Two Economies in the United States
Basics for Understanding our Economic Crisis
john elfrank-dana


source: http://politicalhumor.about.com/od/economy/ig/Economic-Cartoons/Bailout.-Vqd.htm

In the United States, the past 30 years has seen the "financialization" of our economy. We have become a nation less and less of producers of goods and services and more and more of paper-pushers.

The REAL Economy The Financial Economy
The "real" economy makes goods and services for us and the rest of the world to consume. These examples*, however, have been largely shifted to outside the country like China and Mexico.

Examples include:

Building Houses
Building Automobiles*
Health Care
Electronics*
Restaurants
Groceries
Entertainment
Technology*
Apparel (clothing)*

 

Traditional Real Economy 1950s- 1970's
The American middle class was largely built on skilled labor (non-college) who worked in factories and other service sector jobs. Pay was so good that one of these jobs typically could support a family of four.

 

Recent Factors affecting REAL economy:

-The North American Free Trade Agreement (NAFTA)/ -The General Agreement on Tariffs and Trade (GATT)
Two treaties that shifted production jobs outside of the U.S. A Republican initiative signed into law by Democratic President Bill Clinton.

Union busting: With President Reagan (1980s) decertifying PATCO union, unions have lost a lot of power to gain real wage increases and protections for their workers.

The Fallout:

1. The American middle class real wages have steadily declined. Good paying jobs have left the country for those without a college education.

2. Americans have chosen to use credit cards to "buy the American dream" amassing debt.

3. Americans have taken out loans they could not possibly pay back to purchase homes.
 

  Not the "real" economy because it exits to serve the "real" economy. It serves it by providing capital for investment, which in turn is supposed to create jobs and produce goods and services in the "real" economy.

Examples Include:

Banks - made bad loans that could not be repaid
Investment Banks - bundled bad loans and sold them to investors as "mortgaged back securities"
Rating Agencies: like Standard & Poors who rated these securities with AAA (excellent) ratings.
Insurance Companies - Like AIG, who guaranteed the bad loans
Mortgage Brokers - who helped push the Adjustable Rate Mortgages (ARM) to people would eventually have to may much more to pay off down the road.
Credit Cards - Who made money from trickery and fine print that created large fees to users.

Traditional Business Model
Banks make money by lending money at interest (the price of money).

Traditional Banking: a 3 - 6 - 3 business.
Get money at 3% (from depositors and Fed), lend it at 6% (netting a 3% profit), get on the golf course by 3 PM. ;-)

Factors that Changed Banking in the Last Few

decades.

1. DEREGULATION- Banks, insured by the American Tax Payer, were allowed to engage in risky behavior with depositor's money.

2. New Loan Instruments - Adjustable Rate Mortgages (ARMs) and Derivatives (contracts that derive their value from other contracts) come on to the sceen in the 1980s - 1990s.
 

The Fallout:

1. Banks made "bad loans" (ones that will not be paid back), but sold those loans on the derivative market.
2. Taxpayer Bailout:  You and your parents paid hundreds of billions of dollars to these banks to keep them open.
3. Millions of Americans have lost their jobs.
4. Massive cuts in education spending have taken place.

Review Questions: Put in Cornell format. Make a summary and list anticipated questions.

1. What makes the "real" economy, "real"?

2. How is the financial economy supposed to support the real economy?

3. Define: "Financialization" as used at the top.

4. What changes have affected the "real economy"?

5. What changes have affected the "financial economy"?

6. What has been the effects of the changes in the  "financial economy"?

7. In the cartoon above the caption reads, "Sharing profits worked differently." Explain what is assumed to be profits in the picture.