ● 281 capital mobility, 27–8, 64, 232, 233, 243n36, 278n36 capital mobility and the incidence of banking crises, 1800–2008, 28 capitalists, 6–8, 235 Case-Shiller, 16, 56, 125, 269n17 Cayenne, James, 74 channels bank, 114–15, 206 broker-dealers, 115–16 foreign hedge funds and foreign banks, 117 GSE, 116 hedge fund/bond fund, 116–17 household, 117–18 insurance and pensions, 111–14 portfolio, 206–7 channels of transmission motivations of subprime originators, investors, and borrowers, 111–19 preliminaries, 99–100 primary impact, 100–2 shadow banking sector, 102–11 Chetty, Raj, 235 Chimerica, 34–5 China, 246n29 and Asian financial crisis, 31, 46, 48–9, 60–1, 150 and capital flow bonanza, 25–6, 41, 46, 49, 51, 66 and capital mobility, 278n36 China/US foreign exchange rate, 1990–2008, 10 China/US trade, 49–52, 66, 127, 149, 231–3, 246n27, 257n43, 260n2, 267n31 Chinese Communist Party (CCP), current account surplus, 49–52 and free trade, 37–8 investment boom, 60–1 and Keynes Plan, 233 labor, 5, 6, 8, 34–7, 41, 61, 104, 150, 156, 246n22, 278n27 and Marshall-Lerner, 246n27 and mercantilism, 55, 66, 128, 147–8, 150, 246n20 Middle Kingdom, 3–4 monetary base and international reserves, 1998–2007, 52 Opium Wars, 4, 282 ● Index China—Continued People’s Bank of China (PBOC), 24, 194, 208, 232, 242n21, 242n23–4, 246–7n30 People’s Republic of China, 5–12 policy post-Tiananmen Square protests, 7–9 reform and opening, 5–7 renminbi (RMB), 9, 24–6, 49–52, 149, 242n23, 246–7n30, 265n3 saving, 8–10, 13, 47–9, 150 saving and investment, 1992–2008, 11 stocks of bank reserves, forex reserves, and PBOC bills, 2002–2008, 51 total current account balance, 1998–2008, trade policy, 3–13 and US account deficit, 24–6, 42, 100, 147, 156 and US debt, 31, 159, 161–2, 244n48 and US equities, 245n5 and US housing boom, 12–13, 23–6, 31, 33–5, 37–8, 46, 65, 231–2, 245n5 yuan, 10, 49, 51 Citigroup, 74, 167, 222 Cochrane, John, 215 collateral, 21, 30, 58, 86, 107–8, 110–11, 119–20, 139, 163, 167, 169, 172, 175, 177, 188–9, 203–4, 219, 224, 228 collateralized debt obligation (CDO), 69–70, 72, 87, 104–6, 114, 117, 119–20, 159–61, 167–70, 248n8, 255n12–13, 269n5 commercial paper, 169, 182–3, 185, 187 thirty-day commercial paper and treasury rates, 2007–2009, 182 Community Reinvestment Act (CRA), 75 Congress, US, 15, 23, 49, 75, 116, 127–8, 178, 198, 201, 213, 216, 222, 225 Connelly, John, 156 construction, 9, 21–2, 26, 55–6, 58–62, 81, 84, 96, 119, 124, 126, 208, 216, 244n39, 247n3–5, 278n26 consumer price index (CPI), 15, 16, 157, 250n32 consumption, 9, 12, 25, 43, 56, 59–62, 101–2, 118, 126, 134, 145–58, 175 contraction credit, 66, 86, 129, 182–3, 186, 188–97, 206, 212, 229 monetary, 25, 61, 127–9, 186–7 conventional wisdom, 22–3 credit credit contraction, 66, 86, 129, 182–3, 186, 188–97, 206, 212, 229 credit default swaps (CDS), 108, 249n20, 259–60n78, 261n14, 275–6n4 expansion, 20–2, 27, 29, 33–5, 63, 76–8, 129, 173, 208, 217, 222, 238, 261n13 three primary sources of, 188–97 current account deficit, 99–102 and Asian mercantilism, 46–9 and booms, 26–34, 60–3, 66 and China’s current account surplus, 49–52 and dollar depreciation, 52–3 and employment, 56, 57, 59–63, 66 and financial crisis, 26–34, 147–8 and global imbalances, 39–41 and OPEC, 46–9 and permanent saving, 147–8 policy options to reduce, 231–7 and shadow banking sector, 102–11 as source of Accumulation, 148–50 and spending, 24–6, 58–63, 66, 147 and US saving, 41–3 current account surplus, 9, 10–12, 24–5, 44, 47–52, 59–61, 149–50, 232, 246n29 cycles See Wicksell-Hayek business cycle Dante Alighieri, 167 debt debt overhang, 64, 155, 188–9, 194, 197, 199, 201, 204–5, 207–8, 212–13, 217–18, 221, 224 debt-deflation, 46–7, 140–1, 263n18, 263n20, 271n11 effect of offshore purchases on US debt, 31–3 See also US government guaranteed debt decision making and contractually constrained institutions, 83 and experience constrained agents, 83–4 and informationally constrained agents, 83, 84–7 rational, 81–2, 97–8 and uncertainty constrained investors, 83, 87–96 deficit See current account deficit defined benefit pension plan (DBP), 83, 101, 104, 107, 111, 113–14, 116, 119, 161, 258n49 Index deflation, 50, 122, 127–8, 131, 137–44, 144, 146, 149, 156–9, 162, 164–5, 183, 186–8 delinquencies, 69, 73, 97–8, 123–4, 126, 167, 225, 249n20, 254n56 demand aggregate, 55, 143, 152, 156–7, 159, 162, 186, 199, 217 future, 136–7, 139–41, 144–5, 151, 156–7, 164, 212 derivative, 73, 83, 87, 107–9, 116, 129, 223–4, 227–31 distribution, income, 152–6 Disyatit, Piti, 64 Dodd-Frank, 79, 227, 230, 277n24 dollar, 9, 10, 24–6, 40, 42–53, 242n23, 246n29–30 dotcom boom, 27, 40, 126, 164 dynamics, 160–1, 163, 262n9 ecologically rational decisions, 80, 99, 111, 118, 120 See also decision making economic equilibrium, 141, 143–6, 159–60, 171–2, 209 economists and animal spirits, 121 and bank bailout, 197 and capital flows, 28, 65 and cause of housing boom and financial crisis, 15 and deflation, 138–9 and economic equilibrium, 141, 171 and extension of unemployment benefits, 210 and fiscal policy, 217 and GSEs, 75–6 and income concentration, 151, 227, 231 and interest rates, 128–9 and nonsatiation, 143 and permanent savings, 151 and reflux, 207 and too-big-to-fail, 226 and trade, 231 See also individual economists education, 8, 14, 220, 237, 262n13, 278n41 effective demand, 211 Eichengreen, Barry, 267n37 employment and Accumulation, 136–41, 144–6, 149–50, 156–60 ● 283 and aftermath of financial crises, 203 and current account deficit, 56, 57, 59–63, 66 and decline in US manufacturing, 37 full employment, 22, 25, 37, 59–62, 99–100, 126, 128, 137–41, 144–6, 157–60, 216–18, 265n8 Keynesian unemployment, 144–6 and policy, 127–9, 203, 205, 207–13, 216–18, 221, 223, 233, 236, 238 unemployment, 37, 129, 129, 134, 138, 144–6, 151, 169, 203 US unemployment, natural rate, 2003–2008, 57 and Wicksell/Hayek theory of business cycles, 134 equilibrium See economic equilibrium exports, 7–13, 38, 49–53, 59, 147–50, 232, 241n25, 246n27, 265n8–9 See also trade Fable of the Bees (Mandeville), 168–9, 269n2 Fahri, Emanuel, xiv Fama, Eugene, 252n38 Fannie Mae, 27, 116, 169 Fed See Federal Reserve (Fed) Federal Deposit Insurance Corporation (FDIC), 102–3, 105–6, 185, 196, 198, 222, 223, 225, 249n21, 255n16, 275–6n4, 277n18 Federal Reserve (Fed), 27, 84, 93, 101, 127–9, 133–6, 162–5, 168–9, 178, 180 and China, 24–5, 50 Fed assets, 2007–2009, 183 Fed funds rate, 127–8, 133, 135, 135–6, 162–3, 164, 206, 260n6, 270n6 Fed liabilities, 2007–2009, 184 and liquidity programs, 183–7, 198–9 and monetary policy, 206–9 and policy options, 222–3, 226–32 and purchase of long-term debt, 191–6 See also individual chairmen Ferguson, Adam, 81, 99 Ferguson, Niall, 34, 35 FICO, 69, 71, 248n1, 248n3 final goods, 58–9, 141–4, 158, 163, 205, 211, 241n25, 264n29 finance sector, 37, 117 284 ● Index financial crisis, 64–5, 73–4, 128–30 aftermath, 203–6 and amplification of subprime crisis, 170–80 and contraction of credit, 188–97 and current account deficits, 26–34, 147–8 denouement, 167–70 and fiscal policy, 209–17 initial policy response, 181–7 and leverage, 15, 17–21 and mercantilism, 12 and monetary policy, 206–9 See also Asian financial crisis; US housing boom Financial Inquiry Commission (US Congress), xiii, 15, 23, 76 financial institutions, 27, 36, 43, 72–4, 79, 87–8, 111, 120, 157, 171, 183, 196, 198, 208, 223–4, 230–1 financial intermediaries, 17, 67, 72, 93, 99–100, 121–2, 139, 180, 185, 187, 198, 219, 227 financial liberalization, 28, 64, 232 fiscal policy, 209–17 Fisher, Irving, xiv, 138–9, 141, 260n4, 263n18, 263n20 Foote, Christopher, xv, 70, 73, 79, 118, 123 foreclosure, 97–8, 118, 122–4, 224–5, 254n56 MA foreclosures versus defaults, 1990–2008, 123 MA foreclosures versus home price, 1990–2008, 124 foreign capital, 28, 31, 86, 128–9, 245n5 Foreign Direct Investment (FDI), 7–8 Fostel, Ana, xiv–xv, 20, 93, 139, 269n11 Freddie Mac, 27, 116, 169 Freud, Sigmund, 82 Friedman, Milton, 151–2, 185–7, 195, 210, 226, 260n4, 266n20, 266n23, 271n11 frugality, 148, 269n2 Fuld, Richard, 74 full employment See employment GDP, 8–11, 15, 20–1, 25, 29–33, 48, 56–7, 62–5, 129, 148, 155, 169–70, 204–5, 213–15, 221, 232, 234 Geanakoplos, John, xiv–xv, 20–1, 93, 124, 139, 203, 242n12, 259–60n78, 269n11 general glut, 155, 163 See also global savings glut global imbalances, 39–41, 43, 49 global imbalances (in percent of world GDP), 1997–2009, 48 global savings glut, xiii, 39–40, 260n1 See also general glut globalization, 235, 243n36, 268n46 Goldman Sachs, 72, 249n15, 251n25, 275–6n4 Gorton, Gary, 87 government borrowing, 41–2, 161–2, 209, 215 Government Sponsored Enterprise (GSE), 27, 33, 44, 49, 69, 74–6, 104–7, 109, 116, 162, 169, 207–8, 249n27, 257n37 Great Britain, 3–5, 7, 81, 209 Great Depression, xiii, 44, 97, 118, 128, 136, 138–9, 170–1, 185–7, 209, 216, 232, 260n4, 271n11, 276n7 Great Moderation, 18, 20, 42, 88, 93–4 Greenspan, Alan, 18, 93 Greenspan Put, 18–20, 93, 241n9 Greenspan’s conundrum, 128, 134–6, 146, 163, 268n46 Gross, Bill, 117 gross capital flows, 64–6 gross capital flows and current accounts, 1995–2010, 64 gross capital flows by region, 1995–2010, 65 growth rate, 8–9, 122, 137, 162, 239n3, 268n42, 274n21 guarantee, 74–5, 105, 116, 161, 223, 245n13, 271–2n24 Haber, Steven, 75 Haldane, Andrew, 86 Hall, Robert E., 267 Hansen, Alvin H., 158, 267 Hayek, F A., xiii, 90, 208, 210, 231, 251n18–19 business cycle theory, 134–5, 163, 207, 239n7, 240n22, 262n7–9 Hayekian equilibrium, 171–2, 239n7, 269n9 and informationally constrained agents, 84–7 and local knowledge, 85–6, 88, 90 hedge funds, 44, 83, 101, 104, 107, 111, 113, 116–17, 119, 167, 258n49 Hennessey, Keith, xiii Hicks, John, 211–12 Index historical studies, 26–9, 33, 243–4n38 Hoenig, Thomas, 198, 223, 226 Holtz-Eakin, Douglas, xiii home economy, 12, 26, 33, 59–62, 99–100, 149–50, 247n8–10, 278n27 homes, 18, 21, 58, 62–3, 84, 86, 94, 122–6, 163, 250n32, 251n19 See also housing prices house price index rate of change, 1975–2009, 77 households, 42–3 bank and household credit, 1990–2014, 205 formation, 76–7 household, corporate net worth, 2003–2010, 170 household channel, 117–18 household leverage versus household price change, 1997–2007, 22 household sector leverage, 29–30, 63, 174–6, 180 households and nonprofit organizations—net worth level, 2000–2008, 119 leveraged losses, 174–6 real median household income, labor force participation rate, 1984–2013, 157 saving, 43, 155, 201, 204–5, 210, 216–17, 267n35 spending, 26, 43, 55, 100, 119, 174, 176, 180, 199, 205, 212 housing boom See US housing boom housing prices, 15–17, 21–2, 28–30, 33–4, 56, 58, 76–7, 84–8, 118–19, 122–6, 154, 171–7, 203–4, 258n64, 274n6, 278n26 home price and CPI growth, 2000–2008, 16 home vacancy rates and home prices, 2000–2010, 125 house price index rate of change, 1975–2009, 77 MA foreclosures versus home price, 1990–2008, 124 margins offered and housing prices, 2000–2009, 125i Huang, Yasheng, 7–8 Huang, Yiping, 240n12 IKB, 73 imports, 10, 13, 23, 37, 42, 53, 58–9, 100, 128, 149, 156, 231, 246n27, 265n8–9 ● 285 income, 7–9, 24–5, 33, 59–62, 99–101, 107–8, 116–18, 137–40, 142–5, 147–8 income concentration, xv, 221, 231 and Accumulation, 152, 154–8, 266–7n28 and permanent saving, 151–5 and policy, 199, 219–20, 231–8 inflation, 29, 34, 36, 50–1, 58–9, 62–3, 76, 93, 134–6, 140, 145, 149, 195, 208, 213, 217, 232 innovation, 29, 73, 123, 129, 167, 226–7, 231, 237, 261n10 institutional cash pools, 101–11, 114, 119, 126, 159–61, 179, 182, 226, 256n29, 256n32, 257n39 institutional cash pools, 1997–2013, 106 institutional investors, 17, 83, 101, 106, 108, 109, 113, 115, 159–61, 172 institutions See banks and banking; financial institutions Interest and Prices (Woodford), 133 interest rates, 21, 83, 85–6, 111, 113, 117, 120, 190–1, 203–8, 213, 215, 217 and Accumulation, 137, 140, 144–5, 156–7, 162–4 and ARM loans, 79 and capital flow bonanza, 101, 107, 126, 157 and China, 8, 10–11, 26 and current account deficit, 62 and global imbalances, 39–41, 43 and Great Moderation, 18 and Greenspan Put, 18–20, 93, 241n9 and Greenspan’s conundrum, 128, 134–6, 146, 163, 268n46 and gross capital flows, 65 and housing boom, 29, 31, 33–4, 36, 51, 162–4 and maturity spread, 29, 31, 100, 128, 191 and offshore holdings of US securities, 31, 33, 86, 162–3 and safe asset shortage theory, 159 intermediation, 109, 115–16, 257n38, 268n38 international capital flows, 28, 64–5 gross capital flows and current accounts, 1995–2010, 64 International Monetary Fund (IMF), 34–6, 43, 155, 196, 232, 278n30 investment grade rating, 43–4, 75, 102, 107–8, 113–14, 120–1, 177, 182, 258n53 286 ● Index Ireland, 21–2, 244n39 IS-LM, 211 It’s a Wonderful Life (film), 72 Ivashina, Victoria, 113–14, 190, 196 Jaffee, Dwight, 76 Jintao, Hu, 11 Jorda, Oscar172, 204 JP Morgan, 72, 74, 197, 226 Kettering, Charles, 69 Keynes, John Maynard, and Keynesian economics, xiii–xiv, 121, 127, 128, 239n7, 253n46 austerity, 209, 215 consumption behavior, 266n23 deficit spending, 209–11 employment multiplier, 209, 212 income concentration, 235, 263n22 international trade, 233–4 liquidity reference, 251n30 Keynes Plan, 219, 233–4 Keynesian liquidity trap, 159–60, 181–2 Keynesian uncertainty, 87–96, 121, 229, 259n71 Keynesian unemployment, 144–6 refutation of Say’s Law, 266n19 See also animal spirits Koo, Richard, 263n20 Kroszner, Randall, 276n7 Krugman, Paul, 144, 197, 210, 267n35 labor, 37, 151, 211, 265n8, 265–6n17 in China, 5, 6, 8, 34–7, 41, 61, 104, 150, 156, 246n22, 278n27 civilian labor force participation rate, 1990–2014, 204 division of, 231 labor force participation, 210, 267n30, 273n3 real median household income, labor force participation rate, 1984–2013, 157 law of markets See Say’s Law Lehman Brothers, 27, 74, 88, 169, 177, 181, 183, 194, 270n5, 275–6n4, 276n5 Leijonhufvud, Axel, 136, 145 lending, bank, 129–30, 169, 178, 180, 187–97 leverage and housing boom, 15–26, 29–31, 33–4, 63–4 leverage cycle, 20, 93–4, 124–6, 139, 242n12, 269n11 leverage ratio, 229, 238 MPC based on housing leverage ratio, 175 liabilities, 15, 23–4, 27, 46, 63, 102–3, 107–9, 111, 113, 116, 169, 172–3, 178–9, 183–6, 193–6 home mortgage liability levels, 2000–2008, 16 shadow bank, commercial bank liabilities, 1990–2011, 91 liberalization, 28, 64, 232 LIBOR, 128, 177 Life Insurers (LI’s), 101, 107, 111, 113–14, 116, 119–20, 257n44, 258n49 liquidity, 90–1, 165, 177–9, 181, 198–9, 252n38 and Accumulation, 163 and bank runs, 243n32 desire for liquidity and reduced liquidity, 181–3 and the Fed, 27, 183–8, 194–6, 206, 208, 230, 260n4, 261n10, 270n9 Fed’s restoration of, 183–8 and Great Depression, 185–6, 226, 260n4 and housing boom, 167–8 and institutional cash pools, 104–6 liquidity preference, 252n30 liquidity puts, 114–16, 177, 255n13, 258n54 liquidity squeeze, 177, 179 liquidity transformation, 263n19 liquidity trap, 126, 144–6, 159–60 and regulation, 228, 230 and repo-debt, 275–6n4 rush to, 181–3, 186 and shadow banking, 129 Temporary Liquidity Guarantee Program, 196 and US capital market, 36, 44–5 and V Smith experiment, 253n53 loan-to-value ratio (LTV), 21, 117–18, 173, 225 MA LTV DTI subprime, 1999–2006, 71 Lucas, Robert, 231 M2 (broad money supply), 129, 163, 186–7, 271n15 macroeconomics, 20, 29, 39, 129, 133, 141, 158, 209–10, 243–4n38, 268n39 Index Malthus, Thomas Robert, xii, 133, 136, 137 Mandeville, Bernard, 168–9, 269n2 Mankiw, Gregory, 265n8 manufacturing, 4, 34, 37–8, 127, 156, 159, 169, 278n27 market financing, 84, 90, 94, 121 Marshall-Lerner conditions, 246n27, 265n9 Martin, William Machesney, 134 matched book money dealers, 102, 107–9, 254n10 matched book repo, 108 maturity spreads, 29–31, 100, 191 maximization, 151, 250n5 mercantilism, 1, 12, 47–8, 55, 66, 128, 131, 136, 147–50, 155, 215, 238 See also Accumulation Merrill Lynch, 73–4, 116 Merrouche, Ouarda, 29, 31, 33, 162 Metropolitan Planning Organizations (MPOs), 216 Mian, Atif, xv, 77–9, 97, 154, 174–6, 190, 224, 253n55, 254n56, 258n64, 271–2n24 Milesi-Ferretti, Gian Maria, 52 Minsky, Hyman, 18, 20, 93–4, 241n8, 242n12, 251n18 Modigliani, Franco, 151, 266n23 Modigliani-Miller theorem, 172 Monetary History of the United States, A (Friedman and Schwartz), 185–6, 260n4 monetary policy, 163, 206–9, 217, 255n11, 260n4 bank lending channel, 206 Friedman on, 187, 195 and housing boom, 14, 18, 29, 31, 33, 35, 127, 129, 133 portfolio channel, 206–7 quantitative easing, 207–9 money market fund, 65–6, 102, 104–5, 107, 110, 120, 161, 182–3, 186–7, 224, 227–31 money supply, 25–6, 50–1, 186–7, 194, 199, 204, 232, 242–3n25, 246–7n30 monopoly, 4, 7–8, 81, 236–7 Morris, Stephen, 95 mortgage backed securities (MBS), 43, 69–70, 72–3, 83, 94, 116, 124, 165, 167, 241n1, 249n20, 253n55 multiplier, 50, 186, 209, 212–13, 270–1n10 Mundell, Robert, 260n4 MZM, 129 ● 287 Napoleon Bonaparte, Napoleonic Wars, National Federation of Independent Businesses (NFIB), 190 National Income Accounting, 58–60 NAV, 102, 228, 270n4 Nier, Erland, 29, 31, 33, 101 Nixon, Richard, nonsatiation principle, 141–3, 150, 264n27 notional demand, 160 Obstfeld, Maurice, 34, 40, 50 Occupy Wall Street, 197–8 OECD, 29, 162 oligopoly, 198, 226–7, 236, 238, 278n27 OPEC, 35–6, 40, 42–9, 51–2, 100, 104, 161, 254n8 Open Market Committee, 127 open market operations, 206 originate-to-distribute, 71–4 origination, 69–70, 73, 76, 79, 114, 123, 241n1 originators, 71, 79, 248n12 OTC, 223, 230, 275–6n4 patents, 220, 236–7 Paulson, Hank, 178 Paulson, John, 72–3, 251n25 Permanent Income Hypothesis (PIH), 151–2, 154–5, 175, 266n20, 266n22–3, 274n15 permanent savings, 137, 147–8, 150–6, 212, 235, 267n35 Piketty, Thomas, xv, 152, 154 policy fiscal policy, 209–17 and housing boom, 127–30 and income concentration, 199, 219–20, 231–8 See also monetary policy policy options policy contingencies, 238 to recover from balance sheet recession, 221–5 to reduce current account deficits and income concentration, 231–7 to restore competition to banking, 226–31 Pozsar, Zoltan, xiv, 106, 108–10, 113, 117, 129, 254n10, 255n13, 256n32, 257n40, 257n46, 270n28 288 ● Index pretax income, 152, 154 price level, 59, 137, 140, 149, 195 Prime Fund, 182, 270n5 prime mortgages, 69, 78, 117 Prince, Chuck, 97, 167 Principles of Political Economy (Malthus), 137 private sector, 42–3, 46, 51, 60, 100, 102, 144, 159–60, 185, 195, 201, 205–11, 215–17, 274n14 probability, 19–21, 27, 43–4, 88–9, 92, 94, 129, 219 productivity growth, 35–6, 40–1, 43, 51, 122, 126, 146, 157, 246n22 US productivity growth, 1996–2008, 41 profitability, 9, 36, 43–4, 85, 101–2, 115, 122, 134, 158, 262n8 profits, 8–9, 29–30, 34–6, 41–4, 74–5, 101–2, 114–16, 120, 138, 144–6, 236, 244n57, 259n67, 263n15 US corporate business: profits before tax, 1996–2008, 35 Quantitative Easing (QE), 195, 207–9, 272n29 Quigley, John, 76 ratings agencies, 75, 108, 120 reach for yield, 75, 83, 100, 102, 107, 111–14, 117, 120, 126, 157, 159, 208, 258n50 Real Business Cycle Theory (RBC), 209–10 regulation, 18, 31, 33, 59, 74–5, 79, 83, 86, 113, 115, 127, 129–30, 194, 198–9, 226–31, 238 regulators, 18–19, 36, 75, 114–15, 129–30, 194, 227, 229–30 Reinhardt, Carmen, xii–xiii, 27–9, 33, 36–7, 41, 82, 203, 215, 232, 242–3n25, 243n35–6 Reinhardt, Vincent, xii–xiii, 239n5 renminbi (RMB), 9, 24–6, 49–52, 149, 242n23, 246–7n30, 265n3 repo, 106, 119, 169, 174, 182, 186–7, 199, 228–9, 243n32, 256n32, 275–6n4 See also reverse repo reserves, 12–13, 24–5, 33, 46–52, 147–50, 177–8, 183–6, 191–5, 206–8, 222, 228–9 reverse repo, 107–8, 110, 179, 195, 256n29, 256n33 Ricardo, David, 231 Rich, Frank, 18 risk spread, 36, 86, 93, 101, 117, 262n6 Rogoff, Kenneth, xii, 27–9, 33–4, 36–7, 40–1, 50, 82, 203, 215, 232 S&L crisis, 86 S&P Case Shiller, 16, 125 Saez, Emmanuel, xv, 152, 154 safe asset shortage, xiv, 43–6, 100–102, 106, 110–11, 126, 159–62, 226, 243n35–6 safe assets, 245n13–14, 268n41 Santelli, Rick, 17–18 saving household saving, 43, 155, 201, 204–5, 210, 216–17, 267n35 permanent saving, 137, 147–8, 150–6, 212, 235, 267n35 Say’s Law, 141–4, 264n30, 266n18–19 Say’s Principle, 264n25 Scharfstein, David, 196 schooling, 237, 262n13 See also education Schularick, Moritz, 20, 33–5, 172, 243n31, 243n36, 243–4n38, 260n4, 261n13, 271n11 Schumpeter, Joseph, 231 Schwartz, Anna, 185–7, 226, 260n4, 271n11 secular stagnation, 131, 133, 136–7, 146, 147, 158–60, 239n3, 266n23, 267n35 securities mortgage securities, 69–76, 87, 107, 116–17, 121, 124, 126, 129, 169–71, 177, 199, 208, 259–60n78 offshore holdings of US, 31–3, 39–40, 45–6, 129, 162 See also asset backed securities (ABS) securitization, 45–6, 63, 66, 69–75, 99, 102–4, 115, 120–1, 177, 196, 212 Seru, Amit, 118 shadow banking, xiv, 66, 96, 101, 102–11, 119, 129, 228, 236, 254n10, 257n40 bond investors, 107 and broker-dealers, 107–8 concept, 109 institutional cash pools, 104–6 meltdown, 179–80, 182, 199 and safe asset shortage, 110–11 securitizations, 102–4 shadow bank, commercial bank liabilities, 1990–2011, 91 shadow banking diagram, 110 Index Shakespeare, William, 181 Shin, Hyun Song, 66, 95, 99, 121, 191, 254n10 Smith, Adam, 6, 12, 81–2, 133, 148–50, 231, 233, 241n25, 246n20, 250n5 Smith, Vernon, 84, 95–6, 251n12, 253n53 software, 220, 236–7 Southeast Asia, 1, 12, 31, 32, 40, 42–4, 46–7, 49, 51–2, 100, 110, 131, 147, 159, 232, 234, 239n4, 246n19 Spain, 21–2, 244n39 spending and Accumulation, 136–46, 155, 158, 160–3, 235 consumer, 26, 43, 55, 100, 119, 174, 176, 180, 199, 205, 212 and current account deficit, 24–6, 58–63, 66, 147 and fiscal policy, 209–13, 216–17 government, 22, 59–60, 69, 100, 197, 209, 213 and homeowners, 118–19 household, 26, 43, 55, 100, 119, 174, 176, 180, 199, 205, 212 and income concentration, 151–2, 154–5 infrastructure, 216 and leverage, 172–6 military, 42, 213 and monetary policy, 206–9 sponsors, 44, 71–3, 248n12 spreads maturity spreads, 29, 31, 100, 128, 191 risk spreads, 36, 86, 90, 93, 101, 117, 262n6 State Administration of Foreign Exchange (SAFE), 46 state owned enterprise (SOE), 7–8 subprime lending, 99–102 ABS, 44, 65, 69, 75, 87–8, 102, 104, 108, 111–20, 160–1, 167–8, 170, 177–9, 208, 245n14 amplification of subprime crisis, 170–80 basic facts, 69–71 and housing collapse, 122–6 motivations of subprime originators, investors, and borrowers, 111–19 rationale, 120–1 and shadow banking sector, 102–11 Sufi, Amir, xv, 77–9, 97, 118, 154, 174–6, 190, 224, 253n55, 254n56, 258n64 ● 289 Summers, Lawrence, 147, 158, 203, 210, 268n38 supply chains, 10–11, 104, 212, 240n20, 246 Tao, Kunyu, 240n12 TARP, 27, 196–7, 222, 273n41 taxation, 60–1, 154–5, 194, 209, 211, 213–17 and China, 9–10 tax cuts, 42, 216–17 taxpayer, 18, 162, 197, 217, 222, 225–6, 230, 273n47, 274n14, 275–6n4 Taylor, Alan, 20, 33, 172, 243n31, 243n36, 243–4n38, 260n4, 261n13, 271n11 Tea Party, 198 technology, 4–5, 235, 278n27 TED Spread, 177–8 Temporary Liquidity Guarantee Program, 196 ten year treasury yield, 31, 101, 111, 135, 162–3 BAA corporate bond yield relative to yield on ten-year treasury, 2000–2008, 19 Fed funds rate, ten-year treasury yield, 2004–2007, 135 regression tests ten-year treasury yields on Fed funds rate, 1985–2006, 164 Southeast Asian and other flows on ten-year treasury yield, 1984–2005, 32 Theory of Moral Sentiments (Smith), 250n5 This Time is Different (Reinhart and Rogoff ), xiii, 27–8, 215 Thomas, Bill, xiii Thornton, Daniel, 163 Tiananmen Square protests, 7–8, 150 Tier Capital, 229 Tobin, James, 58, 253n39 Tobin’s Q, 58, 93, 96, 101, 119, 207–8, 253n39 too-big-to-fail, 197–8, 224, 226–7, 236, 238, 277n14 Total Factor Productivity (TFP), 226 trade China/US trade, 49–52, 66, 127, 149, 231–3, 246n27, 257n43, 260n2, 267n31 China’s trade policy, 3–13 free trade, 38, 232–3, 278n27 trade balance, 13, 23–4, 28, 149–50 290 ● Index trade—Continued trade cycles, 85–6, 251n18 trade deficit, 24, 42, 127, 148–9, 152, 233, 246n27, 265n9 trade surplus, 1, 3, 12, 48–9, 52–3, 148–50, 233, 257n43 US China bilateral trade in goods, 1999–2014, 13 tranches, 44, 69–75, 97, 107–9, 114–16, 120–1, 248n8, 249n14, 255n13, 258n53, 275n4 trend, 20–1, 33, 82, 137, 147, 154, 156, 158, 160, 162–3, 238, 239n3, 268n38, 277n19 Truman, Harry S., 221 Turgenev, Ivan, 99 Twain, Mark, 15 uncertainty, 83, 87–96, 121, 136, 205, 229, 252n27, 252n29–30, 259n71, 268n39, 273n41 underconsumption, xii, 151, 267n35 unemployment See employment US government guaranteed debt, 25, 43–4, 46, 51, 86, 100–2, 107, 110, 119, 159, 161, 182, 215, 245n9, 245n13, 254n8 US housing boom and asymmetric information, 71–4 and capital flow bonanza, 29–34, 39, 41–6, 49, 51 and China, 12–13, 23–6, 31, 33–5, 37–8, 46, 65, 231–2, 245n5 collapse, 122–6 and contractually constrained institutions, 83 conventional explanations, 71–9 and decision making, 82–98 denouement, 167–9 and experience constrained agents, 83–4 and gross capital flows, 64–6 and GSE securitizations, 75–6 and informationally constrained agents, 83, 84–7 and interest rates, 29, 31, 33–4, 36, 51, 162–4 and irrational exuberance, 76–9 and leverage, 15–26, 29–31, 33–4, 63–4 and misreading capital market efficiency, 35–7 and misreading dealing in US manufacturing, 37–6 and misreading US corporate profits, 34–5 and moral hazard, 74–5 and originate to distribute, 71–4 and policy, 127–30 salient facts, 56–7 and Tobin’s Q, 58 and uncertainty constrained investors, 83, 87–96 and US current account deficit, 22–38, 58–63, 66 See also financial crisis US treasuries, 101, 111, 128–9, 135–6, 162–3, 182, 207–8 10–/30–year treasury constant maturity rate, 1996–2008, 40 BAA corporate bond yield relative to yield on ten-year treasury, 2000–2008, 19 Fed assets, 2007–2009, 183 Fed funds rate, ten-year treasury yield, 2004–2007, 135 Fed liabilities, 2007–2009, 184 foreign holdings of US securities, 2007, 45 and institutional cash pools, 105–6 offshore purchases, 31–3, 46, 49, 100, 104, 162 regression tests ten-year treasury yields on Fed funds rate, 1985–2006, 164 shadow banking diagram, 110 Southeast Asian and other flows on tenyear treasury yield, 1984–2005, 32 ten-year treasury constant maturity rate, 2000–2008, 112 thirty-day commercial paper and treasury rates, 2007–2009, 182 US Treasury, 196–8, 222 See also individual secretaries vacant homes, 21, 124 Value at Risk (VaR), 19–20, 88, 89, 129, 241n10, 254n10 VIX, 20, 129 volatility, 19–20, 75, 93–4, 96, 113, 117, 131, 146, 147, 156–61, 238, 239n5, 253n47, 253n53, 254n10, 257n46 wages, 34, 37, 137–8, 141, 144, 154, 156, 210, 235–7, 260n4, 262n7, 263n15, 265–6n17, 278n27 Index Wall Street, 18, 73, 76, 167, 169 See also Occupy Wall Street warehoused subprime mortgages, 115–16, 255n13 Warnock, Frank, 31, 33, 45, 100, 114, 128–9, 162, 254n8 Warnock, Veronica, 31, 33, 45, 100, 114, 128–9, 162, 254n8 Washington DC, 21 wealth and Accumulation, 137, 139–40, 145, 148, 155–6, 159, 162, 219–20, 263n21, 264n30, 266–7n28 of baby boomers, 268n39 and consumption, 62, 118 definition of wealthy households, 269n20 and economic equilibrium, 171–2 and global imbalance, 43 and housing, 43, 163, 174–5, 224, 259n67 and income concentration, 152, 154–6 and leverage, 172 loss after financial crisis, 170 and People’s Bank of China, 25 and policy, 236 retirement, 104–5, 161 and tech bubble, 176 See also income concentration Wealth of Nations, The (Smith), 12, 241n25, 250n5 ● 291 Wells Fargo, 72 Wicksell, Knut, 134 Wicksell-Hayek business cycle, 134–5, 163, 207, 262n7, 262n9 Wolf, Martin, xii, 81, 210–11, 216–17, 275n30 Woodford, Michael, 133, 208 workers and free trade, 278n27 and income concentration, 236 and institutional cash pools, 104–5 and Keynesian unemployment, 145 and mercantilism, 148 and secular stagnation, 158 and Wicksell/Hayek theory of business cycles, 134 See also employment; labor; wages World Trade Organization (WTO), 10–12 World War II, 13, 20, 28, 64, 122, 135, 152, 213, 215, 219, 230, 232, 237 Xiaoping, Deng, Youbang, Hu, Yun, Chen, Zedong, Mao, 5–6 Zingales, Luigi, 197 Ziyang, Zhao, 5, 13 .. .The Financial Crisis Reconsidered The Financial Crisis Reconsidered The Mercantilist Origin of Secular Stagnation and Boom-Bust Cycles Daniel Aronoff THE FINANCIAL CRISIS RECONSIDERED... companies and representatives throughout the world E-PUB ISBN: 97 8-1 -3 4 9-5 754 7-3 E-PDF ISBN: 97 8-1 -1 3 7-5 478 9-7 DOI: 10.1057/9781137547897 Distribution in the UK, Europe and the rest of the world... author The financial crisis reconsidered : the mercantilist origin of secular stagnation and boom-bust cycles / Daniel Aronoff pages cm Includes bibliographical references and index Global Financial