Zestos the global financial crisis; from US subprime mortgages to european sovereign debt (2016)

THE GLOBAL FINANCIAL CRISIS Although banking and sovereign debt crises are not unusual, the crisis that has unfolded across the world since 2007 has been unique in both its scale and scope It has also been unusual in being both triggered by and mainly affecting developed economies Starting with the US subprime mortgage crisis and the recession in 2007–9, the problem soon erupted into financial crisis in Europe A few of these countries came to the brink of bankruptcy and were rescued by the EU and the IMF on the condition they adopt austerity measures The detrimental social effects of the crisis in both the US and Europe are still emerging Although there have been several studies published on the US crisis in particular, there has so far been an absence of an accessible comparative overview of both crises This insightful text aims to fill this gap, offering a critical overview of causes, policy responses, effects, and future implications Starting with the historical context and mutation of the crisis, the book explores the policies, regulations, and governance reforms that have been implemented to cope with the US subprime mortgage crises A parallel analysis considers the causes of the European sovereign debt crisis and the responses of the European Union, examining why the EU is as yet unable to resolve the crisis This book is supported with eResources that include essay questions and class discussion questions in order to assist students in their understanding This uniquely comprehensive and readable overview will be of interest and relevance to those studying financial crises, financial governance, international economics, and international political economy George K Zestos is Jean Monnet Chair for European Integration Studies and Professor of Economics at Christopher Newport University, USA This page intentionally left blank THE GLOBAL FINANCIAL CRISIS From US subprime mortgages to European sovereign debt George K Zestos First published 2016 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2016 George K Zestos The right of George K Zestos to be identified as author of this work has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Zestos, George K The global financial crisis : from US subprime mortgages to European sovereign debt / George K Zestos pages cm Includes bibliographical references and index Financial crises I Title HB3722.Z42 2015 330.9’0511–dc23 2015016222 ISBN: 978-1-138-80019-9 (hbk) ISBN: 978-1-138-80021-2 (pbk) ISBN: 978-1-315-75559-5 (ebk) Typeset in Bembo by Cenveo Publisher Services To My Family Eva, Kostis, and Alex This page intentionally left blank CONTENTS List of figures List of tables List of boxes Preface Acknowledgments List of abbreviations About the author viii xi xii xiii xix xxi xxv From the Great Depression to the Great Recession Causes of the US subprime mortgage crisis 21 The crisis spreads to Europe 42 Why the European sovereign debt crisis has lasted so long 69 US fiscal and monetary policy to cope with the Great Recession 97 The role of Germany in the financial crisis 130 Greece: the epicenter of the Eurocrisis 165 Financial struggles in the EU and EA 207 Concluding comments 246 Index 260 FIGURES 1.1 1.2(a) 1.2(b) 1.3(a) 1.3(b) 1.4 2.1 2.2 3.1 3.2(a) 3.2(b) 3.3(a) 3.3(b) 3.4(a) 3.4(b) 3.5 3.6(a) 3.6(b) 3.7(a) 3.7(b) 3.8 US and Canadian home ownership rate Case-Schiller two composite home price index Case-Schiller 20 US city home price indices US unemployment rate US real GDP growth rate US recessions as indicated by the unemployment rate (1916–2014) US balance of payments accounts Derivative financial instruments traded over the counter and on organized exchanges Southern European countries’ interest rate spreads vs German bonds Northern European countries’ ten-year interest rate spreads vs German bonds Southern European countries’ ten-year interest rate spreads vs German bonds Southern EA gross public debt as a percentage of GDP Northern EA gross public debt as a percentage of GDP USA, UK, and Japanese ten-year interest rate spread vs German bonds USA, UK, and Japanese public debt to GDP ratio Greek debt as a percentage of GDP Gross private savings Southern EA countries Gross private savings Northern EA countries Southern EA countries’ Current Accounts Northern EA countries’ Current Accounts Net international investment position 14 14 16 16 17 24 26 48 49 49 54 54 56 56 59 61 61 63 63 64 Figures 3.9 4.1(a) 4.1(b) 4.2 4.3 5.1(a) 5.1(b) 5.2 5.3(a) 5.3(b) 5.4 5.5 5.6 5.7(a) 5.7(b) 5.8 5.9 5.10(a) 5.10(b) A5.1(a) A5.1(b) A5.2(a) A5.2(b) A5.3 6.1 6.2 6.3 6.4 6.5(a) 6.5(b) 6.6 6.7(a) 6.7(b) 7.1 7.2 7.3 7.4 7.5 8.1 8.2 8.3 8.4 Rebalancing in the EA Real effective exchange rate for Eurozone countries Real unit labor costs for Eurozone countries US dollars per euro exchange rate ECB REPO rate vs US federal funds rate US real GDP in 2009 dollars US unemployment rate Federal government public surplus/deficit US GDP and public debt in current dollars US public debt to GDP ratio Three US interest rates Excess reserves balances of US banks Short-term lending to financial firms and markets Debt owed to Fed by US banks Debt owed to Fed by European banks Quantitative easing timeline Treasury- and mortgage-backed securities Total number of US workers employed US unemployed workers Cumulative debt owed to Fed by US banks Cumulative debt owed to Fed by European banks Discouraged workers in the US Labor force participation and unemployment rate Average weekly earnings of production Growth of German GDP 1951–2013 German trade balance as a percentage of GDP 1950–2014 German GDP and trade balance indices 1950–2014 German unemployment rate 1950–2014 Trade union membership rate in Germany 1980–2013 Trade union membership rate in Northern EA countries German trade balances by region 2000–14 Election results: 2009 Election results: 2014 Greek public debt and GDP at current prices Greek private and gross national saving as a percentage of nominal GDP Real Greek GDP growth Greek trade, current account and government deficit as a percentage of GDP Greek government revenue vs government expenditures European housing price indices Housing price indices of US and seven EA countries Greece: public deficit and debt to GDP ratios Greece: credit ratings during the debt crisis ix 65 76 76 77 78 100 100 105 107 107 108 109 111 114 114 117 118 122 122 125 125 126 126 127 131 132 133 134 141 141 143 153 153 170 172 173 174 180 208 209 216 217 INDEX Added to a page number ‘n’ denotes notes Page numbers in italic refer to figures and tables AAA ratings 10, 27, 28, 29, 35, 106, 129, 210, 211, 214, 215 ABN Amro Bank NV 211 adjustable rate mortgages (ARMs) 5, 8, 29 adverse selection 34–5 Africa 253 aging populations 135 agency debt 108, 115, 117, 123, 128n20 Agenda 2010 (German) 137–42, 144, 160, 161, 249 aggregate demand: wage reduction and decreased 75 Alt-A mortgages 10, 19n35, 27, 33, 99 Alternative for Germany (AfD) 150 American Dream 8, 26 American International Group (AIG) 36, 101–2 American Mortgage Association 99 American Recovery and Reinvestment Act 2009 (ARRA) 103–4, 120, 121, 124 anarchists 179 Anastasladis, Nikos 237 ANEL 182 anti-EU party: Italy 46 Arab Spring 253 Ash, Michael 57 Asmussen, Jörg 52, 79, 156, 191 asset toxicity 29, 30, 33, 38, 101 asset-backed commercial paper (ABCP) 37, 112 asset-backed securities 37 asymmetric information 31–5, 247 austerity programs: academic disputes concerning 57; as application of contractionary fiscal policy 74; as bailout condition 43; challenge to validity of 66; expectation of fiscal stability 70; German support for 148; humanitarian crises 65, 75, 254; IMF reservations about 43; Merkel’s obsession with 145, 157; opposition and resistance to 43, 66, 254; prolonging of the crisis 45–6, 59; and unemployment 250–1, see also individual countries Australian lawsuit: against S&P 211 Austria: debt to GDP ratio 54; downgrading of status to AA 213; gross private savings 61; housing market 208; ten-year government bonds 49 Austrian School of Economics 155 bailouts see European bailouts; US bailouts balance of payments accounts see current account(s); financial account balance sheets 19n25 balanced budget required (EU) 88, 148 balloon contracts 30 Banco de Valencia 231 Bank of America 10, 101, 102, 113, 114 bank credit 30 Bank of Cyprus 234 Index bank deposit guarantees 74 bank deposit safety 87 Bank of England 79 Bank Holding Company Act 1956 (US) 18n9 Bank of Japan 79 Bankia 230 banking sector: Financial Instability Hypothesis 31; recapitalization(s) 55, 74, 86, 228, 231, 256, see also financial institutions; individual countries banking union: need for European 90 bankruptcy (bank) 32, 33 Barnier, Michel 212 Barosso, José Manuel 187, 188, 191 Barth, J.R Basu, S 192 BBVA 230 Belgium: debt to GDP ratio 53, 54, 55, 62, 171; gross private savings 61; housing price index 207, 208; real effective exchange rate 76; real unit labor costs 76; ten-year government bonds 49; trade union membership 141 Berlusconi, Silvio 151, 188, 214 Bernanke, Ben 71, 97, 116 Betrayers in the Euro-family 157 Bild 157, 195 black market: Greece 193 bonus caps 33 bonuses (bankers) 30, 33 Brussels Summit (2011) 86 Brussels Summit (2015) 254–5 built-in stabilizers: US economy 119 Buiter, William 185 Bundesbank 51, 52, 80, 83, 96n29, 155, 156, 189, 248, 257 Bush, George W 10, 98 business: lending to US 112–13 Business Cycle Dating Committee (NBER) 15 business cycles: EMU countries 70 business innovation 135 Buti, Marco 191 Cabral, Ricardo 228 Cajas 230 Cameron, David 93n8, 151 Canada 8, Cannes Summit 132, 186–8, 189, 225 capital controls: Greece 128, 182, 240 capital flows: volatility of foreign 62, see also individual countries Capital Purchase Program (CPP) 101 cartels 177 Catalunya Bank 231 261 Celtic Tiger see Ireland central banks: EA national 80, see also individual central banks Central and Eastern European (CEE) countries 73, 94 children: provision of food for Greek 194 China 132, 249 Christian Democratic Union (CDU) 45, 87, 144, 147, 150, 153, 154, 250 Christian Social Union (CSU) 45, 147, 148 Chrysler 102 Citigroup 39n22, 40n33, 101, 102, 113, 114, 125, 185 Ciudadanos 151 civilization 254 clientelism 58–9, 181, 183 Clinton, Bill 3, 38n1, 68n22, 105 Cogan, John F 120 collateralized debt obligations (CDOs) 25, 28–9, 36, 37, 38, 211 Collective Action Clauses (CACs) 84, 95n39 collective bargaining: decentralization, Germany 139 commercial banks 1, 3, 12, 27, 55 Commercial Paper Funding Facility (CPFF) 112–13 Commodities Futures Trading Commission (CFTC) 3, 113 common budget 257 common good 89 Communist Party of Greece (KKE) 179 Community Reinvestment Act 1977 (US) 10 comparative advantage 142, 167 conditionality: EU bailout programs 43, 59, 82, 84, 85, 86, 87, 94n16, 190, 208, 226, 229, 230, 251 consensus decision-making 156 constant proportion debt obligations (CPDOs) 214 Constitutional Court of Germany 52–3, 149, 248 consumer spending 22 contagion 19n37, 34, 40n34, 47, 88, 102, 115, 149, 166, 179, 191, 202, 207, 213, 224, 225, 232 contingency plans 159 contractionary fiscal policies: Europe 45, 48, 58, 74, 133, 148, 175, 226; United States 71, see also fiscal consolidation contractionary monetary policies: Europe 45, 48, 71, 248; United States 110 contracts and grants (ARRA) 103, 104 convergence criteria (Maastricht) 67n13, 69, 70, 136, 175, 203n8 cooperation: German political parties 144 262 Index corporate scandals 15, 21–2, 37, 109 corporate tax rates 220, 234 corruption 183, 193, 235 counter-cyclical fiscal policy 4, 22, 74 country leaders (European): decision to create EMU rapidly 136; eleventh hour intervention, distressed countries 187; exit from EMU as a viable option 48; lack of commitment to solve the crisis 81–2, 87–8; lack of determination to save euro 70; Moody’s criticism of 213; need for greater role in promoting peace and prosperity 252–3; need to draw on vision of EU founding fathers 90; perception of themselves as benefactors to Greece 251; replaced by Eurocrats 188–9, see also individual leaders Countrywide Financial Corporation 101 credit default swaps (CDSs) 25, 35–6, 38, 47, 86, 101–2, 127n10, 217 credit democratization 9, 10 credit event 84, 86, 217 credit quality standards 33 credit rating agencies (CRAs) 35, 169; downgrading of securities, Europe 47, 65, 70, 213–14; downgrading of securities, United States 101; experience in the EU 211–15; found guilty of negligence 239; lawsuits filed against 210–11; SEC as regulatory authority over 2; three most important 67n12, see also AAA ratings credit rating scales 242–3 Credit Suisse Group 114 crime: Greece 200 ‘crowding out’ effect 120 currency depreciation 72, 78, 79 currency devaluation 72 currency union (German) 136, 142 current account(s) 162n7; Greece 174, 176; United States 23, 24, 25, 39n6 current account deficits: CEE countries 73; international indebtedness 62; Southern European countries 66, 176; United States 23, 24 current account surpluses: China 132; Northern European countries 63, 66, 132, 249; Southern European countries 46, 181 Cyprus 42; bailout 86, 87, 156, 236–7; banking sector 237, 239; credit rating performance 234–7; debt to GDP ratio 236, 242; deficit to GDP ratio 236, 241; downgrading of public debt 213; exports to GDP ratio 220; GDP 235, 240; haircut 87, 156, 237; interest rates 234; investment in Greek government bonds 234; opposition to austerity programs 43; Turkish occupation 167; unemployment rate 241; unprecedented conditions imposed on 156 debt forgiveness 171 debt relief 179, 257 debt restructuring 67n11, 84, 213 debt to GDP ratio 148, 176; austerity and rising 247–8; economic growth and 57; European area 58; recommendation of growth policies and eurobonds to reduce 44; and savings rates 66, see also individual countries deficit to GDP ratio 176; European Area 58, see also individual countries deindustrialization 136 DeMarco, Edward 11 Democratic Party (Italy) 151 democratic processes: EU politics undermining of 228 Department of Agriculture (US) Department of Housing and Urban Development (HUD) 6, 10, 18n5 Department of Justice (US) 210, 211, 243n5 Depository Institutions Deregulation and Monetary Control Act 1980 (US) derivatives 8, 13, 23, 247; complexity of 38; proliferation of 28–9; trade of 25–6, see also collateralized debt obligations; credit default swaps; mortgage-backed securities Dexia SA 114 Diamond, Peter 158–9 Dijsselbloem, Jeroen 252 Dimitropoulou, Maria 200 Directive 2013/14 (EU) 214 discouraged workers: in the US (1998–2014) 126 discretionary policies 4, 120 discretionary spending (ARRA) 103, 104 disease: austerity and increase in 193 Distomo 197 dividend payments: of GSEs (2012–14) 12 Dodd-Frank Act (2010) 11, 13, 237–8, 253–4 Dogiakos, Isidoros 201 dollar liquidity swap arrangements 112 ‘domino effect’ group 191 Dornbusch, Rudi 131 dot-com crisis 15, 21–2 Draghi, Mario 49, 51, 52, 80, 82, 83, 214, 232, 252 ‘driving by sight’ metaphor 146 dual banking system (US) Index East Germany 136, 137, 141, 142, 145–6, 160 ECB monetary policy: contractionary 248; expansionary 78, 79, 80; inability to apply a common 70; need for delegated authority to apply a fully independent 90–1; ‘one-size-fits-all’ interest rate 71; perceived as destructive 158–9; to cope with sovereign debt crisis 79–83, see also quantitative easing economic classes: Germany 249 economic convergence 70, 93n3, 136, 257 economic development 70 economic disintegration 251 economic dominance 251 economic expansion 21 economic growth: and government debt 57; policies, Hollande’s recommendation of 43–4, see also individual countries economic instability: Greece 46 Economic, Monetary and Fiscal Union (EMFU) 91–2 Economic and Monetary Union (EMU): contractionary policies of candidate countries 48; decision to create rapidly 136; exit from, as a viable option 48; lack of determination to safeguard 70; need to establish a banking union 90; qualification for, based on Maastricht convergence criteria 69; resolution of moral hazard problem 89; structural design flaws 71–2, 159; subprime mortgage crisis as threat to 15; violation of fiscal rules 88 economic stability: EU leaders’ lack of will/determination to restore 81–2; US government initiatives 2–3, 119 economic stagnation (Europe) 15; Lisbon Agenda as response to 134–7, see also individual countries Economic Stimulus Act 2008 (US) 98–9 Economics and Finance Ministers Council (ECOFIN) 72, 79, 142 The Economist 151, 224 educational programmes: massive funding allocated to, in the US 103 Eisenhower, Dwight 145–6 Emergency Economic Stabilization Act 2008 (US) 99–102 emigration 46, 203n10 employment: short work and working time accounts, Germany 139–40, 160; US fiscal policy 120, 121, 122, see also precarious employment; unemployment Employment Office (Germany) 139 263 entitlements (ARRA) 103–4 euro: as an overvalued currency 77–9; assumption of stability 48; crisis as a threat to 42; ECB promise to preserve 51; value of 142 euro-dollar exchange rate 77–8, 79 Eurosystem 80 eurobonds 44, 45, 154–5 Eurocrats 155, 171, 188–9 Europe: effects of Great Recession 15; housing market see European housing market; sovereign debt crisis see sovereign debt crisis; spread of US financial crisis to 42–68 European Area (EA) 42, 66n1, 93n4; comparison between US monetary policy and 81; country leaders see country leaders; euroscepticism in 149–53; financial struggles in 207–45; fiscal statistics 58; GDP and unemployment during recession 69; guarantee commitment to the EFSF 83; inflation (Nov 2013) 94n23; international competitiveness 75; rebalancing in 64, 65, 75, see also individual countries European bailouts 70; funding for 89; German decision-making 147; German insistence on IMF participation 74; IMF conditionality 43, 85; negative/ devastating impacts 65, 88, 247; provision of/contribution to 43, 70, 219; PSI programs 149, see also individual countries European bank resolution authority 90 European bank supervisor 90 European banks: debt owed to the Fed 113, 114, 125; Greek public debt held by 171 European Central Bank (ECB) 142; encouragement of Irish government not to impose a haircut on its bank creditors 222–4; foreign exchange rate policy 72; mandate 71; OMT program 51, 52; Plan Z 191; programs to cope with the crisis and fight recession 70; provision of massive credit to financial institutions 80; purchase of government bonds 67n17, 81; as a replica of Bundesbank 80, see also ECB monetary policy; Troika European Commission 91, 150, 168, 191, 212–13, see also Troika European Council 150, 168 European Credit Rating Agency 213 European Economic Recovery Plan (EERP) 73 European Financial Stability Facility (EFSF) 82, 83, 84, 85, 88, 92, 137, 154, 160, 219 264 Index European fiscal authority 91 European housing market: housing boom, Spain 230; housing bubbles 207–9; housing price indices 207, 208, 209 European insurance deposit agency 90 European integration 87, 89–92, 187–8 European Monetary System 257 European Parliament 91–2, 150, 152, 153, 196 European Securities and Markets Authority (ESMA) 214 European Stability Mechanism (ESM) 52, 82, 83, 84, 88, 137, 219, 254 European System of Central Banks (ESCB) 233 European Union (EU): bonus caps 33; budget 248–9; country leaders see country leaders (EU); CRAs experience in 211–15; decision-making process 250; early response to crisis 73–7; financial crisis and declining popularity of 87–8; financial struggles in 207–45; founding fathers 89–90; German leadership and its stance towards 144–9; lack of political will to safeguard 72; legislation 150; opposition to salary caps 33; politics undermining democratic processes 228; program to reduce trade imbalances 25; provision of bailout packages 43; responsibility for Greek debt 59; transitional associate membership 253 euroscepticism 149–53, 187 Eurostat 168, 192 exchange rate: depreciation, Greece 175–6 Exchange Rate Mechanism crisis 257 executives: pocketing of bailout money 33–4; vs shareholders 32–3 expansionary fiscal policies: austerity and fiscal consolidation aimed at reversing 45; United States 15, 21, 22, 24, 37, 42, 57, 247 expansionary monetary policy: austerity and fiscal consolidation aimed at reversing effects of 45; Europe 71, 78, 79, 80; United States 15, 21, 22, 24, 37, 42, 80, 247 export-led growth model 132, 143, 224, 249 exporting firms: Germany 142 exports: demand for Greek 176 Fair Housing Act 1968 (US) family-owned companies 135 Fannie Mae 5–6, 7, 10, 11, 12, 19n21, 26, 27, 115, 246 federal banking system (US) Federal Deposit Insurance Corporation (FDIC) 3, 13, 18n8, 33, 37, 38, 90, 99, 102, 237, 238 Federal Employment Agency (Germany) 138 federal funds rate 21, 80, 106, 108–10, 120; REPO rate vs 78 Federal Home Loan Corporation see Freddie Mac Federal Housing Administration Federal Housing Financing Agency (FHFA) 6, 7, 10–11, 12, 113 Federal National Mortgage Association see Fannie Mae Federal Open Market Committee (FOMC) 97, 110, 112, 115–16, 118 Federal Reserve Act 1913 (US) Federal Reserve Bank of New York 111, 112 Federal Reserve System 2, 18n5, 71, 97, 238, see also US monetary policy Fianna Fáil 219, 224 financial account (US) 23, 24 financial deregulation 23 financial engineers 29, 30 financial fragility 13, 25, 27, 31, 38, 66n3 financial fraud 22, 210 Financial Fraud Task Force 210 financial innovation 23, 25, 27–9, 31, 38 financial instability: United States 13, 27, 38, 102 Financial Instability Hypothesis 31, 38 financial institutions: aid/support, Europe 74, 80; bailouts see US bailouts financial integration 47, 89, 207, 238 financial managers behaviour 169 Financial Regulatory Reform Act see Dodd-Frank Act Financial Services Modernization Act see Gramm-Leach Bliley Act Financial Stability Board (FSB) 213 Financial Times 155, 256 financial uncertainty 13, 25, 38 Fine Gael 219, 224 Finland: fiscal discipline legislation 43; gross private savings 61; housing price index 207, 208, 209; real effective exchange rate 76; real unit labor costs 76; ten-year government bonds 49; trade union membership 141 firewalls 83, 84, 147 First Bank of the US fiscal cliff 98 Fiscal Compact Treaty 43, 52, 67n4, 71, 91, 95n48, 148, 225, 255 Index fiscal consolidation 43, 45, 58, 67n5, 74, 135, 178 fiscal discipline 43–4, 87, 88, 137, 148, 257 fiscal disputes 57, 72 fiscal instability: Greece 59–60, 175 fiscal (mis)management: Greece 171–7, 202 fiscal policies: contractionary see contractionary fiscal policies; expansionary see expansionary fiscal policies; Greece 176; and suppression of destabilizing behaviour 169, see also US fiscal policy fiscal rules (EU) 249; introduction of new, after crisis 176; violation/ non-compliance 72, 88, 168, 174, see also Fiscal Compact Treaty fiscal stability: austerity and expectation of 70; requirement, EMU membership 72; restoring, Europe 74; SGP cyclicality requirement 174, see also individual countries fiscal statistics: European Area 58; revelations of incorrectly reported, Greece 47, 157, 167, 168, 248 fiscal stimulus: Europe 73; United States 73, 98–104, 120, 121 fiscal transfers: from West to East Germany 136–7 fiscal union: need for European 91 Fitch 210, 213, 217, 242–3 Five Star Movement (M5S) 46, 151 fixed rate mortgages 4, Focus 157 foreign central bank swap lines 112 foreign debt to GDP ratio 60 foreign exchange rate policy (EU) 72 foreign investment 136, 178, 219, 220 Forza Italia 151 founding fathers: European Union 89–90 France: claims on Spanish banks 233; competition for influence over Greece 165; debt to GDP ratio 54; downgrading of status to AA 213; economic growth 44, 131; euroscepticism 150–1; fiscal problems 62; housing price index 209; inability to meet fiscal requirements of SGP 44; insistence on economic indicators to monitor trade imbalances 132; leadership 156; private saving rate 61, 62; real effective exchange rate 76; real unit labor costs 76; support for eurobonds 154; support for Greece 255; ten-year government bonds 49; trade union membership 141; warning to restore fiscal stability 68n27 265 Franco, Francisco 230 Freddie Mac 7, 10, 11, 12, 26, 27, 115, 246 Free Democratic Party 147, 148, 154 free market(s) 18n11, 67n10, 130, 131, 155 French Revolution 165 ‘future fund’ 197 Fyssas, Pavlos 200 G20 67n9; program to reduce trade imbalances 25; summits see Cannes Summit; Washington Summit Gauch, Joachim 197 GDP: debt and deficit ratios see debt to GDP ratio; deficit to GDP ratio; European Area, during recession 69; fiscal consolidation and 74; global 25, see also individual countries General Motors 102 German Council of Economic Experts 157 German press: influence on public opinion, Greece 156–7 Germany: Agenda 2010 in 137–42, 249; approach to European crisis 46, 67n10; capital inflows 45, 250; claims on Spanish banks 233; coalition governments 45, 134, 137–8, 147–8, 153; contribution to first Greek bailout 137; current account surpluses 132, 249; debt to GDP ratio 54; economic classes 249; economic growth 131, 132, 135, 159; economic stagnation 133–4, 160; economy 135, 136, 137, 138, 153; euroscepticism 149–53; favourable impact of crisis on 250; fiscal discipline legislation 43; GDP 130, 131, 133; home ownership 209; housing market 208–9; housing price index 208, 209; insistence on IMF participation in bailout programs 74; interest rates 45, 250; labor productivity 135, 136, 139, 140, 141; lack of leadership 153–6; leadership and its stance towards the EU 144–9; opposition to eurobonds 45; perception of East German people 137; perception of superiority of 250; private saving 61; real effective exchange rate 76; real unit labor costs 76; redirection of exports 77; reunification 133, 136–7, 160; taxation, liberal welfare and need for high 136; ten-year government bonds 48, 49, 56, 67n15; trade balances 133, 143; trade and growth 130–4; trade surpluses 77, 131, 132–3, 143, 249; trade unions 136, 138, 140–2; turning of public opinion against Greece 137; unattractiveness for investors, 1990s 136; unemployment rate 133–4, 266 Index 136, 138; US assistance to, after World War II 161n2; vision of EU founding fathers missing in 90; ‘war reparations’ issue 195–8 Germexit 190 Gesamptmetall 139 Ginnie Mae Glass-Steagall Act 1933 (US) 3, 8, 12, 27, 37 Glezos, Manolis 196 global GDP 25 globalization 140 Golden Dawn 152, 190, 198–201 Governing Council (ECB) 52, 81, 82, 83, 248 government bonds: betting against 70; Cypriot investment in Greek 234; downgrading of 47, 70; ECB purchasing of 67n17, 81; financing of fiscal deficits, US 105; long-term interest rates 43, 47–50, 51; speculative attacks on 248, see also ten-year government bonds government employment: relative to GDP, Greece 183 government expenditures: to GDP ratio, European Area (2009–2014) 58; vs government revenue, Greece (2000–14) 180 Government National Mortgage Association see Ginnie Mae government revenues: to GDP ratio, European Area (2009–2014) 58 government spending: fiscal stability and reduction in 74; under the ARRA 121 government-guaranteed mortgages government-sponsored enterprises: bailouts 10; expansion of home loan portfolios 10; growing importance of role in home finance 12; mortgage securitization 8, 34; nationalization 6, 7, 10; plan for dismantling 11–12; shadow banking 37, see also Fannie Mae; Freddie Mac; Ginnie Mae Gramm-Leach Bliley Act 1999 (US) 3, 13, 23 Great Depression 3, 4, 5, 10, 15, 18n12 Great Greek Depression 170 Great Recession see subprime mortgage crisis Greece 42, 165–205; asymmetric market response to 182; austerity programs 59, 192–5; bailouts see Greek bailouts; bank recapitalization 256; bloated public sector 181, 183; bribery investigations 251; coalition governments 46, 50, 51, 152, 179–80, 182, 191, 196; credit rating performance 215–18, 219; crisis as an opportunity for change 251; current account 174, 176; current account deficit 62, 63; Cypriot investment in government bonds 234; democratic process undermined by EU politics 228; downgrading of sovereign bonds 47; ECB purchase of government bonds 81; economic growth 167; economic stagnation 46, 175; elections (2012) 46, 51; embezzlement cases 185; emigration of young people 46; European course 167; exports to GDP ratio 220; fiscal instability 59–60, 175; fiscal (mis) management 171–7, 202; fiscal stability 171; foreign influences 166; GDP 170, 173, 177, 181, 240; German public opinion 137, 156–7; Germany’s refusal to support 154; Germany’s unpaid war reparations to 195–8; haircut 84, 86, 88, 149, 170, 179, 186; housing price index 208; humanitarian crisis 254; independence from Ottoman Empire 165; infected leg theory 146; informal economy 177; interest rates 212, 218, 219; national tragedies 166–7; noncompliance with prudent fiscal policy 174; political stability/instability 46, 51; politics, role in fermenting the crisis 182–5; private and public saving 62, 172; productivity 182, 183, 192; protests/ demonstrations 179, 190, 196; public debt and deficit see Greek public debt; Greek public deficit; real effective exchange rate 76; real unit labor costs 76; recession 59; resistance to structural reforms 177–82; tax evasion 176–7, 183, 185, 203n22, 251; ten-year government bonds 47, 48, 49, 50, 51, 181, 189, 215–18, 219; tourism 176; trade deficit 174; unemployment rate 45, 192, 241 Greek bailouts 43; alternatives to 68n23; cancelled referendum on 186–8; first 47, 50, 59, 85, 137, 171, 178; and high indebtedness 59; possibility of economic stability through more favourable terms 40n34; PSI program 84, 86, 88, 170, 186, 213, 224; refusal and EU insistence on 84; second 50–1, 85, 86, 170, 186; third 254–8; voters’ anger at major political parties 46 Greek bashing 157 Greek Orthodox Church 194 Greek public debt 167–71, 172, 173; accumulation 208; debt to GDP ratio 53, 54, 55, 58, 59, 60, 167, 169, 171, 175, 183, 215, 216, 242; default on 182, Index 240; IMF insistence on debt relief 257; referendum on 255; repayment 256; responsibility for 58–60; restructuring 84, 213 Greek public deficit: deficit to GDP ratio 174, 175, 216, 241; Papandreou’s accusation of misrepresentation 47; tax raising to reduce 179–80 Greek Revolution 165 green economy 73, 94n17 Green Party (Germany) see SPD-Green coalition Greenspan, Alan 23, 32 Grexit 185–92, 252, 255 Grillo, Pepe 46, 151 The Guardian 197, 200, 201 Gurria, Angel 182 Handelsblatt 157 Hartz, Peter 134, 137 Hartz reforms 134, 137, 138, 139, 249 health: link between recession and 192 health insurance: Greece 193 healthcare: Greece 193 heart attacks 192 hedge funds 36–7 Hellenic Telecommunications Organization (OTE) 178 Herndon, Thomas 57 Hofreiter, Anton 198 Holder, Eric 211 Hole, Jackson 116 Hollande, Franỗois 434, 151, 255, 257 home nance system (US): innovation in 27–9; irresponsibility in 28, 30; major changes in 8–10; role of GSEs 12; unethical behaviour/practices 29–31 home foreclosures (US) 3, 4, 5, 22, 99 home insurance (US) 4, 36 home loan portfolios (US) 10 Home Owners Loan Act 1933 (US) Home Owners Loan Corporation (HOLC) 5, 19n19 home ownership 4, 6, 7, 8, 9, 9, 10, 27, 209 homelessness 194–5 hospitals: impact of recession on Greek 192–3 Housing and Economic Recovery Act 2008 (US) 10, 11 housing markets see European housing market; US housing market humanitarian crises 65, 75, 254 humanitarian organizations 193, 194, 253 humanitarianism 199 Hungary 73 267 hunger 194–5 hysterisis 121, 123, 128n39 identity crisis: Europe 47 IG Metal 139 ill health: austerity and 192 IMF Australia Ltd 211 income: mortgage brokers 33 income inequality 130, 138, 144, 158 Independence Party (UKIP) 151 The Independent 192–3 Indignados 179 infected leg theory 146, 191 inflation 7, 8, 71, 78, 94n23 informal economy (Greek) 177 integration: Germany 136, see also European integration; financial integration interbank lending freeze 43, 47 interbank liquidity: Spain 230 interest rates: ECB intention to correct disparity in 80; government bonds 239; rising, as first major signal of crisis 47–52, see also fixed rate mortgages, federal funds rate; individual countries; long-term interest rates internal devaluation 74, 176 international competitiveness 62–4, 74, 75–7, 135, 140, 175 international healthcare: Greece 193 International Monetary Fund (IMF): advice on adopting neoliberal policies 144; aid to CEE countries 73; approach to crisis 46, 67n10; and bailouts see European bailouts; Greek default on debt to 182, 240; insistence on debt relief to Greece 257; program to reduce trade imbalances 25; reservations about austerity 43; responsibility for Greek debt 59, see also Troika International Swaps and Derivatives Association 217 investment banks (US) 12, 19n38, 254; creation of synthetic assets 29; prohibition from commercial banking 3; purchase of lower quality mortgages 10; shadow banking 37; unethical lending practices 30, 247, see also individual banks Ireland 42; bailout 43, 47, 84, 85–6, 219; bank deposit guarantees 74; capital inflows 55; coalition governments 219–20; credit rating performance 219–25; current account deficit 62, 63; debt to GDP ratio 53, 54, 60, 221–2, 242; deficit to GDP ratio 221, 222, 241; democratic process undermined 268 Index by EU politics 228; ECB purchase of government bonds from 81; economic growth 224; economic stagnation 220; exit from bailout 222–5; export growth model 224; exports to GDP ratio 220; foreign firms attracted to 220, 224; GDP 220, 221, 224, 240; housing price index 207, 208, 209; inclusion as Southern European country 66n2; interest rates 212; money lent through EFSF 83; opposition to austerity programs 43; private debt 55; real effective exchange rate 76; real unit labor costs 76; ten-year government bonds 47, 48, 49, 50, 85–6; unemployment rate 241 ISIS 253 ‘issuer pays’ model 35, 239 Italy 42; coalition government 46; country leader replaced by Eurocrat 188; CRAs’ downgrading of public debt 213–14; current account deficit 63; debt to GDP ratio 53, 54, 55, 60, 171; democratic process undermined by EU politics 228; ECB purchase of government bonds from 81; euroscepticism in 151; gain from the OMT program 83; housing price index 209; interest rates 188; political stability/ instability 46; private savings rate 61; real effective exchange rate 76; real unit labor costs 76; support for eurobonds 154; support for Greece 255; ten-year government bonds 47, 48, 49, 189 Jackson, Andrew Jagot, Jayne 211 Janssen, Ronald 171 Japan 56, 57, 81, 131, 135 joint stimulus plan (Europe) 73 Jones, Claire 159 JP Morgan Chase 102, 113, 114 Juncker, Jean-Claude 44, 155, 187 Karamanlis Konstantinos 184 Karamanlis, Kostas 60 Kenny, Enda 220, 222, 225 Keynesianism 31 Klapa, Ioanna 200 Kohl, Helmut 136, 141, 144, 146, 154 kurzarbeit 135–6, 139–40, 142 Kutter, Amelie 157 labor agreements: Germany 139, 140, 142 labor cost reduction, Germany 140 labor force participation rate (LFPR) 121–3, 126 labor market rigidity 134, 135, 136, 139 labor reforms 74, 135, 179 laborers (German) 138 Lagarde, Christine 43, 86, 185, 187 Lagarde list 185 Lahge, Nina 199 Laiki Bank 234, 237 laissez-faire 18n11, 23, 27, 37 Latvia 73 lawsuits: against credit rating agencies 210–11; against foreign and domestic banks, US 113 Le Pen, Marine 150–1 Le-Pen, Jean-Marie 151, 201 Lehman Brothers 34, 211 lender of last resort 110, 237, 248 Letta, Enrico 46 liberal welfare 136, 138 Lindau Nobel Laureate conference (2014) 158–9 liquidity: Greece runs out of 182; shortterm programs, US 110–15; support, EU 74, 82 Lisbon Agenda 134–5, 249 Local Exchange Trading System 195 long-term interest rates: and euro-dollar exchange rate 79; government bonds 43, 47–50, 51; reduction of US 116 long-term mortgage contracts (US) 4, long-term refinancing operations 82 Maastricht Treaty 48, 51, 53, 69, 133, see also convergence criteria McCully, Paul 37 Macron, Emmanuel 151 main refinancing operations (MROs) 80 malnutrition 195 Malta 213, 234 Marshall Plan 145–6, 197 maximum loan-to-home value ratio medical expenditure: Greece 193 Medium-Term Fiscal Strategy (MTFS) 178, 179 Medium-Term Objective (MTO): of closeto-balance or surplus budget 174 Memorandums of Understanding see bailouts Mendelsohn, Julianne 195 Merck 192 Merkel, Angela 43, 44, 45, 51–2, 53, 144, 145–6, 147, 149, 152, 153, 154, 155, 156, 157, 186, 189, 191–2, 237, 250–1, 255 mezzanine tranche (securities) 28 Michaloliakos, Nikolaos 200 military spending: Greece 181, 204n32 Index Minsky, Hyman 31, 38 Minsky moment 102 Mittelstand 135 monetary policies: Bundesbank 257; contractionary see contractionary monetary policies; expansionary see expansionary monetary policies, see also ECB monetary policy; US monetary policy monetization of debt 248 money laundering 235 Money Market Investor Funding Facility (MMIF) 112 Monti, Mario 188, 214 Moody’s 210, 213, 217, 242–3 moral hazard 31, 32–4, 44, 89, 91, 247 Morgan Stanley 102, 113 mortgage securitization 8, 10, 11, 34, 246 mortgage-backed securities (MBSs): AAA ratings 27; Fannie Mae 5, 6, 10, 11, 12; first private 10; Freddie Mac 7, 10, 11; Ginnie Mae 6; government guarantee of 9; QE3 116; trust of investors in 9–10 mortgages (US): adjustable rate (ARMS) 5, 8, 29; balloon contracts 30; brokers 33, 37; defaults 30; Fannie Mae purchases 6; government-guaranteed 6; issued by US S&Ls 7; long-term contracts 4, 5; low quality 10, 38; NINJA contracts 30; predatory lending behaviour 29–30; privately insured 4; purchased and reinstated by the HOLC 19n19; repayment period, extension of multi-family housing project mortgages mutual funds 37 mutualization of debt 92 naked CDSs 36 National Bank Act 1863 (US) National Bureau of Economic Research (NBER) 15 National Democratic Party (NPD) 150 National Front (France) 150, 151 National Housing Act 1934 (US) National Olympic Airlines 178 nationalization: Spanish banks 230, 231; US government-sponsored enterprises 6, 7, 10 Navarino (1828) 165 negative equity 28 neo-mercantilism 249 neo-Nazi parties 150, 151, see also Golden Dawn neoliberal policies 138, 143, 144, 151, 152 net international investment: Europe 62–4 269 Netherlands: debt to GDP ratio 54; fiscal discipline legislation 43; gross private savings 61; housing price index 207, 208; real effective exchange rate 76; real unit labor costs 76; ten-year government bonds 49; trade union membership 141 New Century Financial 99 New Deal 3, 5, 7, New Democracy Party 46, 58, 59–60, 168, 182, 183 New Democracy/PASOK coalition 50, 51, 179–80, 191, 196, 202 New Länder 136 Niarchos, Stavros 194 ‘no income, no job or assets’ (NINJA) contracts 30 ‘no skin in the game’ 28 non-governmental organizations (NGOs): assistance to Greeks 193, 195 non-performing loans 27, 55 Northern Europe: blocking of programs that might create inflation 88; current account surpluses 63, 66, 132, 249; least affected by the crisis 42; net international investment 62–4; savings rates 66; trade imbalances as destabilizing the economy 131; trade surpluses 64, 65; trade union membership 141, see also Austria; Belgium; Finland; France; Germany; Netherlands Nothaft, Frank E 209, 238 Novag Banco 231 novels: about subprime mortgage crisis 30–1 Obama, Barack 11, 12, 103, 113, 189, 210, 251 Obstfeld, M 25 Office of the Comptroller of the Currency (OCC) 1, 18n1 oil crises 15, 20n43, 133, 134, 173 opaque derivatives 26 open market operations 80 Operation Twist 116 Optimum Currency Area (OCA) 69, 72 ordoliberalism 155 Organization for Economic Cooperation and Development (OECD) 144, 181, 182 ‘originate-to-distribute’ model 27, 33–4 ‘Other assets’ program 110–11 ‘Other loans’ programs 111–12 Otto of Bavaria 165, 166 outright monetary transactions (OMT) program 51, 52, 82–3, 155–6 270 Index over-regulation of economies 134, 135, 136, 139 over-the-counter (OTC) derivatives 25–6, 35–6 Padoan, Carlo 214 Pan-Hellenic Socialist Party (PASOK) 46, 58, 60, 168, 179, 183, 188, see also New Democracy/PASOK coalition Papademos, Lucas 188 Papandreou, Andreas 184 Papandreou, George 47, 157, 167, 168, 169, 184, 186, 187, 188, 248 Papakonstantinou, George 185 Papoulias, Karolos 197 Paradox of Thrift 145 Paterson, William E 154 pensions 22, 74, 89, 134, 135, 138, 181, 190 periphery EA countries see Southern European countries perverse incentives 27–38, 38 PIMCO 250 Plan Z 190–1 Podemos 151, 233 Poland 84 political families: dominance of, Greece 183–5 political instability 46, 65 political stability 46, 51, 144 Pollin, Robert 57 populist politics/parties 147, 148, 150, 152, 155, 160, 257 Portugal 42; austerity programs 226, 227–8; bailout 43, 47, 84, 85, 226, 228; bank recapitalization 228; capital inflows 226; contractionary fiscal policy 226; credit rating performance 225–9; current account deficit 62, 63; debt to GDP ratio 53, 54, 60, 226, 227, 242; deficit to GDP ratio 226, 227, 241; demonstrations against bailouts 228; downgrading of public debt 213; ECB purchase of government bonds from 81; economic growth 225, 229; economic stagnation 225; exit from bailout 228; exports to GDP ratio 220; GDP 226, 240; interest rates 212; money lent through EFSF 83; real effective exchange rate 76; real unit labor costs 76; ten-year government bonds 47, 48, 49; unemployment rate 241 poverty 75, 135, 195 precarious employment 138, 140, 142, 144, 249 predatory lending behaviour 29–30 price stability 2, 71, 72 principal-agent problem 32–3, 38, 39n29 private debt 55 private savings 61–2, 172 private sector: over-indebtedness, Spain 231; role in promoting peace and prosperity 253 private sector involvement (PSI) programs 84, 86, 88, 149, 170, 186, 213, 224, 252 privatization: Fannie Mae 5, 12, 17, 18; Greece 178, 179, 181; Portugal 226 ‘problematic’ public enterprises 178 production costs: reduction, Germany 142 profit maximization 31, 32, 38 Prolepsis 194 protectionism 181 protests/demonstrations 179, 190, 196, 228 public debt: at the center of the Eurocrisis 53–64; and government share in the economy 172; monetization 248; mutualization 91, see also individual countries public deficits: recommendation of more time for reducing 43, see also individual countries public saving: Greece 172 public sector (Greek) 181, 183 quantitative easing: Europe 78, 79; United States 71–2, 81, 97, 115–18 Rajoy, Mariano 229 Reagan, Ronald 23 real effective exchange rates: European Area 75–6 real estate investment trusts (REITs) 99 real estate sector 30, 230 real unit labor costs: European Area 75–6 recessions: bailouts and prolonged 65; Greece 59; link between health and 192; United States 15, 20n43, see also subprime mortgage crisis referendum (cancelled): on second bailout, Greece 186–8 Regling, Klaus 222 Regulation 462/2013 (EC) 214 Regulation 1060/2009 (EC) 214 Regulation Q 7, 19n27 regulatory reform: trading of derivatives 26 Reinhart, Carmen 57 Reis, Ricardo 225, 226, 228 remuneration (banker) 30, 32 Renzi, Mateo 151 Repurchase Agreement (REPO) rate 78–9, 80, 82, 94n29 Index repurchase agreements (repos) 37 rescue funds: European see European Financial Stability Facility; European Stability Mechanism Rhineland model of capitalism 130 Ricardo equivalence 120 Rickens, Christian 171 risk: financial innovation and 23 risk premium 67n14, 106 Rogoff, Kenneth 57 Rondholz, Eberhard 198 Roosevelt, Franklin D 3, Rösler, Phillip 147–8 ‘round-tripped’ FDI 234, 235 Royal Bank of Scotland 214 Ruggiero, Michele 213–14 rules-based policies (fiscal) 120 Russia 165, 234, 235, 253 salami tactics 145–6 salaries (banker) 32 salary caps 33 salary reduction: decreased aggregate demand 75 Salomon Brothers 10 Samaras, Antonis 156, 181, 188, 191, 192 Santander 230 Santas, Apostolos 196 Sarkozy, Nicolas 186, 187, 189 savings and loans associations (US) 7–8 savings rates: and debt to GDP ratios 66 Schäuble, Wolfgang 43, 145, 146, 191, 252, 254, 257 Schawn, Gesine 198 Schmidt, I 137 Schröder, Gerhard 74, 134, 137, 138 Second National Bank of the US securities: downgrading of 101 Securities Act 1933 (US) Securities Exchange Act 1934 (US) Securities and Exchange Commission (SEC) 2, 3, 113, 210 Securities Markets Programme 80–2 securitization: as a source of financial fragility 31 sequesters 57, 71, 94n12, 98 shadow banking 37, 38 shareholders: managers/executives vs 32–3 short work 135–6, 139–40, 142 short-selling 36, 73 short-term government bonds 51, 82 short-term liquidity programs 110–15, 118 Siemens 136 271 Sikorski, Radoslaw 147 Sims, Christopher 159 Sinn Fein 224 Sinn, Hans-Werner 155 ‘skin in the game’ 33 Slovakia 213 Slovenia 213 small and medium-sized enterprises (SMEs) 79, 135 Smith, Helena 200, 201 Social Democratic Party (SPD) 144, 147, 150, 153, see also SPD-Green coalition social inclusion 130, 135 social market economy model 134, 135, 140, 144, 249 Social Science and Medicine 192 Socialist Democratic Party (SPD) 45, 74 Sócrates, José 225 solidarity 88, 89, 157, 188, 195, 196 Southern European countries: bailouts see European bailouts; current account surpluses 46, 181; international indebtedness 64; most affected by the crisis 42; opposition to austerity 43; probability of recovery in 159; trade deficits 64, 65; trade surpluses 66, 143, 228, see also Cyprus; Greece; Ireland; Italy; Portugal; Spain sovereign bonds see government bonds sovereign debt crisis (EU): bailouts see European bailouts; development of 44; early EU response to 73–7; ECB monetary policy 79–83; eurobonds recommended as a solution to 44; financial innovation and 25, 36; Greece as epicentre of 165–205; lack of commitment from EA country leaders to solve 87–8; policy recommendations and government reforms 88–92; prolonged through austerity 45–6; public debt at the center of 53–64; reasons for long duration of 69–95; rescue funds see European Financial Stability Facility; European Stability Mechanism; rising interest rates as first major signal of 47–52; role of Germany in 130–63; triggered by revelations of incorrectly reported fiscal statistics 248 Spain 42; austerity 231; bailout 55, 73, 86–7, 229, 230; banking sector 55, 62, 230, 231, 233; capital flows 55, 233; credit rating performance 229–33; current account deficit 62, 63; debt to GDP ratio 54, 231, 242; deficit to GDP ratio 231, 241; downgrading of public debt 213; ECB 272 Index purchase of government bonds from 81; economic growth 230; economic stagnation 230; euroscepticism 151; exit from bailout 232; exports to GDP ratio 220; foreign borrowing 62; gain from the OMT program 83; GDP 229, 233, 240; haircut 232, 233; housing boom 230; housing price index 207, 208, 209; interest rates 212, 230; private debt 55; private savings rate 61; protests against austerity 179, 196; real effective exchange rate 76; real unit labor costs 76; support for eurobonds 155; ten-year government bonds 47, 48, 49; unemployment rate 45, 230, 241 SPD-Green coalition (Germany) 134, 137–8 Special Drawing Rights (SDRs) 189, 204n40 Special Purpose Vehicles (SPVs) 12–13, 19n40, 95n37, 112, see also European Financial Stability Facility speculation 36 speculative attacks: on government bonds 248 speculative/junk status 70, 215, 217, 218, 222, 232 speculators 169 Spiegel 171 Stability and Growth Pact (SGP) 44, 87, 88, 174, 176 Staikouras, Christos 196–7 Standard & Poor’s (S&P) 210–11, 214, 215, 242–3 standards of living 43, 46, 89, 135, 140, 143, 144, 160, 200 Stark, Jürgen 81 State Banking Commissions (US) state guarantees 74 State Street Corp 114 Stegner, Ralph 198 Steinbrük, Peer 154, 155 Steinmeier, Frank-Walter 155 sterilization 81, 83, 95n36, 156 Stiglitz, Joseph 158, 159 stock market bubbles 22 stock market regulation structural reforms: Greek resistance to 177–82 structured finance products see derivatives Stuckler, D 192 subprime mortgage crisis: causes 21–40; effects 15, 18n10, 42; and housing market see US housing market; novels written about 30–1; rising unemployment since 9, 99; spread to Europe 42–68; US fiscal policy see US fiscal policy; US monetary policy see US monetary policy subprime mortgages 10, 27, 99 subsidiarity 150 suicides 192 support credit lines 181 ‘Swabian housewife’ metaphor 145 Sweden 84, 207, 208 Syriza 50, 152, 179, 180, 182, 190, 196, 202, 256, 258 Target (T2) program 233 target inflation rate: of ECB 71, 78 Targeted Investment Program (TIP) 101 tax evasion 176–7, 183, 185, 203n22, 251 tax incentives (ARRA) 103, 104 tax rebates (US) 98–9 tax reduction programs 121 taxation: to reduce deficit, Greece 178, 179–80 Taylor, John 120 ten-year government bonds: European 47, 48, 49, 50, 56, 67n15, 85–6, 181, 189, 215–38; Japanese 56; United States 108–9 Term Asset-Backed Securities Loan Facility (TALF) 111 Term Auction Facility (TAF) 113–15 Thatcher, Margaret 23 thirty-year mortgage rate 108, 109 To Vima 196 Tobin’s tax 220 ‘too big to fail’ 10, 11, 19n37, 34, 102, 113 ‘too big to save’ 188 tourism (Greek) 176 toxic securities 29, 30, 33 Traa, Bob 179 trade balances: depreciation and improvement in 79; Germany 131, 132, 133, 143; weak euro and improvement in 78 trade deficits: Southern European countries 64, 65, 174, 175, 176; United States 23, 24 trade imbalances: European Area 64, 65, 75; French insistence on economic indicators to monitor 132; and high indebtedness, Southern EU countries 87; Northern Europe, as destabilizing the EA economy 131; United States 23–5 trade liberalization 23 trade surpluses: Northern European countries 64, 65, 77, 131, 132–3, 249; Index Southern European countries 66, 143, 228 trade union membership: Germany and Northern Europe 140, 141 trade unions: Germany 136, 138, 140–2 trading desk operations 13, 20n41 ‘trans-shipped’ FDI 234, 235 transitional associate membership: European Union 253 transparency Treasury (US) 237, 238 Tremonti, Giulio 44 Trichet, Jean-Claude 81, 82 Trimonti, Guilio 155 Troika 60, 67n16, 70, 93n7, 169, 171, 178, 179, 195, 222, 258 Troubled Asset Relief Program (TARP) 19n20, 101, 102, 113 Truth in Securities Act Tsakolotos, Euclid 256 Tsipras, Alexis 146, 182, 187, 251, 254, 255, 256, 257, 258 Tusk, Donald 250, 252, 255 Ukraine 73, 253 unemployment: austerity and 45, 250–1; bailouts and 65; benefits 134; European Area, during recession 69; US fiscal policy and 121, 122, see also individual countries unethical lending practices 29–31 unfair competition 142–4 Union for a Popular Movement (UMP) 150, 151 United Kingdom: competition for influence over Greece 165; debt to GDP ratio 56, 57; euroscepticism 149, 151; housing price index 207, 208, 209; ten-year government bonds 56 United States: assistance to Germany after World War II 161n2; banking sector see US banking sector; capital inflows 24–5, 72; CRAs sued in 210–12; current account 23, 24; debt to GDP ratio 56, 57, 106, 107; deficit to GDP ratio 105; economic growth 2, 71; economic stability 2–3, 119; fiscal stability 57, 107; GDP 15, 16, 72, 99, 100, 106, 107, 120, 121; government surplus 105; housing market see US housing market; lowerand middle-income classes 9, 10, 22, 38; massive government spending program 46; public debt 72, 106, 107; savings and loans associations 7–8; subprime mortgage crisis see subprime mortgage crisis; ten-year interest rate spreads 273 vs German bond rates 56; trade and financial flows 23–7; unemployment rate 9, 15, 16, 21, 99, 100, 121, 126, see also euro-dollar exchange rate University of Portsmouth 192 US bailouts: automotive institutions 102; executives’ pocketing of money 33–4; Federal Housing Administration 4; financial institutions 33, 34, 36, 101–2, 113–15, 120–1; government-sponsored enterprises 10, 34 US banking sector: approval of home loan applications 28; bankruptcy 32, 33; cumulative debt owed to Fed by 125; excess reserve balances 109–10; failures 1, 2, 3; innovation and structural changes as cause of subprime mortgage crisis 27; legislation/regulation 3, 8; overview of 1; panics 2, 18n3; resistance to regulation 12–13; unethical lending practices 30, see also commercial banks; Federal Reserve system; investment banks US fiscal policy: contractionary 71; counter-cyclical 4; evaluation of 119–23; expansionary 15, 21, 22, 24, 37, 42, 57, 247; recovery from recession 71; stimulus plans 98–104 US housing market: agencies/institutions 4–8; changing structure of 7; government influence on 10–11; government involvement 8, 9, 26–7; government stabilization 3–4; house prices 3, 13–15, 22, 28, 30, 209; housing bubbles 13–15, 22, 26, 27, 38; loan applicants 28, 33, 34–5, see also home finance system (US) US monetary policy 2; comparison between the European Area and 81; contractionary 110; during the financial crisis 106–10; evaluation of 119–23; expansionary 15, 21, 22, 24, 37, 42, 80, 247; recovery from recession 71; short-term liquidity programs 110–15; to control growth of the money supply 7, see also federal funds rate; quantitative easing Valls, Manuel 151 Van Rompuy, Herman 187 Venizelos, Evangelos 187, 188, 191 Veterans Affairs Visvizi, Anna 179 Voigt, Udo 150 Volcker, Paul Volcker Rule 13, 238, 253 Volkswagen 136 274 Index wage reduction 74, 75, 147, 249 wages: Germany 136, 138; Greece 190 Wanka, Johanna 158 Washington Summit (2008) 212, 214 wealth effect 22, 38n3 Weber, Alex 81 Weidmann, Jens 51, 52, 83, 155–6, 189 welfare system (German) 136, 138 West Germany 133, 136, 137, 141, 160 Westerwelle, Guido 213 Wieser, Thomas 191 Wilmarth, Arthur 238 women: impact of austerity on, Greece 192 working time accounts 139–40 Works Councils (Germany) 140 World Bank 144 World Trade Organization (WTO) 142 World War II ‘reparations’ issue 195–8 Wren, Olin 215 Yellen, Janet 118 young people: emigration from recessioninflicted countries 46 Zacaro, Ludwig 199 zero-bound federal funds 106, 110, 115, 117, 119, 120 ... Publication Data Zestos, George K The global financial crisis : from US subprime mortgages to European sovereign debt / George K Zestos pages cm Includes bibliographical references and index Financial. .. xxv From the Great Depression to the Great Recession Causes of the US subprime mortgage crisis 21 The crisis spreads to Europe 42 Why the European sovereign debt crisis has lasted so long 69 US. .. many of the subprime mortgages and sold them in the US and abroad The US subprime mortgage crisis initially entered Europe when US mortgagerelated securities were sold to European investors who