CMP Associates Regulation Blog: Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk: Part I

Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk

Carlos M. Pelaez

Executive Summary

I Mediocre and Decelerating United States Economic Growth

IA Collapse of United States Dynamism of Income Growth and Employment Creation

II United States Housing Collapse and Commercial Banks Assets and Liabilities

IIA United States Housing Collapse

IIA1 United States New House Sales

IIA2 United States House Prices

IIA3 Factors of United States Housing Collapse

IIB United States Commercial Banks Assets and Liabilities

IIB1 Transmission of Monetary Policy

IIB2 Functions of Banks

IIB3 United States Commercial Banks Assets and Liabilities

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

Executive Summary

ESI Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth and without jobs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IIIQ(2012) has been at the average annual rate of 2.2 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 28.7 million unemployed or underemployed in the United States for an effective unemployment rate of 17.8 percent (http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html).

The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.4 percent on an annual basis in 2010 and 1.8 percent in 2011 to cumulative growth of 1.3 percent in the first three quarters of 2012, which is equivalent to 1.77 percent per year. This rate is well below 3 percent per year in trend from 1870 to 2010, which has been always recovered after events such as wars and recessions (Lucas 2011May). Growth is not only mediocre but sharply decelerating to a rhythm that is not consistent with reduction of unemployment and underemployment of 28.7 million people corresponding to 17.8 percent of the effective labor force of the United States (http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html). In the four quarters of 2011 and the first three quarters of 2012, US real GDP grew at the seasonally-adjusted annual equivalent rates of 0.1 percent in the first quarter of 2011 (IQ2011), 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011, 4.1 percent in IVQ2011, 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.0 percent in IIIQ2012. The annual equivalent rate of growth of GDP for the four quarters of 2011 and the first three quarters of 2012 is 1.9 percent, obtained as follows. Discounting 0.1 percent to one quarter is 0.025 percent {[(1.001)^1/4 -1]100 = 0.025}; discounting 2.5 percent to one quarter is 0.62 percent {[(1.025)^1/4 – 1]100}; discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 – 1]100}; discounting 4.1 percent to one quarter is 1.0 {[(1.04)^1/4 -1]100; discounting 2.0 percent to one quarter is 0.50 percent {[(1.020)^1/4 -1]100); discounting 1.3 percent to one quarter is 0.32 percent {[(1.013)^1/4 -1]100}; and discounting 2.0 percent to one quarter is 0.50 {[(1.020)^1/4 -1]100). Real GDP growth in the four quarters of 2011 and the first three quarters of 2012 accumulated to 3.3 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.005) - 1]100 = 3.3%}. This is equivalent to growth from IQ2011 to IIIQ2012 obtained by dividing the seasonally-adjusted annual rate (SAAR) of IIIQ2012 of $13,616.2 billion by the SAAR of IVQ2010 of $13,181.2(http://www.bea.gov/iTable/iTable.cfm?ReqID=9&step=1 and Table I-6 below) and expressing as percentage {[($13,616.2/$13,181.2) - 1]100 = 3.3%}. The growth rate in annual equivalent for the four quarters of 2011 and the first three quarters of 2012 is 1.9 percent {[(1.00025 x 1.0062 x 1.0032 x 1.010 x 1.005 x 1.0032 x 1.005)^4/7 -1]100 =1.9%], or {[($13,616.2/$13,181.2)]^4/7-1]100 = 1.9%} dividing the SAAR of IIIQ2012 by the SAAR of IVQ2010 in Table I-6 below, obtaining the average for seven quarters and the annual average for one year of four quarters. Growth in the first three quarters of 2012 accumulates to 1.3 percent {[(1.02)^1/4(1.013)^1/4(1.02)^1/4 -1]100 = 1.3%}, which is equivalent to 1.77 percent per year {([(1.02)^1/4(1.013)^1/4(1.02)^1/4 ]^4/3 – 1]100 = 1.77%}. The US economy is still close to a standstill especially considering the GDP report in detail. Excluding growth at the SAAR of 2.5 percent in IIQ2011 and 4.1 percent in IVQ2011, the US economy grew at 1.3 percent in the remaining five quarters {[(1.00025x1.0032x1.005x1.0032x1.005)^4/5 – 1]100 = 1.3%} with declining growth trend in three consecutive quarters from 4.1 percent in IVQ2011, to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.0 percent in IIIQ2012. Weakness of growth is shown by the exceptional one-time contributions to growth from items that are not aggregate demand, 2.53 percentage points contributed by inventory change to growth of 4.1 percent in IVQ2011 and 0.64 percentage points contributed by expenditures in national defense to growth of 2.0 percent in IIIQ2012. The Bureau of Economic Analysis (BEA) of the US Department of Commerce released on Fri Oct 26, 2012, the first estimate of GDP for IIIQ2012 at 2.0 percent seasonally-adjusted annual rate (SAAR) (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf).

The objective of this section is analyzing US economic growth in the current cyclical expansion. There is initial discussion of the conventional explanation of the current recovery as being weak because of the depth of the contraction and the financial crisis and also brief discussion of the concept of “slow-growth recession.” The bulk of the section consists of comparison of the current growth experience of the US with earlier expansions after past deep contractions and consideration of recent performance.

This blog has analyzed systematically the weakness of the United States recovery in the current business cycle from IIIQ2009 to the present in comparison with the recovery from the two recessions in the 1980s from IQ1983 to IVQ1985. The United States has grown on average at 2.2 percent annual equivalent in the 13 quarters of expansion since IIIQ2009 while growth was 6.2 percent on average in recoveries after World War II and 5.7 percent from IQ1983 to IVQ1985. The conventional explanation is that the recession from IVQ2007 (Dec) to IIQ2009 (Jun) was so profound that it caused subsequent weak recovery and that historically growth after recessions with financial crises has been weaker. Michael D. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) provide evidence contradicting the conventional explanation: recovery is much stronger on average after profound contractions and also much stronger after recessions with financial crises than after recessions without financial crises. Insistence on the conventional explanation prevents finding policies that can accelerate growth, employment and prosperity.

Characteristics of the four cyclical contractions are provided in Table ESI-1 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 4.7 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table ESI-1, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-4.7	-0.80

Sources: Business Cycle Reference Dates: http://www.nber.org/cycles.html US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table ESI-2 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twelve quarters of the current cyclical expansion from IIIQ2009 to IIQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 percent decelerating to 1.8 percent annual growth in 2011 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 0.82 percent in the first three quarters of 2012 {[(1.02)^1/4(1.013)^1/4(1.02)^1/4 – 1]100 = 1.3%}, which is equivalent to 1.77 percent per year {([(1.02)^1/4(1.013)^1/4(1.02)^1/4 ]^4/3 – 1)100 = 1.77%}. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table ESI-2, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIIQ2012	13	7.2	2.2

Sources: Business Cycle Reference Dates: http://www.nber.org/cycles.html US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart ESI-1 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart ESI-1, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart ESI-1 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first twelve quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Chart ESI-2, US, Real GDP, 2007-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

As shown in Tables ESI-1 and ESI-2 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 7.2 percent (last row in Table ESI-2), using all latest revisions. As a result, the level of real GDP in IIQ2012 with the first estimate and revisions is only higher by 2.2 percent than the level of real GDP in IVQ2007. Table ESI-3 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IIQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in four successive quarters from IVQ2009 to IIQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)⁴ – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)⁴ – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)^4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table ESI-3 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.5 percent in IIIQ2012 and 2.3 percent relative to IIIQ2011. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table ESI-3, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,711.0	-4.6	-1.3	-4.2
IIQ2009	12,701.0	-4.7	-0.1	-4.6
IIIQ2009	12,746.7	-4.3	0.4	-3.3
IV2009	12,873.1	-3.4	1.0	-0.1
IQ2010	12,947.6	-2.8	0.6	1.9
IIQ2010	13,019.6	-2.3	0.6	2.5
IIIQ2010	13,103.5	-1.7	0.6	2.8
IVQ2010	13,181.2	-1.1	0.6	2.4
IQ2011	13,183.8	-1.1	0.0	1.8
IIQ2011	13,264.7	-0.5	0.6	1.9
IIIQ2011	13,306.9	-0.1	0.3	1.6
IV2011	13,441.0	0.9	1.0	2.0
IQ2012	13,506.4	1.4	0.5	2.4
IIQ2012	13,548.5	1.7	0.3	2.1
IIIQ2012	13,616.2	2.2	0.5	2.3

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

ESII Exiting Quantitative Easing QE∞. Monetary policy can lower short-term interest rates quite effectively. Lowering long-term yields is somewhat more difficult. The critical issue is that monetary policy cannot ensure that increasing credit at low interest cost increases consumption and investment. There is a large variety of possible allocation of funds at low interest rates from consumption and investment to multiple risk financial assets. Monetary policy does not control how investors will allocate asset categories. A critical financial practice is to borrow at low short-term interest rates to invest in high-risk, leveraged financial assets. Investors may increase in their portfolios asset categories such as equities, emerging market equities, high-yield bonds, currencies, commodity futures and options and multiple other risk financial assets including structured products. If there is risk appetite, the carry trade from zero interest rates to risk financial assets will consist of short positions at short-term interest rates (or borrowing) and short dollar assets with simultaneous long positions in high-risk, leveraged financial assets such as equities, commodities and high-yield bonds. Low interest rates may induce increases in valuations of risk financial assets that may fluctuate in accordance with perceptions of risk aversion by investors and the public. During periods of muted risk aversion, carry trades from zero interest rates to exposures in risk financial assets cause temporary waves of inflation that may foster instead of preventing financial instability (http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism.html). During periods of risk aversion such as fears of disruption of world financial markets and the global economy resulting from collapse of the European Monetary Union, carry trades are unwound with sharp deterioration of valuations of risk financial assets. More technical discussion is in IA Appendix: Transmission of Unconventional Monetary Policy at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html.

It may be quite painful to exit QE∞ or use of the balance sheet of the central together with zero interest rates forever. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that discount rates increase without bound, then V → 0, or

declines.

The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent restatement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption decisions is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞. Equally, as r→∞, W→∞. Monetary policy is constrained in a QE∞ trap with all adverse effects of financial repression and resource misallocation.

Modern banking theory analyzes three important functions provided by banks: monitoring of borrowers, provision of liquidity services and transformation of illiquid assets into immediately liquid assets (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 51-60). These functions require valuation of alternative investment projects that may be distorted by zero interest rates of monetary policy and artificially low long-term interest rates. The QE∞ trap frustrates essential banking functions.

1. Monitoring. Banks monitor projects to ensure that funds are allocated to their intended projects (Diamond 1984, 1996). Banks issue deposits, which are secondary assets, to acquire loans, which are primary assets. Monitoring reduces costs of participating in business projects. Acting as delegated monitor, banks obtain information on the borrower, allowing less costly participation through the issue of unmonitored deposits. Monitoring of borrowers provides enhanced less costly participation by investors through the issue of deposits. There is significant reduction of monitoring costs by delegating to a bank. If there are many potential investors, monitoring by the bank of a credit name is less costly than the sum of individual monitoring of the same credit name by all potential investors. Banks permit borrowers to reach many investors for their projects while affording investors less costly participation in the returns of projects of bank borrowers.

2. Transformation of Illiquid Loans into Liquid Deposits. Diamond and Dybvig (1986) analyze bank services through their balance sheets.

i. Assets. Banks provide loans to borrowers. The evaluation of borrowers prevents “adverse selection,” which consists of banks choosing unsound projects and failing to finance sound projects. Monitoring of loans prevents “moral hazard,” which consists of borrowers using the funds of the loan for purposes other than the project for which they were lent, as for example, using borrowed bank funds for speculative real estate instead of for the intended industrial project. Relationship banking improves the information on borrowers and the monitoring function.

ii. Liabilities. Banks provide numerous services to their clients such as holding deposits, clearing transactions, currency inventory and payments for goods, services and obligations.

iii. Assets and Liabilities: Transformation Function. The transformation function operates through both sides of the balance sheet: banks convert illiquid loans in the asset side into liquid deposits in the liability side. There is rich theory of banking (Diamond and Rajan 2000, 2001a,b). Securitized banking provides the same transformation function by bundling mortgage and other consumer loans into securities that are then sold to investors who finance them in short-dated sale and repurchase agreements (Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 61-6).

Data and analysis on US commercial bank assets and liabilities are introduced below in two forms: two tables provide not seasonally adjusted (NSA) assets and liabilities from Sep 2011 to Sep 2012 and seasonally adjusted annual rates of percentage change (SAAR); and a group of charts permits different perspectives of longer historical series.

Selected assets and liabilities of US commercial banks, not seasonally adjusted, in billions of dollars, from Report H.8 of the Board of Governors of the Federal Reserve System are provided in Table ESII-1. Data are not seasonally adjusted to permit comparison between Sep 2011 and Sep 2012. Total assets of US commercial banks grew 3.2 percent from $12,479 billion in Sep 2011 to $12,874 billion in Sep 2012. US GDP in 2011 is estimated at $15,076 billion (http://www.bea.gov/iTable/index_nipa.cfm). Thus, total assets of US commercial banks are equivalent to around 80 percent of US GDP. Bank credit grew 5.9 percent from $9288 billion in Sep 2011 to $9836 billion in Sep 2012. Securities in bank credit increased 8.2 percent from $2473 billion in Sep 2011 to $2677 billion in Sep 2012. A large part of securities in banking credit consists of US Treasury and agency securities, growing 10.2 percent from $1675 billion in Sep 2011 to $1846 billion in Sep 2012. Credit to the government that issues or backs Treasury and agency securities of $1846 in Sep 2012 is about 18.8 percent of total bank credit of US commercial banks of $9836 billion. Mortgage-backed securities, providing financing of home loans, grew 11.4 percent, from $1203 billion in Sep 2011 to $1340 billion in Sep 2012. Loans and leases were less dynamic, growing 5.0 percent from $6816 billion in Sep 2011 to $7160 billion in Sep 2012. The only dynamic class is commercial and industrial loans, growing 13.3 percent from Sep 2011 to Sep 2012 and providing $1464 billion or 20.5 percent of total loans and leases of $7160 billion in Sep 2012. Real estate loans increased only 1.6 percent, providing $3541 billion in Sep 2012 or 49.5 percent of total loans and leases. Consumer loans increased only 2.3 percent, providing $1114 billion in Sep 2012 or 15.6 percent of total loans. Cash assets “include vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks” (http://www.federalreserve.gov/releases/h8/current/default.htm). Cash assets in US commercial banks fell 6.9 percent from $1721 billion in Sep 2011 to $1603 billion in Sep 2012 but a single year of the series masks exploding cash in banks as a result of unconventional monetary policy, which is discussed below. Bank deposits increased 6.7 percent from $8343 billion to $8898 billion. The difference between bank deposits and total loans and leases in banks increased from $1527 billion in Sep 2011 to $1738 billion in Sep 2012 or by $211 billion, which is roughly equal to the increase in securities in bank credit by $201 billion from $2450 billion in Sep 2011 to $2651 billion in Sep 2012 and to the increase in Treasury and agency securities by $204 billion from $2473 billion in Sep 2011 to $2677 billion in Sep 2012. Loans and leases increased $344 billion from $6816 billion in Sep 2011 to $7160 billion in Sep 2012. Banks expanded both lending and investment in lower risk securities partly because of the weak economy and credit disappointments during the global recession that has resulted in an environment of fewer sound lending opportunities. Lower interest rates resulting from monetary policy may not necessarily encourage higher borrowing in the current loss of dynamism of the US economy with real disposable income per capita in IIQ2012 lower than in IVQ2007 in contrast with long-term growth of per capita income in the United States at 2 percent per year from 1870 to 2010 (Lucas 2011May).

Table ESII-1, US, Assets and Liabilities of Commercial Banks, NSA, Billions of Dollars

	Sep 2011	Sep 2012	∆%
Total Assets	12,479	12,874	3.2
Bank Credit	9288	9836	5.9
Securities in Bank Credit	2473	2677	8.2
Treasury & Agency Securities	1675	1846	10.2
Mortgage-Backed Securities	1203	1340	11.4
Loans & Leases	6816	7160	5.0
Real Estate Loans	3486	3541	1.6
Consumer Loans	1089	1114	2.3
Commercial & Industrial Loans	1297	1464	12.9
Other Loans & Leases	944	1041	10.3
Cash Assets*	1721	1603	-6.9
Total Liabilities	11,039	11,380	3.1
Deposits	8343	8898	6.7

Note: balancing item of residual assets less liabilities not included

*”Includes vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks.”

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h8/current/default.htm

Seasonally adjusted annual equivalent rates (SAAR) of change of selected assets and liabilities of US commercial banks from the report H.8 of the Board of Governors of the Federal Reserve System are provided in Table ESII-2 annually from 2007 to 2011 and for Aug and Sep 2012. The global recession had strong impact on bank assets as shown by declines of total assets of 6.0 percent in 2009 and 2.7 percent in 2010. Loans and leases fell 10.2 percent in 2009 and 5.8 percent in 2010. Commercial and industrial loans fell 18.6 percent in 2009 and 8.9 percent in 2011. Unconventional monetary policy caused an increase of cash assets of banks of 157.3 percent in 2008, 47.9 percent in 2009 and 47.6 percent in 2011 and at the SAAR of 30.3 percent in Aug 2012 but contraction by 65.1 percent in Sep 2012. Acquisitions of securities for the portfolio of the central bank injected reserves in depository institutions that were held as cash and reserves at the central banks because of the lack of sound lending opportunities and the adverse expectations in the private sector on doing business. The truly dynamic investment of banks has been in securities in bank credit, growing at the SAAR of 15.4 percent in Jul 2012 and 6.7 percent in Sep 2012. Throughout the crisis banks allocated increasing part of their assets to the safety of Treasury and agency securities, or credit to the US government and government-backed credit, with growth of 15.5 percent in 2009 and 15.1 percent in 2010 and at the rate of 16.2 percent in Jul 2012, declining to the rate of 4.7 percent in Aug 2012 and 2.7 percent in Sep 2012. Deposits grew at the rate of 10.5 percent in Jul 2012, with the rate declining as for most assets of commercial banks to the rate of 5.4 percent in Aug 2012 and 7.7 percent in Sep 2012. The credit intermediation function of banks is broken because of adverse expectations on future business and is not easily mended simply by monetary and fiscal policy. Incentives to business and consumers are more likely to be effective in this environment in recovering willingness to assume risk on the part of the private sector, which is the driver of growth and job creation.

Table ESII-2, US, Selected Assets and Liabilities of Commercial Banks, Seasonally Adjusted Annual Rate, ∆%

	2007	2008	2009	2010	2011	Aug 12	Sep 12
Total Assets	10.4	7.9	-6.0	-2.7	5.3	2.5	-5.3
Bank Credit	9.3	2.2	-6.6	-2.8	1.8	2.9	3.4
Securities in Bank Credit	6.1	-2.1	6.8	6.8	1.7	2.9	6.7
Treasury & Agency Securities	-6.4	3.0	15.5	15.1	2.8	4.7	2.7
Other Securities	26.7	-8.4	-5.1	-7.0	-0.7	-1.3	15.6
Loans & Leases	10.2	3.4	-10.2	-5.8	1.8	2.9	2.2
Real Estate Loans	7.1	-0.1	-5.6	-5.6	-3.8	-0.7	2.1
Consumer Loans	5.4	5.1	-3.3	-6.9	-0.6	2.3	1.3
Commercial & Industrial Loans	18.1	12.9	-18.6	-8.9	9.6	8.8	1.4
Other Loans & Leases	19.2	1.7	-23.3	0.1	18.8	7.4	4.3
Cash Assets	-0.1	157.3	47.9	-7.8	47.6	30.0	-65.1
Total Liabilities	11.2	10.5	-7.3	-3.5	5.4	0.6	-2.5
Deposits	9.1	5.4	5.2	2.4	6.6	5.4	7.7

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-1 of the Board of Governors of the Federal Reserve System provides cash assets in commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Acquisitions of securities for the portfolio of the central bank were processed by increases in bank cash reserves. There is no comparable experience in US economic history and such flood of money was never required to return US economic growth to trend of 3 percent per year and 2 percent per year in per capita income after events such as recessions and wars (Lucas 2011May). It is difficult to argue that higher magnitudes of monetary and fiscal policy impulses would have been more successful. Selective incentives to the private sector of a long-term nature could have been more effective.

Chart ESII-1, US, Cash Assets in Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-2 of the Board of Governors of the Federal Reserve System provides total assets of Federal Reserve Banks in millions of dollars on Wednesdays from 2002 to 2012. This is what is referred as the leverage of the central bank balance sheet in monetary policy (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-62, Regulation of Banks and Finance (2009b) 224-27). Consecutive rounds of unconventional monetary policy increased total assets by purchase of mortgage-backed securities, agency securities and Treasury securities. Bank reserves in cash and deposited at the central bank swelled as shown in Chart IIB-8. The central bank created assets in the form of securities financed with creation of liabilities in the form of reserves of depository institutions.

Chart ESII-2, US, Total Assets of Federal Reserve Banks, Wednesday Level, Millions of Dollars, 2002 to 2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1

Chart ESII-3 of the Board of Governors of the Federal Reserve System provides deposits in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Deposit growth clearly accelerated after 2001 and continued during the current cyclical expansion after bumps during the global recession.

Chart ESII-3, US, Deposits in Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-4 of the Board of Governors of the Federal Reserve System provides Treasury and agency securities in US commercial banks, not seasonally adjusted, in billions of dollars from 1973 to 2012. Holdings stabilized between the recessions of 2001 and after IQ2007. There was rapid growth during the global contraction especially after unconventional monetary policy in 2008 and nearly vertical increase without prior similar historical experience during the various bouts of unconventional monetary policy. Banks hoard cash and less risky Treasury and agency securities instead of risky lending because of the weakness of the economy and the lack of demand for financing sound business projects.

Chart ESII-4, US, Treasury and Agency Securities in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-5 of the Board of Governors of the Federal Reserve System provides total loans and leases in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Total loans and leases of US commercial banks contracted sharply and have stalled during the cyclical expansion.

Chart ESII-5, US, Loans and Leases in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-6 of the Board of Governors of the Federal Reserve System provides real estate loans in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Housing subsidies and low interest rates caused a point of inflexion to higher, nearly vertical growth until 2007. Real estate loans have contracted in downward trend partly because of adverse effects of uncertainty on the impact on balance sheets of the various mechanisms of resolution imposed by policy.

Chart ESII-6, US, Real Estate Loans in Bank Credit, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart ESII-7 of the Board of Governors of the Federal Reserve System provides consumer loans in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Consumer loans even increased during the contraction then declined and increased vertically to decline again. There was high demand for reposition of durable goods that exhausted and limited consumption again with increase in savings rates in recent periods.

Chart ESII-7, US, Consumer Loans in Bank Credit, Not Seasonally Adjusted, US Commercial Banks, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Finally, Chart ESII-8 of the Board of Governors of the Federal Reserve System provides commercial and industrial loans not seasonally adjusted in billions of dollars from 1973 to 2012. Commercial and industrial loans fell sharply during both contractions in 2001 and after IVQ2007 and then rebounded with accelerated growth. Commercial and industrial loans have not reached again the peak during the global recession.

Chart ESII-8, US, Commercial and Industrial Loans in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

ESIII United States Housing Collapse. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective with recent improvement at the margin. Table ESIII-1 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). House sales fell in nine of twenty one months from Jan 2011 to Sep 2012 but mostly concentrated in Jan-Feb 2011 and May-Aug 2011. In Jan-Apr 2012, house prices increased at the annual equivalent rate of 17.6 percent and at 22.3 percent in May-Sep 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 56.4 percent. The annual equivalent rate in May-Aug 2011 was minus 18.1 percent and minus 12.2 percent in Jan-Apr 2011 but after increase of 13.6 percent in Dec 2010.

Table ESIII-1, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Sep 2012	389	5.7
Aug	368	-1.3
Jul	373	3.6
Jun	360	-2.4
May	369	3.1
AE ∆% May-Sep		22.3
Apr	358	1.7
Mar	352	-3.8
Feb	366	7.9
Jan	339	0.0
AE ∆% Jan-Apr		17.6
Dec 2011	339	3.7
Nov	327	4.1
Oct	314	2.6
Sep	306	4.8
AE ∆% Sep-Dec		56.4
Aug	292	-1.7
Jul	297	-2.3
Jun	304	-1.3
May	308	-1.3
AE ∆% May-Aug		-18.1
Apr	312	3.7
Mar	301	10.3
Feb	273	-11.4
Jan	308	-5.5
AE ∆% Jan-Apr		-12.2
Dec 2010	326	13.6

AE: Annual Equivalent

Source: US Census Bureau http://www.census.gov/construction/nrs/

There is additional information of the report of new house sales in Table ESIII-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.5 in Jul and Aug 2012. Median and average house prices oscillate. In Sep 2012, median prices of new houses sold not seasonally adjusted (NSA) decreased 3.2 percent but after increasing revised 5.8 percent in Aug and increasing 1.8 percent in Jul. Average prices decreased 0.5 percent in Sep 2012 but after increasing 4.8 percent in Aug and 3.2 percent in Jul. Between Dec 2010 and Sep 2012, median prices increased 0.5 percent and average prices 0.2 percent. Median house prices increased 10.9 percent from Dec 2011 to Sep 2012 while average price houses increased 11.2 percent. Price increases concentrated in 2012. There are only seven months with price increases in both median and average house prices: Apr 2011 with 1.9 percent in median prices and 3.1 percent in average prices, Jun 2011 with 8.2 percent in median prices and 3.9 percent in average prices, Oct 2011 with 3.6 percent in median prices and 1.1 percent in average prices, Dec 2011 with 2.0 percent in median prices and 5.2 percent in average prices, Jan 2012 with 1.4 percent in median prices and 1.1 percent in average prices, Feb 2012 with 8.2 percent in median prices and 3.1 percent in average prices, Jul with 1.8 percent in median and 3.2 percent in average and Aug 2012 with 5.8 percent in median prices and 4.8 percent in average prices. Median prices of new houses sold in the US fell in ten of the 20 months from Jan 2011 to Aug 2012 and average prices fell in eleven months.

Table ESIII-2, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Sep	4.5	242,400	-3.2	292,400	-0.5
Aug	4.7	250,400	5.8	293,900	4.8
Jul	4.6	236,700	1.8	280,500	3.2
Jun	4.8	232,600	-2.8	271,800	-3.2
May	4.7	239,200	1.2	280,900	-2.4
Apr	4.9	236,400	-1.4	287,900	1.5
Mar	4.9	239,800	0.0	283,600	3.5
Feb	4.8	239,900	8.2	274,000	3.1
Jan	5.3	221,700	1.4	265,700	1.1
Dec 2011	5.4	218,600	2.0	262,900	5.2
Nov	5.7	214,300	-4.7	250,000	-3.2
Oct	6.1	224,800	3.6	258,300	1.1
Sep	6.3	217,000	-1.2	255,400	-1.5
Aug	6.6	219,600	-4.5	259,300	-4.1
Jul	6.7	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.6	222,000	-1.2	262,700	-2.3
Apr	6.7	224,700	1.9	268,900	3.1
Mar	7.1	220,500	0.2	260,800	-0.8
Feb	8.0	220,100	-8.3	262,800	-4.7
Jan	7.3	240,100	-0.5	275,700	-5.5
Dec 2010	7.0	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

Source: US Census Bureau http://www.census.gov/construction/nrs/

The depressed level of residential construction and new house sales in the US is evident in Table ESIII-3 providing new house sales not seasonally adjusted in Jan-Sep of various years. Sales of new houses in Jan-Sep 2012 are substantially lower than in any year between 1963 and 2012 with the exception of 2010 and 2011. There is only one increase of 11.3 percent between Jan-Sep 2011 and Jan-Sep 2012. Sales of new houses in 2012 are lower by 2.1 percent relative to Jan-Sep 2009, 28.8 percent relative to 2008, 54.7 percent relative to 2007, 65.9 percent relative to 2006 and 71.6 percent relative to 2005. The housing boom peaked in 2005 and 2006 when increases in fed funds rates to 5.25 percent in Jun 2006 from 1.0 percent in Jun 2004 affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan-Sep 2012 relative to the same period in 2004 fell 69.5 percent and 66.4 percent relative to the same period in 2003. Similar percentage declines are also observed for 2012 relative to years from 2000 to 2004. Sales of new houses in Jan-Sep 2012 fell 45.4 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hoobs and Snoops 2012, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table ESIII-3 reveals catastrophic data: sales of new houses in Jan-Sep 2012 of 285 thousand units are lower by 36.1 percent relative to 446 thousand units houses sold in Jan-Sep 1963, the first year when data become available, while population increased 72.2 percent.

Table ESIII-3, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Sep 2012	285
Jan-Sep 2011	234
∆%	21.8
Jan-Sep 2010	256
∆% Jan-Sep 2012/ Jan-Sep 2010	11.3
Jan-Sep 2009	291
∆% Jan-Sep 2012/ Jan-Aug 2009	-2.1
Jan-Sep 2008	400
∆% Jan-Sep 2012/ Jan-Sep 2008	-28.8
Jan-Sep 2007	629
∆% Jan-Sep 2012/ Jan-Sep 2007	-54.7
Jan-Sep 2006	835
∆% Jan-Sep 2012/Jan-Sep 2006	-65.9
Jan-Sep 2005	1,005
∆% Jan-Sep 2012/Jan-Sep 2005	-71.6
Jan-Sep 2004	935
∆% Jan-Sep 2012/Jan-Sep 2004	-69.5
Jan-Sep 2003	848
∆% Jan-Sep 2012/ Jan-Sep 2003	-66.4
Jan-Sep 2002	753
∆% Jan-Sep 2012/ Jan-Sep 2001	-62.2
Jan-Sep 2001	709
∆% Jan-Sep 2012/ Jan-Sep 2001	-59.8
Jan-Sep 2000	679
∆% Jan-Sep 2012/ Jan-Sep 2000	-58.0
Jan-Sep 1995	522
∆% Jan-Sep 2012/ Jan-Sep 1995	-45.4
Jan-Sep 1963	446
∆% Jan-Sep 2012/ Jan-Sep 1963	-36.1

Source: US Census Bureau http://www.census.gov/construction/nrs/

Table ESIII-4 provides the entire available annual series of new house sales from 1963 to 2011. The revised level of 306 thousand new houses sold in 2011 is the lowest since 560,000 in 1963 in the 48 years of available data. In that period, the population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. In fact, there is no year from 1963 to 2011 in Table ESIII-4 with sales of new houses below 400 thousand with the exception of the immediately preceding years of 2009 and 2010.

Table ESIII-4, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323
2011	306

Source: US Census Bureau http://www.census.gov/construction/nrs/

Chart ESIII-1 of the US Bureau of the Census provides the entire monthly sample of new houses sold in the US between Jan 1963 and Sep 2012 without seasonal adjustment. The series is almost stationary until the 1990s. There is sharp upward trend from the early 1990s to 2005-2006 after which new single-family houses sold collapse to levels below those in the beginning of the series in the 1960s.

Chart ESIII-1, US, New Single-family Houses Sold, NSA, 1963-2012

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table ESIII-5. The percentage change of new house sales from 1963 to 2011 is minus 45.4 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2011 fell 54.1 percent relative to the same period in 1995.

Table ESIII-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2011	-45.4	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2011	-54.1	NA
2000-2011	-65.1	NA
2005-2011	-76.1	NA

NA: Not Applicable

Source: US Census Bureau

http://www.census.gov/construction/nrs/

ESIV Global Financial and Economic Risk. The International Monetary Fund (IMF) provides an international safety net for prevention and resolution of international financial crises. The IMF’s Financial Sector Assessment Program (FSAP) provides analysis of the economic and financial sectors of countries (see Pelaez and Pelaez, International Financial Architecture (2005), 101-62, Globalization and the State, Vol. II (2008), 114-23). Relating economic and financial sectors is a challenging task both for theory and measurement. The IMF provides surveillance of the world economy with its Global Economic Outlook (WEO) (http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf), of the world financial system with its Global Financial Stability Report (GFSR) (http://www.imf.org/external/pubs/ft/gfsr/2012/02/index.htm) and of fiscal affairs with the Fiscal Monitor (http://www.imf.org/external/pubs/ft/fm/2012/02/pdf/fm1202.pdf). There appears to be a moment of transition in global economic and financial variables that may prove of difficult analysis and measurement. It is useful to consider a summary of global economic and financial risks, which are analyzed in detail in the comments of this blog in Section VI Valuation of Risk Financial Assets, Table VI-4.

Economic risks include the following:

1. China’s Economic Growth. China is lowering its growth target to 7.5 percent per year. The growth rate of GDP of China in the third quarter of 2012 of 2.2 percent is equivalent to 9.1 percent per year and GDP increased 7.4 percent relative to the third quarter of 2011.

2. United States Economic Growth, Labor Markets and Budget/Debt Quagmire. The US is growing slowly with 28.7 million in job stress, fewer 10 million full-time jobs, high youth unemployment, historically-low hiring and declining real wages.

3. Economic Growth and Labor Markets in Advanced Economies. Advanced economies are growing slowly. There is still high unemployment in advanced economies.

4. World Inflation Waves. Inflation continues in repetitive waves globally (see Section I).

A list of financial uncertainties includes:

1. Euro Area Survival Risk. The resilience of the euro to fiscal and financial doubts on larger member countries is still an unknown risk.

2. Foreign Exchange Wars. Exchange rate struggles continue as zero interest rates in advanced economies induce devaluation of their currencies.

3. Valuation of Risk Financial Assets. Valuations of risk financial assets have reached extremely high levels in markets with lower volumes.

4. Duration Trap of the Zero Bound. The yield of the US 10-year Treasury rose from 2.031 percent on Mar 9, 2012, to 2.294 percent on Mar 16, 2012. Considering a 10-year Treasury with coupon of 2.625 percent and maturity in exactly 10 years, the price would fall from 105.3512 corresponding to yield of 2.031 percent to 102.9428 corresponding to yield of 2.294 percent, for loss in a week of 2.3 percent but far more in a position with leverage of 10:1. Min Zeng, writing on “Treasurys fall, ending brutal quarter,” published on Mar 30, 2012, in the Wall Street Journal (http://professional.wsj.com/article/SB10001424052702303816504577313400029412564.html?mod=WSJ_hps_sections_markets), informs that Treasury bonds maturing in more than 20 years lost 5.52 percent in the first quarter of 2012.

5. Credibility and Commitment of Central Bank Policy. There is a credibility issue of the commitment of monetary policy (Sargent and Silber 2012Mar20).

6. Carry Trades. Commodity prices driven by zero interest rates have resumed their increasing path with fluctuations caused by intermittent risk aversion.

It is in this context of economic and financial uncertainties that decisions on portfolio choices of risk financial assets must be made. There is a new carry trade that learned from the losses after the crisis of 2007 or learned from the crisis how to avoid losses. The sharp rise in valuations of risk financial assets shown in Table VI-1 in the text after the first policy round of near zero fed funds and quantitative easing by the equivalent of withdrawing supply with the suspension of the 30-year Treasury auction was on a smooth trend with relatively subdued fluctuations. The credit crisis and global recession have been followed by significant fluctuations originating in sovereign risk issues in Europe, doubts of continuing high growth and accelerating inflation in China now complicated by political developments, events such as in the Middle East and Japan and legislative restructuring, regulation, insufficient growth, falling real wages, depressed hiring and high job stress of unemployment and underemployment in the US now with realization of growth standstill. The “trend is your friend” motto of traders has been replaced with a “hit and realize profit” approach of managing positions to realize profits without sitting on positions. There is a trend of valuation of risk financial assets driven by the carry trade from zero interest rates with fluctuations provoked by events of risk aversion or the “sharp shifts in risk appetite” of Blanchard (2012WEOApr, XIII). Table ESIV-1, which is updated for every comment of this blog, shows the deep contraction of valuations of risk financial assets after the Apr 2010 sovereign risk issues in the fourth column “∆% to Trough.” There was sharp recovery after around Jul 2010 in the last column “∆% Trough to 10/26/12,” which has been recently stalling or reversing amidst bouts of risk aversion. “Let’s twist again” monetary policy during the week of Sep 23 caused deep worldwide risk aversion and selloff of risk financial assets (http://cmpassocregulationblog.blogspot.com/2011/09/imf-view-of-world-economy-and-finance.html http://cmpassocregulationblog.blogspot.com/2011/09/collapse-of-household-income-and-wealth.html). Monetary policy was designed to increase risk appetite but instead suffocated risk exposures. There has been rollercoaster fluctuation in risk aversion and financial risk asset valuations: surge in the week of Dec 2, 2011, mixed performance of markets in the week of Dec 9, renewed risk aversion in the week of Dec 16, end-of-the-year relaxed risk aversion in thin markets in the weeks of Dec 23 and Dec 30, mixed sentiment in the weeks of Jan 6 and Jan 13 2012 and strength in the weeks of Jan 20, Jan 27 and Feb 3 followed by weakness in the week of Feb 10 but strength in the weeks of Feb 17 and 24 followed by uncertainty on financial counterparty risk in the weeks of Mar 2 and Mar 9. All financial values have fluctuated with events such as the surge in the week of Mar 16 on favorable news of Greece’s bailout even with new risk issues arising in the week of Mar 23 but renewed risk appetite in the week of Mar 30 because of the end of the quarter and the increase in the firewall of support of sovereign debts in the euro area. New risks developed in the week of Apr 6 with increase of yields of sovereign bonds of Spain and Italy, doubts on Fed policy and weak employment report. Asia and financial entities are experiencing their own risk environments. Financial markets were under stress in the week of Apr 13 because of the large exposure of Spanish banks to lending by the European Central Bank and the annual equivalent growth rate of China’s GDP of 7.4 percent in IQ2012 [(1.018)⁴], which was repeated in IIQ2012. There was strength again in the week of Apr 20 because of the enhanced IMF firewall and Spain placement of debt, continuing into the week of Apr 27. Risk aversion returned in the week of May 4 because of the expectation of elections in Europe and the new trend of deterioration of job creation in the US. Europe’s sovereign debt crisis and the fractured US job market continued to influence risk aversion in the week of May 11. Politics in Greece and banking issues in Spain were important factors of sharper risk aversion in the week of May 18. Risk aversion continued during the week of May 25 and exploded in the week of Jun 1. Expectations of stimulus by central banks caused valuation of risk financial assets in the week of Jun 8 and in the week of Jun 15. Expectations of major stimulus were frustrated by minor continuance of maturity extension policy in the week of Jun 22 together with doubts on the silent bank run in highly indebted euro area member countries. There was a major rally of valuations of risk financial assets in the week of Jun 29 with the announcement of new measures on bank resolutions by the European Council. New doubts surfaced in the week of Jul 6, 2012 on the implementation of the bank resolution mechanism and on the outlook for the world economy because of interest rate reductions by the European Central, Bank of England and People’s Bank of China. Risk appetite returned in the week of July 13 in relief that economic data suggests continuing high growth in China but fiscal and banking uncertainties in Spain spread to Italy in the selloff of July 20, 2012. Mario Draghi (2012Jul26), president of the European Central Bank, stated: “But there is another message I want to tell you.

Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” This statement caused return of risk appetite, driving upward valuations of risk financial assets worldwide. Buiter (2011Oct31) analyzes that the European Financial Stability Fund (EFSF) would need a “bigger bazooka” to bail out euro members in difficulties that could possibly be provided by the ECB. The dimensions of the problem may require more firepower than a bazooka perhaps that of the largest conventional bomb of all times of 44,000 pounds experimentally detonated only once by the US in 1948 (http://www.airpower.au.af.mil/airchronicles/aureview/1967/mar-apr/coker.html). Buiter (2012Oct15) finds that resolution of the euro crisis requires full banking union together with restructuring the sovereign debt of at least four and possibly total seven European countries. Risk appetite continued in the week of Aug 3, 2012, in expectation of purchases of sovereign bonds by the ECB. Growth of China’s exports by 1.0 percent in the 12 months ending in Jul 2012 released in the week of Aug 10, 2012, together with doubts on the purchases of bonds by the ECB injected a mild dose of risk aversion. There was optimism on the resolution of the European debt crisis on Aug 17, 2012. The week of Aug 24, 2012 had alternating shocks of risk aversion and risk appetite from the uncertainties of success of the Greek adjustment program, the coming decision of the Federal Constitutional Court of Germany on the European Stability Mechanism, disagreements between the Deutsche Bundesbank and the European Central Bank on purchase of sovereign bonds of highly indebted euro area member countries and the exchange of letters between Darrell E. Issa (2012Aug1), Chairman of the House Committee on Oversight and Government Reform, and Chairman Bernanke (2012Aug22) on monetary policy. Bernanke (2012JHAug31) and Draghi (2012Aug29) generated risk enthusiasm in the week of Aug 31, 2012. Risk appetite returned in the week of Sep 7, 2012, with the announcement of the bond-buying program of OMT (Outright Monetary Transactions) on Sep 6, 2012, by the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Valuations of risk financial assets increased sharply after the statement of the FOMC on Sep 13, 2012 with open-ended quantitative easing and self-imposed single-mandate of jobs that would maintain easing monetary policy well after the economy returns to full potential. Risk aversion returned in the week of Sep 21, 2012 on doubts about the success of quantitative easing and weakness in flash purchasing managers’ indices. Risk aversion returned in the week of Sep 28, 2012, because of uncertainty on the consequences of a bailout of Spain and weakness of central banks in controlling financial turbulence but was followed by risk appetite in the week of Oct 5, aversion in the week of Oct 12 and mixed views in the week of Oct 19. Revenue declines for reporting companies caused decline of stocks in the week of Oct 26. The highest valuations in column “∆% Trough to 10/26/12” are by US equities indexes: DJIA 35.3 percent and S&P 500 38.1 percent, driven by stronger earnings and economy in the US than in other advanced economies but with doubts on the relation of business revenue to the weakening economy and fractured job market. The DJIA reached 13,703.53 on Oct 5, 2012, which is the highest level in 52 weeks (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata). The carry trade from zero interest rates to leveraged positions in risk financial assets had proved strongest for commodity exposures but US equities have regained leadership. Before the current round of risk aversion, almost all assets in the column “∆% Trough to 10/26/12” had double digit gains relative to the trough around Jul 2, 2010 but now some valuations of equity indexes show varying increases: China’s Shanghai Composite is 13.3 percent below the trough; Japan’s Nikkei Average is 1.9 percent above the trough; DJ Asia Pacific TSM is 8.3 percent above the trough; Dow Global is 12.5 percent above the trough; STOXX 50 of 50 blue-chip European equities (http://www.stoxx.com/indices/index_information.html?symbol=sx5E) is 10.3 percent above the trough; and NYSE Financial is 13.2 percent above the trough. DJ UBS Commodities is 15.3 percent above the trough. DAX index of German equities (http://www.bloomberg.com/quote/DAX:IND) is 27.5 percent above the trough. Japan’s Nikkei Average is 1.9 percent above the trough on Aug 31, 2010 and 21.1 percent below the peak on Apr 5, 2010. The Nikkei Average closed at 8993.06 on Fri Oct 26, 2012 (http://professional.wsj.com/mdc/public/page/marketsdata.html?mod=WSJ_PRO_hps_marketdata), which is 12.3 percent lower than 10,254.43 on Mar 11, 2011, on the date of the Tōhoku or Great East Japan Earthquake/tsunami. Global risk aversion erased the earlier gains of the Nikkei. The dollar depreciated by 8.6 percent relative to the euro and even higher before the new bout of sovereign risk issues in Europe. The column “∆% week to 10/26/12” in Table ESIV-1 shows that there were decreases of valuations of risk financial assets in the week of Oct 26, 2012 such as 2.2 percent for Dow Global, 1.7 percent for NYSE Financial, 1.5 percent for STOXX 50, 2.0 percent for DAX and 1.5 percent for DJ Asia Pacific TSM. Nikkei Average decreased 0.1 percent in the week. DJ UBS Commodities decreased 2.3 percent. China’s Shanghai Composite decreased 2.9 percent in the week of Oct 26, 2012. The DJIA decreased 1.8 percent and S&P 500 decreased 1.5 percent. The USD appreciated 0.6 percent. There are still high uncertainties on European sovereign risks and banking soundness, US and world growth slowdown and China’s growth tradeoffs. Sovereign problems in the “periphery” of Europe and fears of slower growth in Asia and the US cause risk aversion with trading caution instead of more aggressive risk exposures. There is a fundamental change in Table ESIV-1 from the relatively upward trend with oscillations since the sovereign risk event of Apr-Jul 2010. Performance is best assessed in the column “∆% Peak to 10/26/12” that provides the percentage change from the peak in Apr 2010 before the sovereign risk event to Oct 19, 2012. Most risk financial assets had gained not only relative to the trough as shown in column “∆% Trough to 10/26/12” but also relative to the peak in column “∆% Peak to 10/26/12.” There are now only three equity indexes above the peak in Table ESIV-1: DJIA 17.0 percent, S&P 500 16.0 percent and DAX 14.2 percent. There are several indexes below the peak: NYSE Financial Index (http://www.nyse.com/about/listed/nykid.shtml) by 9.8 percent, Nikkei Average by 21.1 percent, Shanghai Composite by 34.7 percent, DJ Asia Pacific by 5.1 percent, STOXX 50 by 6.6 percent and Dow Global by 8.2 percent. DJ UBS Commodities Index is now 1.4 percent below the peak. The US dollar strengthened 14.2 percent relative to the peak. The factors of risk aversion have adversely affected the performance of risk financial assets. The performance relative to the peak in Apr 2010 is more important than the performance relative to the trough around early Jul 2010 because improvement could signal that conditions have returned to normal levels before European sovereign doubts in Apr 2010. Kate Linebaugh, writing on “Falling revenue dings stocks,” on Oct 20, 2012, published in the Wall Street Journal (http://professional.wsj.com/article/SB10000872396390444592704578066933466076070.html?mod=WSJPRO_hpp_LEFTTopStories), identifies a key financial vulnerability: falling revenues across markets for United States reporting companies. Global economic slowdown is reducing corporate sales and squeezing corporate strategies. Linebaugh quotes data from Thomson Reuters that 100 companies of the S&P 500 index have reported declining revenue only 1 percent higher in Jun-Sep 2012 relative to Jun-Sep 2011 but about 60 percent of the companies are reporting lower sales than expected by analysts with expectation that revenue for the S&P 500 will be lower in Jun-Sep 2012 for the entities represented in the index. Results of US companies are likely repeated worldwide. It may be quite painful to exit QE∞ or use of the balance sheet of the central together with zero interest rates forever. The basic valuation equation that is also used in capital budgeting postulates that the value of stocks or of an investment project is given by:

Where R_τ is expected revenue in the time horizon from τ =1 to T; C_τ denotes costs; and ρ is an appropriate rate of discount. In words, the value today of a stock or investment project is the net revenue, or revenue less costs, in the investment period from τ =1 to T discounted to the present by an appropriate rate of discount. In the current weak economy, revenues have been increasing more slowly than anticipated in investment plans. An increase in interest rates would affect discount rates used in calculations of present value, resulting in frustration of investment decisions. If V represents value of the stock or investment project, as ρ → ∞, meaning that interest rates increase without bound, then V → 0, or

declines. Equally, decline in expected revenue from the stock or project, R_τ, causes decline in valuation. An intriguing issue is the difference in performance of valuations of risk financial assets and economic growth and employment. Paul A. Samuelson (http://www.nobelprize.org/nobel_prizes/economics/laureates/1970/samuelson-bio.html) popularized the view of the elusive relation between stock markets and economic activity in an often-quoted phrase “the stock market has predicted nine of the last five recessions.” In the presence of zero interest rates forever, valuations of risk financial assets are likely to differ from the performance of the overall economy. The interrelations of financial and economic variables prove difficult to analyze and measure.

Table ESIV-1, Stock Indexes, Commodities, Dollar and 10-Year Treasury

	Peak	Trough	∆% to Trough	∆% Peak to 10/26/ /12	∆% Week 10/26/12	∆% Trough to 10/26/ 12
DJIA	4/26/ 10	7/2/10	-13.6	17.0	-1.8	35.3
S&P 500	4/23/ 10	7/20/ 10	-16.0	16.0	-1.5	38.1
NYSE Finance	4/15/ 10	7/2/10	-20.3	-9.8	-1.7	13.2
Dow Global	4/15/ 10	7/2/10	-18.4	-8.2	-2.2	12.5
Asia Pacific	4/15/ 10	7/2/10	-12.5	-5.1	-1.5	8.3
Japan Nikkei Aver.	4/05/ 10	8/31/ 10	-22.5	-21.1	-0.1	1.9
China Shang.	4/15/ 10	7/02 /10	-24.7	-34.7	-2.9	-13.3
STOXX 50	4/15/10	7/2/10	-15.3	-6.6	-1.5	10.3
DAX	4/26/ 10	5/25/ 10	-10.5	14.2	-2.0	27.5
Dollar Euro	11/25 2009	6/7 2010	21.2	14.5	0.6	-8.6
DJ UBS Comm.	1/6/ 10	7/2/10	-14.5	-1.4	-2.3	15.3
10-Year T Note	4/5/ 10	4/6/10	3.986	1.748

T: trough; Dollar: positive sign appreciation relative to euro (less dollars paid per euro), negative sign depreciation relative to euro (more dollars paid per euro)

Source: http://professional.wsj.com/mdc/page/marketsdata.html?mod=WSJ_hps_marketdata

I Mediocre and Decelerating United States Economic Growth. The US is experiencing the first expansion from a recession after World War II without growth and without jobs. Long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The expansion since the third quarter of 2009 (IIIQ2009 (Jun)) to the latest available measurement for IIIQ(2012) has been at the average annual rate of 2.2 percent per quarter in contrast with 6.2 percent on average in all expansions after World War II. As a result, there are 28.7 million unemployed or underemployed in the United States for an effective unemployment rate of 17.8 percent (http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html).

A monumental effort of data gathering, calculation and analysis by Carmen M. Reinhart and Kenneth Rogoff is highly relevant to banking crises, financial crash, debt crises and economic growth (Reinhart 2010CB; Reinhart and Rogoff 2011AF, 2011Jul14, 2011EJ, 2011CEPR, 2010FCDC, 2010GTD, 2009TD, 2009AFC, 2008TDPV; see also Reinhart and Reinhart 2011Feb, 2010AF and Reinhart and Sbrancia 2011). See http://cmpassocregulationblog.blogspot.com/2011/07/debt-and-financial-risk-aversion-and.html The dataset of Reinhart and Rogoff (2010GTD, 1) is quite unique in breadth of countries and over time periods:

“Our results incorporate data on 44 countries spanning about 200 years. Taken together, the data incorporate over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate and monetary arrangements and historic circumstances. We also employ more recent data on external debt, including debt owed by government and by private entities.”

Reinhart and Rogoff (2010GTD, 2011CEPR) classify the dataset of 2317 observations into 20 advanced economies and 24 emerging market economies. In each of the advanced and emerging categories, the data for countries is divided into buckets according to the ratio of gross central government debt to GDP: below 30, 30 to 60, 60 to 90 and higher than 90 (Reinhart and Rogoff 2010GTD, Table 1, 4). Median and average yearly percentage growth rates of GDP are calculated for each of the buckets for advanced economies. There does not appear to be any relation for debt/GDP ratios below 90. The highest growth rates are for debt/GDP ratios below 30: 3.7 percent for the average and 3.9 for the median. Growth is significantly lower for debt/GDP ratios above 90: 1.7 for the average and 1.9 percent for the median. GDP growth rates for the intermediate buckets are in a range around 3 percent: the highest 3.4 percent average is for the bucket 60 to 90 and 3.1 percent median for 30 to 60. There is even sharper contrast for the United States: 4.0 percent growth for debt/GDP ratio below 30; 3.4 percent growth for debt/GDP ratio of 30 to 60; 3.3 percent growth for debt/GDP ratio of 60 to 90; and minus 1.8 percent, contraction, of GDP for debt/GDP ratio above 90.

For the five countries with systemic financial crises—Iceland, Ireland, UK, Spain and the US—real average debt levels have increased by 75 percent between 2007 and 2009 (Reinhart and Rogoff 2010GTD, Figure 1). The cumulative increase in public debt in the three years after systemic banking crisis in a group of episodes after World War II is 86 percent (Reinhart and Rogoff 2011CEPR, Figure 2, 10).

An important concept is “this time is different syndrome,” which “is rooted in the firmly-held belief that financial crises are something that happens to other people in other countries at other times; crises do not happen here and now to us” (Reinhart and Rogoff 2010FCDC, 9). There is both an arrogance and ignorance in “this time is different” syndrome, as explained by Reinhart and Rogoff (2010FCDC, 34):

“The ignorance, of course, stems from the belief that financial crises happen to other people at other time in other places. Outside a small number of experts, few people fully appreciate the universality of financial crises. The arrogance is of those who believe they have figured out how to do things better and smarter so that the boom can long continue without a crisis.”

There is sober warning by Reinhart and Rogoff (2011CEPR, 42) on the basis of the momentous effort of their scholarly data gathering, calculation and analysis:

“Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117 percent of GDP. It has only been higher during a one-year sting at 119 percent in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only be one more example of the “This Time is Different” syndrome.”

As both sides of the Atlantic economy maneuver around defaults the experience on debt and growth deserves significant emphasis in research and policy. The world economy is slowing with high levels of unemployment in advanced economies. Countries do not grow themselves out of unsustainable debts but rather through de facto defaults by means of financial repression and in some cases through inflation. This time is not different.

Professor Michael D. Bordo (2012Sep27), at Rutgers University, is providing clear thought on the correct comparison of the current business cycles in the United States with those in United States history. There are two issues raised by Professor Bordo: (1) incomplete conclusions by lumping together countries with different institutions, economic policies and financial systems; and (2) the erroneous contention that growth is mediocre after financial crises and deep recessions, which is repeated daily in the media, but that Bordo and Haubrich (2012DR) persuasively demonstrate to be inconsistent with United States experience.

Depriving economic history of institutions is perilous as is illustrated by the economic history of Brazil. Douglass C. North (1994) emphasized the key role of institutions in explaining economic history. Rondo E. Cameron (1961, 1967, 1972) applied institutional analysis to banking history. Friedman and Schwartz (1963) analyzed the relation of money, income and prices in the business cycle and related the monetary policy of an important institution, the Federal Reserve System, to the Great Depression. Bordo, Choudhri and Schwartz (1995) analyze the counterfactual of what would have been economic performance if the Fed had used during the Great Depression the Friedman (1960) monetary policy rule of constant growth of money(for analysis of the Great Depression see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 198-217). Alan Meltzer (2004, 2010a,b) analyzed the Federal Reserve System over its history. The reader would be intrigued by Figure 5 in Reinhart and Rogoff (2010FCDC, 15) in which Brazil is classified in external default for seven years between 1828 and 1834 but not again until 64 years later in 1989, above the 50 years of incidence for serial default. This void has been filled in scholarly research on nineteenth-century Brazil by William R. Summerhill, Jr. (2007SC, 2007IR). There are important conclusions by Summerhill on the exceptional sample of institutional change or actually lack of change, public finance and financial repression in Brazil between 1822 an 1899, combining tools of economics, political science and history. During seven continuous decades, Brazil did not miss a single interest payment with government borrowing without repudiation of debt or default. What is really surprising is that Brazil borrowed by means of long-term bonds and even more surprising interest rates fell over time. The external debt of Brazil in 1870 was ₤41,275,961 and the domestic debt in the internal market was ₤25,708,711, or 62.3 percent of the total (Summerhill 2007IR, 73).

The experience of Brazil differed from that of Latin America (Summerhill 2007IR). During the six decades when Brazil borrowed without difficulty, Latin American countries becoming independent after 1820 engaged in total defaults, suffering hardship in borrowing abroad. The countries that borrowed again fell again in default during the nineteenth century. Venezuela defaulted in four occasions. Mexico defaulted in 1827, rescheduling its debt eight different times and servicing the debt sporadically. About 44 percent of Latin America’s sovereign debt was in default in 1855 and approximately 86 percent of total government loans defaulted in London originated in Spanish American borrowing countries.

External economies of commitment to secure private rights in sovereign credit would encourage development of private financial institutions, as postulated in classic work by North and Weingast (1989), Summerhill 2007IR, 22). This is how banking institutions critical to the Industrial Revolution were developed in England (Cameron 1972). The obstacle in Brazil found by Summerhill (2007IR) is that sovereign debt credibility was combined with financial repression. There was a break in Brazil of the chain of effects from protecting public borrowing, as in North and Weingast (1989), to development of private financial institutions. According to Pelaez 1976, 283) following Cameron:

“The banking law of 1860 placed severe restrictions on two basic modern economic institutions—the corporation and the commercial bank. The growth of the volume of bank credit was one of the most significant factors of financial intermediation and economic growth in the major trading countries of the gold standard group. But Brazil placed strong restrictions on the development of banking and intermediation functions, preventing the channeling of coffee savings into domestic industry at an earlier date.”

Brazil actually abandoned the gold standard during multiple financial crises in the nineteenth century, as it should have to protect domestic economic activity. Pelaez (1975, 447) finds similar experience in the first half of nineteenth-century Brazil:

“Brazil’s experience is particularly interesting in that in the period 1808-1851 there were three types of monetary systems. Between 1808 and 1829, there was only one government-related Bank of Brazil, enjoying a perfect monopoly of banking services. No new banks were established in the 1830s after the liquidation of the Bank of Brazil in 1829. During the coffee boom in the late 1830s and 1840s, a system of banks of issue, patterned after similar institutions in the industrial countries, supplied the financial services required in the first stage of modernization of the export economy.”

Financial crises in the advanced economies were transmitted to nineteenth-century Brazil by the arrival of a ship (Pelaez and Suzigan 1981). The explanation of those crises and the economy of Brazil requires knowledge and roles of institutions, economic policies and the financial system chosen by Brazil, in agreement with Bordo (2012Sep27).

The departing theoretical framework of Bordo and Haubrich (2012DR) is the plucking model of Friedman (1964, 1988). Friedman (1988, 1) recalls “I was led to the model in the course of investigating the direction of influence between money and income. Did the common cyclical fluctuation in money and income reflect primarily the influence of money on income or of income on money?” Friedman (1964, 1988) finds useful for this purpose to analyze the relation between expansions and contractions. Analyzing the business cycle in the United States between 1870 and 1961, Friedman (1964, 15) found that “a large contraction in output tends to be followed on the average by a large business expansion; a mild contraction, by a mild expansion.” The depth of the contraction opens up more room in the movement toward full employment (Friedman 1964, 17):

“Output is viewed as bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. Given institutional rigidities and prices, the contraction takes in considerable measure the form of a decline in output. Since there is no physical limit to the decline short of zero output, the size of the decline in output can vary widely. When subsequent recovery sets in, it tends to return output to the ceiling; it cannot go beyond, so there is an upper limit to output and the amplitude of the expansion tends to be correlated with the amplitude of the contraction.”

Kim and Nelson (1999) test the asymmetric plucking model of Friedman (1964, 1988) relative to a symmetric model using reference cycles of the NBER, finding evidence supporting the Friedman model. Bordo and Haubrich (2012DR) analyze 27 cycles beginning in 1872, using various measures of financial crises while considering different regulatory and monetary regimes. The revealing conclusion of Bordo and Haubrich (2012DR, 2) is that:

“Our analysis of the data shows that steep expansions tend to follow deep contractions, though this depends heavily on when the recovery is measured. In contrast to much conventional wisdom, the stylized fact that deep contractions breed strong recoveries is particularly true when there is a financial crisis. In fact, on average, it is cycles without a financial crisis that show the weakest relation between contraction depth and recovery strength. For many configurations, the evidence for a robust bounce-back is stronger for cycles with financial crises than those without.”

The average rate of growth of real GDP in expansions after recessions with financial crises was 8 percent but only 6.9 percent on average for recessions without financial crises (Bordo 2012Sep27). Real GDP declined 12 percent in the Panic of 1907 and increased 13 percent in the recovery, consistent with the plucking model of Friedman (Bordo 2012Sep27). The comparison of recovery from IQ1983 to IVQ1985 is appropriate even when considering financial crises. There was significant financial turmoil during the 1980s. Bordo and Haubrich (2012DR, 11) identify a financial crisis in the United States stating in 1981. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.74 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery. Money center banks were under extraordinary pressure from the default of sovereign debt by various emerging nations that represented a large share of their net worth (see Pelaez 1986).

Bordo (2012Sep27) finds two probable explanations for the weak recovery during the current economic cycle: (1) collapse of United States housing; and (2) uncertainty originating in fiscal policy, regulation and structural changes. There are serious doubts if monetary policy is adequate to recover the economy under these conditions.

The concept of growth recession was popular during the stagflation from the late 1960s to the early 1980s. The economy of the US underperformed with several recession episodes in “stop and go” fashion of policy and economic activity while the rate of inflation rose to the highest in a peacetime period (see http://cmpassocregulationblog.blogspot.com/2011/06/risk-aversion-and-stagflation.html http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/05/global-inflation-seigniorage-monetary.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html Appendix I; see Taylor 1993, 1997, 1999, 1998LB, 2012Mar27, 2012Mar28, 2012FP, 2012JMCB). A growth recession could be defined as a period in which economic growth is insufficient to move the economy toward full employment of humans, equipment and other productive resources. The US is experiencing a dramatic slow growth recession with 28.819 million people in job stress, consisting of an effective number of unemployed of 17.974 million, 8.316 million employed part-time because they cannot find full employment and 2.529 million marginally attached to the labor force (see Table I-4 http://cmpassocregulationblog.blogspot.com/2012/08/twenty-nine-million-unemployed-or.html). The discussion of the growth recession issue in the 1970s by two recognized economists of the twentieth century, James Tobin and Paul A. Samuelson, is worth recalling.

In analysis of the design of monetary policy in 1974, Tobin (1974, 219) finds that the forecast of the President’s Council of Economic Advisers (CEA) was also the target such that monetary policy would have to be designed and implemented to attain that target. The concern was with maintaining full employment as provided in the Employment Law of 1946 (http://www.law.cornell.edu/uscode/15/1021.html http://uscode.house.gov/download/pls/15C21.txt http://www.eric.ed.gov/PDFS/ED164974.pdf) see http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html), which also created the CEA. Tobin (1974, 219) describes the forecast/target of the CEA for 1974:

“The expected and approved path appears to be quarter-to-quarter rates of growth of real gross national product in 1974 of roughly -0.5, 0.1, and 1 percent, with unemployment rising to about 5.6 percent in the second quarter and remaining there the rest of the year. The rate of price inflation would fall shortly in the second quarter, but rise slightly toward the end of the year.”

Referring to monetary policy design, Tobin (1974, 221) states: “if interest rates remain stable or rise during the current (growth) recession and recovery, this will be a unique episode in business cycle annals.” Subpar economic growth is often called a “growth recession.” The critically important concept is that economic growth is not sufficient to move the economy toward full employment, creating the social and economic adverse outcome of idle capacity and unemployed and underemployed workers, much the same as currently.

The unexpected incidence of inflation surprises during growth recessions is considered by Samuelson (1974, 76):

“Indeed, if there were in Las Vegas or New York a continuous casino on the money GNP of 1974’s fourth quarter, it would be absurd to think that the best economic forecasters could improve upon the guess posted there. Whatever knowledge and analytical skill they possess would already have been fed into the bidding. It is a manifest contradiction to think that most economists can be expected to do better than their own best performance. I am saying that the best forecasters have been poor in predicting the general price level’s movements and level even a year ahead. By Valentine’s Day 1973 the best forecasters were beginning to talk of the growth recession that we now know did set in at the end of the first quarter. Aside from their end-of-1972 forecasts, the fashionable crowd has little to blame itself for when it comes to their 1973 real GNP projections. But, of course, they did not foresee the upward surge of food and decontrolled industrial prices. This has been a recurring pattern: surprise during the event at the virulence of inflation, wisdom after the event in demonstrating that it did, after all, fit with past patterns of experience.”

Economists are known for their forecasts being second only to those of astrologers. Accurate forecasts are typically realized for the wrong reasons. In contrast with meteorologists, economists do not even agree on what happened. There is not even agreement on what caused the global recession and why the economy has reached a perilous standstill.

Historical parallels are instructive but have all the limitations of empirical research in economics. The more instructive comparisons are not with the Great Depression of the 1930s but rather with the recessions in the 1950s, 1970s and 1980s. The growth rates and job creation in the expansion of the economy away from recession are subpar in the current expansion compared to others in the past. Four recessions are initially considered, following the reference dates of the National Bureau of Economic Research (NBER) (http://www.nber.org/cycles/cyclesmain.html ): IIQ1953-IIQ1954, IIIQ1957-IIQ1958, IIIQ1973-IQ1975 and IQ1980-IIIQ1980. The data for the earlier contractions illustrate that the growth rate and job creation in the current expansion are inferior. The sharp contractions of the 1950s and 1970s are considered in Table I-1, showing the Bureau of Economic Analysis (BEA) quarter-to-quarter, seasonally adjusted (SA), yearly-equivalent growth rates of GDP. The recovery from the recession of 1953 consisted of four consecutive quarters of high percentage growth rates from IIIQ1954 to IIIQ1955: 4.6, 8.3, 12.0, 6.8 and 5.4. The recession of 1957 was followed by four consecutive high percentage growth rates from IIIQ1958 to IIQ1959: 9.7, 9.7, 8.3 and 10.5. The recession of 1973-1975 was followed by high percentage growth rates from IIQ1975 to IIQ1976: 6.9, 5.3, 9.4 and 3.0. The disaster of the Great Inflation and Unemployment of the 1970, which made stagflation notorious, is even better in growth rates during the expansion phase in comparison with the current slow-growth recession.

Table I-1, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

	IQ	IIQ	IIIQ	IVQ
1953	7.7	3.1	-2.4	-6.2
1954	-1.9	0.5	4.6	8.3
1955	12.0	6.8	5.4	2.3
1957	2.5	-1.0	3.9	-4.1
1958	-10.4	2.5	9.7	9.7
1959	8.3	10.5	-0.5	1.4
1973	10.6	4.7	-2.1/	3.9
1974	3.5	1.0	-3.9	6.9
1975	-4.8	3.1	6.9	5.3
1976	9.4	3.0	2.0	2.9
1979	0.7	0.4	2.9	1.1
1980	1.3	-7.9	-0.7	7.6

Source: http://www.bea.gov/iTable/index_nipa.cfm

The NBER dates another recession in 1980 that lasted about half a year. If the two recessions from IQ1980s to IIIQ1980 and IIIQ1981 to IVQ1982 are combined, the impact of lost GDP of 4.8 percent is more comparable to the latest revised 4.7 percent drop of the recession from IVQ2007 to IIQ2009. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.5 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Table I-2 provides the Bureau of Economic Analysis (BEA) quarterly growth rates of GDP in SA yearly equivalents for the recessions of 1981 to 1982 and 2007 to 2009, using the latest major revision published on Jul 29, 2011 (http://www.bea.gov/newsreleases/national/gdp/2011/pdf/gdp2q11_adv.pdf) and the revision back to 2009 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp2q12_adv.pdf) and first estimate for IIIQ2012 (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf), which are available in the dataset of the US Bureau of Economic Analysis (http://www.bea.gov/iTable/index_nipa.cfm). There were four quarters of contraction in 1981-1982 ranging in rate from -1.5 percent to -6.4 percent and five quarters of contraction in 2007-2009 ranging in rate from -0.3 percent to -8.9 percent. The striking difference is that in the first twelve quarters of expansion from IQ1983 to IIIQ1985, shown in Table I-2 in relief, GDP grew at the high quarterly percentage growth rates of 5.1, 9.3, 8.1, 8.5, 8.0, 7.1, 3.9, 3.3, 3.8, 3.4, 6.4 and 3.1 while the percentage growth rates in the first thirteen quarters of expansion from IIIQ2009 to IIQ2012, shown in relief in Table I-2, were mediocre: 1.4, 4.0, 2.3, 2.2, 2.6, 2.4, 0.1, 2.5, 1.3, 4.1, 2.0, 1.3 and 2.0. Asterisks denote the estimates that have been revised by the BEA in the first round of Jul 29, 2011 and double asterisks the revisions released on Jul 27, 2012. During the four quarters of 2011 GDP grew at annual equivalent rates of 0.1 percent in IQ2011, 2.5 percent in IIQ2011, 1.3 percent in IIIQ2011 and 4.1 percent in IVQ2011. The rate of growth of the US economy decelerated from seasonally-adjusted annual equivalent of 4.1 percent in IVQ2011 to 2.0 percent in IQ2012, 1.3 percent in IIQ2012 and 2.0 percent in IIIQ2012. Inventory change contributed to initial growth but was rapidly replaced by growth in investment and demand in 1983. Inventory accumulation contributed 2.53 percentage points to the rate of growth of 4.1 percent in IVQ2011, which is the only relatively high rate from IQ2011 to IIQ2012. Economic growth and employment creation are decelerating rapidly during 2012.

Table I-2, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA

Q	1981	1982	1983	1984	2008	2009	2010
I	8.6	-6.4	5.1	8.0	-1.8*	-5.3**	2.3**
II	-3.2	2.2	9.3	7.1	1.3*	-0.3**	2.2**
III	4.9	-1.5	8.1	3.9	-3.7*	1.4**	2.6**
IV	-4.9	0.3	8.5	3.3	-8.9*	4.0**	2.4**
				1985			2011
I				3.8			0.1**
II				3.4			2.5**
III				6.4			1.3**
IV				3.1			4.1**
				1986			2012
I				3.9			2.0**
II				1.6			1.3
III				3.9			2.0
IV				1.9

*Revision of Jul 29, 2011 **Revision of Jul 27, 2012

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-1 of the Bureau of Economic Analysis (BEA) provides strong growth of real quarterly GDP in the US between 1947 and 1999. There is an evident acceleration of the rate of GDP growth in the 1990s as shown by a much sharper slope of the growth curve. Cobet and Wilson (2002) define labor productivity as the value of manufacturing output produced per unit of labor input used (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). Between 1950 and 2000, labor productivity in the US grew less rapidly than in Germany and Japan. The major part of the increase in productivity in Germany and Japan occurred between 1950 and 1973 while the rate of productivity growth in the US was relatively subdued in several periods. While Germany and Japan reached their highest growth rates of productivity before 1973, the US accelerated its rate of productivity growth in the second half of the 1990s. Between 1950 and 2000, the rate of productivity growth in the US of 2.9 percent per year was much lower than 6.3 percent in Japan and 4.7 percent in Germany. Between 1995 and 2000, the rate of productivity growth of the US of 4.6 percent exceeded that of Japan of 3.9 percent and the rate of Germany of 2.6 percent.

Chart I-1, US, Real GDP 1947-1999

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-2 provides the growth of real quarterly GDP in the US between 1947 and 2011. The drop of output in the recession from IVQ2007 to IIQ2009 has been followed by anemic recovery compared with return to trend at 3.0 percent from 1870 to 2010 after events such as wars and recessions (Lucas 2011May) and a standstill that can lead to growth recession, or low rates of economic growth, but perhaps even another contraction or conventional recession.

Chart I-2, US, Real GDP 1947-2011

Source:

US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-3 provides real GDP percentage change on the quarter a year earlier for 1983-1984. The objective is simply to compare expansion in two recoveries from sharp contractions as shown in Table I-2. Growth rates in the early phase of the recovery in 1983 and 1984 were very high, which is the opportunity to reduce unemployment that has characterized cyclical expansion in the postwar US economy.

Chart I-3, Real GDP Percentage Change on Quarter a Year Earlier 1983-1985

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, growth rates in the comparable first eleven quarters of expansion from 2009 to 2012 in Chart I-4 have been mediocre. As a result, growth has not provided the exit from unemployment and underemployment as in other cyclical expansions in the postwar period. Growth rates did not rise in V shape as in earlier expansions and then declined close to the standstill of growth recessions.

Chart I-4, US, Real GDP Percentage Change on Quarter a Year Earlier 2009-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Table I-3, US, Percentage Change of Table I-3 provides the change in real GDP in the United States in the 1930s, 1980s and 2000s. The recession in 1981-1982 is quite similar on its own to the 2007-2009 recession. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). Data are available for the 1930s only on a yearly basis. US GDP fell 4.8 percent in the two recessions (1) from IQ1980 to IIIQ1980 and (2) from III1981 to IVQ1981 to IVQ1982 and 4.7 percent cumulatively in the recession from IVQ2007 to IIQ2009. It is instructive to compare the first two years of the expansions in the 1980s and the current expansion. GDP grew at 4.5 percent in 1983 and 7.2 percent in 1984 while GDP grew at 2.4 percent in 2010, 1.8 percent in 2011 and at 2.0 percent in IQ2012 relative to IQ2011 and 1.5 percent in IIQ2012 relative to IQ2012. Growth in the first two quarters of 2012 accumulates to 0.87 percent, which is equivalent to 1.75 percent per year, decelerating from 2.4 percent annual growth in 2011. GDP grew at 4.1 percent in 1985 and 3.5 percent in 1986 while the forecasts of participants of the Federal Open Market Committee (FOMC) are in the range of 1.7 to 2.0 percent in 2012 and 2.5 to 3.0 percent in 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20120913.pdf).

Table I-3, GDP in the 1930s, 1980s and 2000s, ∆%

Year	GDP ∆%	Year	GDP ∆%	Year	GDP ∆%
1930	-8.6	1980	-0.3	2000	4.1
1931	-6.5	1981	2.5	2001	1.1
1932	-13.1	1982	-1.9	2002	1.8
1933	-1.3	1983	4.5	2003	2.5
1934	10.9	1984	7.2	2004	3.5
1935	8.9	1985	4.1	2005	3.1
1936	13.1	1986	3.5	2006	2.7
1937	5.1	1987	3.2	2007	1.9
1938	-3.4	1988	4.1	2008	-0.3
1930	8.1	1989	3.6	2009	-3.1
1940	8.8	1990	1.9	2010	2.4
1941	17.1	1991	-0.2	2011	1.8

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-5 provides percentage change of GDP in the US during the 1930s. There is vast literature analyzing the Great Depression (Pelaez and Pelaez, Regulation of Banks and Finance (2009), 198-217). Cole and Ohanian (1999) find that US real per capita output was 11 percent lower in 1939 than in 1929 while the typical expansion of real per capita output in the US during a decade is 31 percent. Private hours worked in the US were 25 percent lower in 1939 relative to 1929.

Chart I-5, US, Percentage Change of GDP in the 1930s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

In contrast, Chart I-6 shows rapid recovery from the recessions in the 1980s. High growth rates in the initial quarters of expansion eliminated the unemployment and underemployment created during the contraction. The economy then returned to grow at the trend of expansion, interrupted by another contraction in 1991.

Chart I-6, US, Percentage Change of GDP in the 1980s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-7 provides the rates of growth during the 2000s. Growth rates in the initial eleven quarters of expansion have been relatively lower than during recessions after World War II. As a result, unemployment and underemployment continue at the rate of 17.4 percent of the US labor force (http://cmpassocregulationblog.blogspot.com/2012/09/twenty-eight-million-unemployed-or.html).

Chart I-7, US, Percentage Change of GDP in the 2000s

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Characteristics of the four cyclical contractions are provided in Table I-4 with the first column showing the number of quarters of contraction; the second column the cumulative percentage contraction; and the final column the average quarterly rate of contraction. There were two contractions from IQ1980 to IIIQ1980 and from IIIQ1981 to IVQ1982 separated by three quarters of expansion. The drop of output combining the declines in these two contractions is 4.8 percent, which is almost equal to the decline of 4.7 percent in the contraction from IVQ2007 to IIQ2009. In contrast, during the Great Depression in the four years of 1930 to 1933, GDP in constant dollars fell 26.7 percent cumulatively and fell 45.6 percent in current dollars (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 150-2, Pelaez and Pelaez, Globalization and the State, Vol. II (2009b), 205-7). The comparison of the global recession after 2007 with the Great Depression is entirely misleading.

Table I-4, US, Number of Quarters, Cumulative Percentage Contraction and Average Percentage Annual Equivalent Rate in Cyclical Contractions

	Number of Quarters	Cumulative Percentage Contraction	Average Percentage Rate
IIQ1953 to IIQ1954	4	-2.5	-0.63
IIIQ1957 to IIQ1958	3	-3.1	-9.0
IQ1980 to IIIQ1980	2	-2.2	-1.1
IIIQ1981 to IVQ1982	4	-2.7	-0.67
IVQ2007 to IIQ2009	6	-4.7	-0.80

Sources: Business Cycle Reference Dates: http://www.nber.org/cycles.html US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-5 shows the extraordinary contrast between the mediocre average annual equivalent growth rate of 2.2 percent of the US economy in the twelve quarters of the current cyclical expansion from IIIQ2009 to IIQ2012 and the average of 6.2 percent in the four earlier cyclical expansions. BEA data show the US economy in standstill with annual growth of 2.4 percent in 2010 percent decelerating to 1.8 percent annual growth in 2011 (http://www.bea.gov/iTable/index_nipa.cfm) and cumulative 0.82 percent in the first three quarters of 2012 {[(1.02)^1/4(1.013)^1/4(1.02)^1/4 – 1]100 = 1.3%}, which is equivalent to 1.77 percent per year {([(1.02)^1/4(1.013)^1/4(1.02)^1/4 ]^4/3 – 1)100 = 1.77%}. The expansion of IQ1983 to IVQ1985 was at the average annual growth rate of 5.7 percent.

Table I-5, US, Number of Quarters, Cumulative Growth and Average Annual Equivalent Growth Rate in Cyclical Expansions

	Number of Quarters	Cumulative Growth ∆%	Average Annual Equivalent Growth Rate
IIIQ 1954 to IQ1957	11	12.6	4.4
IIQ1958 to IIQ1959	5	10.2	8.1
IIQ1975 to IVQ1976	8	9.5	4.6
IQ1983 to IV1985	13	19.6	5.7
Average Four Above Expansions			6.2
IIIQ2009 to IIIQ2012	13	7.2	2.2

Sources: Business Cycle Reference Dates: http://www.nber.org/cycles.html US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-8 shows US real quarterly GDP growth from 1980 to 1989. The economy contracted during the recession and then expanded vigorously throughout the 1980s, rapidly eliminating the unemployment caused by the contraction.

Chart I-8, US, Real GDP, 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-9 shows the entirely different situation of real quarterly GDP in the US between 2007 and 2012. The economy has underperformed during the first twelve quarters of expansion for the first time in the comparable contractions since the 1950s. The US economy is now in a perilous standstill.

Chart I-9, US, Real GDP, 2007-2012

Source: http://www.bea.gov/iTable/index_nipa.cfm

As shown in Tables I-4 and I-5 above the loss of real GDP in the US during the contraction was 5.1 percent but the gain in the cyclical expansion has been only 7.2 percent (last row in Table I-5), using all latest revisions. As a result, the level of real GDP in IIQ2012 with the first estimate and revisions is only higher by 2.2 percent than the level of real GDP in IVQ2007. Table I-6 provides in the second column real GDP in billions of chained 2005 dollars. The third column provides the percentage change of the quarter relative to IVQ2007; the fourth column provides the percentage change relative to the prior quarter; and the final fifth column provides the percentage change relative to the same quarter a year earlier. The contraction actually concentrated in two quarters: decline of 2.3 percent in IVQ2008 relative to the prior quarter and decline of 1.3 percent in IQ2009 relative to IVQ2008. The combined fall of GDP in IVQ2008 and IQ2009 was 3.6 percent {[(1-0.023) x (1-0.013) -1]100 = -3.6%}, or {[(IIQ2009 $12,711.0)/(IIIQ2008 $13,186.9) – 1]100 = -3.6%}. Those two quarters coincided with the worst effects of the financial crisis. GDP fell 0.1 percent in IIQ2009 but grew 0.4 percent in IIIQ2009, which is the beginning of recovery in the cyclical dates of the NBER. Most of the recovery occurred in four successive quarters from IVQ2009 to IIQ2010 of growth of 1.0 percent in IVQ2009 and equal growth at 0.6 percent in IQ2010, IIQ2010, IIIQ2010 and IVQ2010 for cumulative growth in those five quarters of 3.4 percent, obtained by accumulating the quarterly rates {[(1.01 x 1.006 x 1.006 x 1.006 x 1.006) – 1]100 = 3.4%} or {[(IVQ2010 $13,181.2)/(IIIQ2009 $12,746.7) – 1]100 = 3.4%}. The economy lost momentum already in 2010 growing at 0.6 percent in each quarter, or annual equivalent 2.4 per cent {[(1.006)⁴ – 1]100 = 2.4%}, compared with annual equivalent 4.0 percent in IV2009 {[(1.01)⁴ – 1]100 = 4.0%}. The economy then stalled during the first half of 2011 with growth of 0.0025 percent in IQ2011 and 0.6 percent in IIQ2011 for combined annual equivalent rate of 1.2 percent {(1.00025 x 1.006)²}. The economy grew 0.3 percent in IIIQ2011 for annual equivalent growth of 1.2 percent in the first three quarters {[(1.00025 x 1.006 x 1.003)^4/3 -1]100 = 1.2%}. Growth picked up in IVQ2011 with 1.0 percent relative to IIIQ2011. Growth in a quarter relative to a year earlier in Table I-6 slows from over 2.4 percent during three consecutive quarters from IIQ2010 to IVQ2010 to 1.8 percent in IQ2011, 1.9 percent in IIQ2011, 1.6 percent in IIIQ2011 and 2.0 percent in IVQ2011. As shown below, growth of 1.0 percent in IVQ2011 was partly driven by inventory accumulation. In IQ2012, GDP grew 0.5 percent relative to IVQ2011 and 2.4 percent relative to IQ2011, decelerating to 0.3 percent in IIQ2012 and 2.1 percent relative to IIQ2011 and 0.5 percent in IIIQ2012 and 2.3 percent relative to IIIQ2011. Rates of a quarter relative to the prior quarter capture better deceleration of the economy than rates on a quarter relative to the same quarter a year earlier. The critical question for which there is not yet definitive solution is whether what lies ahead is continuing growth recession with the economy crawling and unemployment/underemployment at extremely high levels or another contraction or conventional recession. Forecasts of various sources continued to maintain high growth in 2011 without taking into consideration the continuous slowing of the economy in late 2010 and the first half of 2011. The sovereign debt crisis in the euro area is one of the common sources of doubts on the rate and direction of economic growth in the US but there is weak internal demand in the US with almost no investment and spikes of consumption driven by burning saving because of financial repression forever in the form of zero interest rates.

Table I-6, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2005 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	13,326.0	NA	NA	2.2
IQ2008	13,266.8	-0.4	-0.4	1.6
IIQ2008	13,310.5	-0.1	0.3	1.0
IIIQ2008	13,186.9	-1.0	-0.9	-0.6
IVQ2008	12,883.5	-3.3	-2.3	-3.3
IQ2009	12,711.0	-4.6	-1.3	-4.2
IIQ2009	12,701.0	-4.7	-0.1	-4.6
IIIQ2009	12,746.7	-4.3	0.4	-3.3
IV2009	12,873.1	-3.4	1.0	-0.1
IQ2010	12,947.6	-2.8	0.6	1.9
IIQ2010	13,019.6	-2.3	0.6	2.5
IIIQ2010	13,103.5	-1.7	0.6	2.8
IVQ2010	13,181.2	-1.1	0.6	2.4
IQ2011	13,183.8	-1.1	0.0	1.8
IIQ2011	13,264.7	-0.5	0.6	1.9
IIIQ2011	13,306.9	-0.1	0.3	1.6
IV2011	13,441.0	0.9	1.0	2.0
IQ2012	13,506.4	1.4	0.5	2.4
IIQ2012	13,548.5	1.7	0.3	2.1
IIIQ2012	13,616.2	2.2	0.5	2.3

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart I-10 provides the percentage change of real GDP from the same quarter a year earlier from 1980 to 1989. There were two contractions almost in succession in 1980 and from 1981 to 1983. The expansion was marked by initial high rates of growth as in other recession in the postwar US period during which employment lost in the contraction was recovered. Growth rates continued to be high after the initial phase of expansion.

Chart I-10, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The experience of recovery after 2009 is not as complete as during the 1980s. Chart I-11 shows the much lower rates of growth in the early phase of the current expansion and how they have sharply declined from an early peak. The US missed the initial high growth rates in cyclical expansions during which unemployment and underemployment are eliminated.

Chart I-11, Percentage Change of Real Gross Domestic Product from Quarter a Year Earlier 2007-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-12 provides growth rates from a quarter relative to the prior quarter during the 1980s. There is the same strong initial growth followed by a long period of sustained growth.

Chart I-12, Percentage Change of Real Gross Domestic Product from Prior Quarter 1980-1989

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

Chart I-13 provides growth rates in a quarter relative to the prior quarter from 2007 to 2012. Growth in the current expansion after IIIQ2009 has not been as strong as in other postwar cyclical expansions.

Chart I-13, Percentage Change of Real Gross Domestic Product from Prior Quarter 2007-2012

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

The revised estimates and earlier estimates from IQ2008 to IQ2012 in seasonally adjusted annual equivalent rates are shown in Table I-7. The strongest revision is for IVQ2008 for which the contraction of GDP is revised from minus 6.8 percent to minus 8.9 percent. IQ2009 is also revised from contraction of minus 4.9 percent to minus 6.7 percent but then lowered to contraction of 5.3 percent. There is only minor revision in IIIQ2008 of the contraction of minus 4.0 percent to minus 3.7 percent. Growth of 5.0 percent in IV2009 is revised to 3.8 percent and then increased to 4.0 percent. Growth in IQ2010 is lowered from 3.9 percent to 2.3 percent. Growth in IIQ2010 is upwardly revised to 3.8 percent but then lowered to 2.2 percent. The revisions do not alter the conclusion that the current expansion is much weaker than historical sharp contractions since the 1950s and is now changing into slow growth recession with higher risks of contraction.

Table I-7, US, Quarterly Growth Rates of GDP, % Annual Equivalent SA, Revised and Earlier Estimates

Quarters	Revised Estimate Jul 27, 2012	Revised Estimate Jul 29, 2011	Earlier Estimate
2008
I		-1.8	-0.7
II		1.3	0.6
III		-3.7	-4.0
IV		-8.9	-6.8
2009
I	-5.3	-6.7	-4.9
II	-0.3	-0.7	-0.7
III	1.4	1.7	1.6
IV	4.0	3.8	5.0
2010
I	2.3	3.9	3.7
II	2.2	3.8	1.7
III	2.6	2.5	2.6
IV	2.4	2.3	3.1
2011
I	0.1	0.4	1.9
II	2.5
III	1.3
IV	4.1
2012
I	2.0
II	1.3
III	2.0

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Aggregate demand, personal consumption expenditures (PCE) and gross private domestic investment (GDI) were much stronger during the expansion phase in IQ1983 to IIQ1984 than in IIIQ2009 to IIIQ2012. GDI provided the impulse of growth in 1983 and 1984, which has not been the case from 2009 to 2012. The investment decision in the US economy has been frustrated in the current cyclical expansion. Growth of GDP in IIIQ2012 of 2.0 percent at seasonally-adjusted annual rate (SAAR) consisted of positive contributions of 1.42 percentage points of personal consumption expenditures (PCE) + 0.07 percentage points of gross domestic investment (GDI) but inventory change deducting 0.12 percentage points (∆ PI) less 0.18 percentage points of net exports (net trade or exports less imports) plus 0.71 percentage points of government consumption expenditures and gross investment (GOV). While the contribution of personal consumption expenditures increased from 1.06 percentage points in IIQ2012 to 1.42 percentage points in IIIQ2012, the contribution of government expenditures increased from deduction of 0.14 percentage points in IIQ2012 to adding 0.71 percentage points in IIIQ2012. The bulk of the contribution of government consisted of 0.64 percentage points of one-time national defense expenditures resulting from growth of national defense expenditures at the seasonally adjusted annual rate (SAAR) of 13.0 percent in IIIQ2012. The contribution of PCE fell from 1.72 percentage points in IQ2012 to 1.06 percentage points in IIQ2012 and 1.42 percentage points in IIIQ2012 as savings decreased. The contribution of GDI decreased from 0.78 percentage points in IQ2012 to 0.09 percentage points in IIQ2012 and 0.07 percentage points in IIIQ2012 with inventory accumulation deducting 0.12 percentage points in IIIQ2012 relative to deduction of 0.46 percentage points in IQ2012. Growth in IVQ2011 was driven mainly by increase in private inventories of 2.53 percentage points. The economy of the United States has lost the dynamic growth impulse of earlier cyclical expansions with mediocre growth resulting from consumption forced by one-time effects of financial repression and national defense expenditures.

Table I-8, US, Contributions to the Rate of Growth of GDP in Percentage Points

	GDP	PCE	GDI	∆ PI	Trade	GOV
2012
I	2.0	1.72	0.78	-0.39	0.06	-0.60
II	1.3	1.06	0.09	-0.46	0.23	-0.14
III	2.0	1.42	0.07	-0.12	-0.18	0.71
2011
I	0.1	2.22	-0.68	-0.54	0.03	-1.49
II	2.5	0.70	1.40	0.01	0.54	-0.16
III	1.3	1.18	0.68	-1.07	0.02	-0.60
IV	4.1	1.45	3.72	2.53	-0.64	-0.43
2010
I	2.3	1.72	2.13	2.23	-0.83	-0.69
II	2.2	1.81	1.65	0.07	-1.81	0.59
III	2.6	1.75	1.87	1.97	-0.95	-0.06
IV	2.4	2.84	-0.75	-1.61	1.24	-0.94
2009
I	-5.3	-1.06	-7.02	-2.29	2.45	0.37
II	-0.3	-1.21	-3.52	-1.03	2.47	1.94
III	1.4	1.50	-0.14	0.19	-0.70	0.79
IV	4.0	-0.01	3.85	4.55	-0.05	0.23
1982
I	-6.4	1.62	-7.50	-5.47	-0.49	-0.03
II	2.2	0.90	-0.05	2.35	0.84	0.50
III	-1.5	1.92	-0.72	1.15	-3.31	0.57
IV	0.3	4.64	-5.66	-5.48	-0.10	1.44
1983
I	5.1	2.54	2.20	0.94	-0.30	0.63
II	9.3	5.22	5.87	3.51	-2.54	0.75
III	8.1	4.66	4.30	0.60	-2.32	1.48
IV	8.5	4.20	6.84	3.09	-1.17	-1.35
1984
I	8.0	2.35	7.15	5.07	-2.37	0.86
II	7.1	3.75	2.44	-0.30	-0.89	1.79
III	3.9	2.02	1.67	0.21	-0.36	0.62
IV	3.3	3.38	-1.26	-2.50	-0.58	1.75
1985
I	3.8	4.34	-2.38	-2.94	0.91	0.95
II	3.4	2.35	1.24	0.35	-2.01	1.85
III	6.4	4.91	-0.68	-0.16	-0.01	2.18
IV	3.1	0.54	2.72	1.45	-0.68	0.50

Note: PCE: personal consumption expenditures; GDI: gross private domestic investment; ∆ PI: change in private inventories; Trade: net exports of goods and services; GOV: government consumption expenditures and gross investment; – is negative and no sign positive

GDP: percent change at annual rate; percentage points at annual rates

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The Bureau of Economic Analysis (BEA) (http://www.bea.gov/newsreleases/national/gdp/2012/pdf/gdp3q12_adv.pdf 1-2) explains growth of GDP in IIQ2012 as follows:

“The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), federal government spending, and residential fixed investment that were partly offset by negative contributions from exports, nonresidential fixed investment, and private inventory investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The acceleration in real GDP in the third quarter primarily reflected an upturn in federal government spending, a downturn in imports, an acceleration in PCE, a smaller decrease in private inventory investment, an acceleration in residential fixed investment, and a smaller decrease in state and local government spending that were partly offset by downturns in exports and in nonresidential fixed investment.”

There are positive contributions to growth in IIIQ2012 shown in Table I-9:

· Personal consumption expenditures (PCE) growing at 2.0 percent with increasing consumption of durable goods

· Residential fixed investment (RFI) growing at 14.4 percent

· Government expenditures growing at 3.7 percent because of growth of federal government expenditures at 9.6 percent with national defense expenditures growing at 13.0 percent in IIIQ2012 and contributing 0.64 percentage points after deducting from growth in three consecutive prior quarters IIQ2012, IQ2012 and IVQ2011 and contributing only 0.15 percentage points in IIIQ2011

· Imports declining 0.2 percent, which is a contribution to growth

There were negative contributions in IIIQ2012:

· Nonresidential fixed investment (NRFI) declining 1.3 percent

· Exports declining 1.6 percent

· Private inventory investment of minus 0.12 percentage points

· State and local government spending (State/Local GOV) falling at 0.1 percent

The BEA explains acceleration in real GDP in IIIQ2012 by:

· Acceleration in PCE from growth at 1.5 percent in IIQ2012 to 2.0 percent in IIIQ2012

· Acceleration in growth of RFI from 8.5 percent in IIQ2012 to 14.4 percent in IIIQ2012

· Acceleration of private inventory investment from deduction of 0.46 percentage points in IIQ2012 to deduction of 0.12 percentage points in IIIQ2012

· Acceleration of national defense expenditures of minus 0.2 percent in IIQ2012 to 13.0 percent in IIIQ2012 with contribution to growth changing from minus 0.01 percent to 0.64 percentage points

The BEA finds offsetting causes of acceleration in IIIQ2012:

· Deceleration in contraction of nonresidential fixed investment from 3.6 percent in IIQ2012 to minus 1.3 percent in IIIQ2012

· Deceleration in import growth from 5.3 percent in IIQ2012 to minus 1.6 percent in IIIQ2012

Table I-9, US, Percentage Seasonally Adjusted Annual Equivalent Quarterly Rates of Increase, %

	IIIQ 2011	IVQ 2011	IQ 2012	IIQ 2012	IIIQ 2012
GDP	1.3	4.1	2.0	1.3	2.0
PCE	1.7	2.0	2.4	1.5	2.0
Durable Goods	5.4	13.9	11.5	-0.2	8.5
NRFI	19.0	9.5	7.5	3.6	-1.3
RFI	1.4	12.1	20.5	8.5	14.4
Exports	6.1	1.4	4.4	5.3	-1.6
Imports	4.7	4.9	3.1	2.8	-0.2
GOV	-2.9	-2.2	-3.0	-0.7	3.7
Federal GOV	-4.3	-4.4	-4.2	-0.2	9.6
National Defense	2.6	-10.6	-7.1	-0.2	13.0
Cont to GDP Growth % Points	0.15	-0.60	-0.39	-0.01	0.64
State/Local GOV	-2.0	-0.7	-2.2	-1.0	-0.1
∆ PI (PP)	-1.07	2.53	-0.39	-0.46	-0.12
Final Sales of Domestic Product	2.3	1.5	2.4	1.7	2.1
Gross Domestic Purchases	1.2	4.6	1.8	1.0	2.1
Prices Gross Domestic Purchases	2.3	0.9	2.5	0.7	1.5
Prices of GDP	3.0	0.4	2.0	1.6	2.8
Prices of GDP Excluding Food and Energy	2.1	0.9	2.6	1.4	1.5
Prices of PCE	2.3	1.1	2.5	0.7	1.8
Prices of PCE Excluding Food and Energy	1.9	1.3	2.2	1.7	1.3
Prices of Market Based PCE	2.6	1.2	2.5	0.6	1.8
Prices of Market Based PCE Excluding Food and Energy	2.1	1.5	2.2	1.8	1.3
Real Disposable Personal Income*	0.6	0.3	0.2	1.3	1.8
Personal Savings As % Disposable Income	3.9	3.4	3.6	4.0	3.7

Note: PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment; GOV: government consumption expenditures and gross investment; ∆ PI: change in

private inventories; GDP - ∆ PI: final sales of domestic product; PP: percentage points; Personal savings rate: savings as percent of disposable income

*Percent change from quarter one year ago

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Percentage shares of GDP are shown in Table I-10. PCE is equivalent to 70.8 percent of GDP and is under pressure with stagnant real disposable income, high levels of unemployment and underemployment and higher savings rates than before the global recession, temporarily interrupted by financial repression in the form of zero interest rates. Gross private domestic investment is also growing slowly even with about two trillions of dollars in cash holdings by companies. In a slowing world economy, it may prove more difficult to grow exports faster than imports to generate higher growth. Bouts of risk aversion revalue the dollar relative to most currencies in the world as investors increase their holdings of dollar-denominated assets.

Table I-10, US, Percentage Shares of GDP, %

	IIIQ2012
GDP	100.0
PCE	70.8
Goods	24.1
Durable	7.7
Nondurable	16.4
Services	46.7
Gross Private Domestic Investment	13.0
Fixed Investment	12.7
NRFI	10.2
RFI	2.5
Change in Private Inventories	0.3
Net Exports of Goods and Services	-3.4
Exports	13.8
Goods	9.7
Services	4.1
Imports	17.2
Goods	14.3
Services	2.9
Government	19.6
Federal	7.9
Defense	5.3
Nondefense	2.6
State and Local	11.7

PCE: personal consumption expenditures; NRFI: nonresidential fixed investment; RFI: residential fixed investment

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-11 shows percentage point (PP) contributions to the annual levels of GDP growth in the earlier recessions 1958-1959, 1975-1976, 1982-1983 and 2009, 2010 and 2011. The data incorporate the new revisions released by the BEA on Jul 29, 2011 and Jul 27, 2012 and the first estimate of 2012 GDP released on Jul 27, 2012. The most striking contrast is in the rates of growth of annual GDP in the expansion phases of 7.2 percent in 1959, 4.5 percent in 1983 followed by 7.2 percent in 1984 and 4.1 percent in 1985 but only 2.4 percent in 2010 after six consecutive quarters of growth and 1.8 percent in 2011 after ten consecutive quarters of expansion. Annual levels also show much stronger growth of PCEs in the expansions after the earlier contractions than in the expansion after the global recession of 2007. Gross domestic investment was much stronger in the earlier expansions than in 2010 and 2011.

Table I-11, US, Percentage Point Contributions to the Annual Growth Rate of GDP

	GDP	PCE	GDI	∆ PI	Trade	GOV
1958	-0.9	0.54	-1.25	-0.18	-0.89	0.70
1959	7.2	3.61	2.80	0.86	0.00	0.76
1975	-0.2	1.40	-2.98	-1.27	0.89	0.48
1976	5.4	3.51	2.84	1.41	-1.08	0.10
1982	-1.9	0.86	-2.55	-1.34	-0.60	0.35
1983	4.5	3.65	-1.45	0.29	-1.35	0.76
1984	7.2	3.43	4.63	1.95	-1.58	0.70
1985	4.1	3.32	-0.17	-1.06	-0.42	1.41
2009	-3.1	-1.36	-3.59	-0.78	1.14	0.74
2010	2.4	1.28	1.50	1.52	-0.52	0.14
2011	1.8	1.79	0.62	-0.14	0.07	-0.67

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Table I-12 provides more detail of the contributions to growth of GDP from 2009 to 2011 using annual-level data. PCEs contributed 1.28 PPs to GDP growth in 2010 of which 0.82 percentage points (PP) in goods and 0.46 PP in services. Gross private domestic investment (GPDI) deducted 3.59 PPs of GDP growth in 2009 of which -2.80 PPs by fixed investment and -0.78 PPs of inventory change (∆PI) and added 1.50 PPs of GPDI in 2010 of which minus 0.03 PPs of fixed investment and 1.52 PPs of inventory accumulation (∆PI). Trade, or exports of goods and services net of imports, contributed 1.14 PPs in 2009 of which exports deducted 1.14 PPs and imports added 2.28 PPs. In 2010, trade deducted 0.52 PPs with exports contributing 1.29 PPs and imports deducting 1.81 PPs likely benefitting from dollar devaluation. In 2009, government added 0.74 PP of which 0.46 PPs by the federal government and 0.28 PPs by state and local government; in 2010, government added 0.14 PPs of which 0.37 PPs by the federal government with state and local government deducting 0.23 PPs. The final column of Table II-12 provides the estimate for 2011. PCE contributed 1.79 PPs in 2011 after 1.28 PPs in 2010. The breakdown into goods and services is similar. Gross private domestic investment contributed 1.50 PPs in 2010 with addition of 1.52 PPs of change of private inventories but the contribution of gross private domestic investment was only 0.62 PPs in 2011. Net exports of goods and services contributed marginally in 2011 with 0.07 PPs. Government deducted 0.67 PPs in 2011. The expansion since IIIQ2009 has been characterized by weak contributions of aggregate demand, which is the sum of personal consumption expenditures plus gross private domestic investment. The US did not recover strongly from the global recessions as typical in past cyclical expansions. Recovery tends to be more sluggish as the expansion matures. At the margin in IVQ2011 the acceleration of expansion was driven by inventory accumulation instead of aggregate demand of consumption and investment. Growth of PCE was partly the result of burning savings because of financial repression, which may not be sustainable in the future.

Table I-12, US, Contributions to Growth of Gross Domestic Product in Percentage Points

	2009	2010	2011
GDP Growth ∆%	-3.1	2.4	1.8
Personal Consumption Expenditures (PCE)	-1.36	1.28	1.79
Goods	-0.69	0.82	0.89
Durable	-0.41	0.45	0.53
Nondurable	-0.28	0.37	0.36
Services	-0.67	0.46	0.90
Gross Private Domestic Investment (GPDI)	-3.59	1.50	0.62
Fixed Investment	-2.80	-0.03	0.76
Nonresidential	-2.08	0.07	0.80
Structures	-0.85	-0.50	0.07
Equipment, software	-1.23	0.56	0.72
Residential	-0.73	-0.09	-0.03
Change Private Inventories	-0.78	1.52	-0.14
Net Exports of Goods and Services	1.14	-0.52	0.07
Exports	-1.14	1.29	0.87
Goods	-1.05	1.11	0.65
Services	-0.10	0.18	0.22
Imports	2.28	-1.81	-0.80
Goods	2.19	-1.74	-0.72
Services	0.09	-0.07	-0.08
Government Consumption Expenditures and Gross Investment	0.74	0.14	-0.67
Federal	0.46	0.37	-0.23
National Defense	0.31	0.17	-0.15
Nondefense	0.16	0.20	-0.09
State and Local	0.28	-0.23	-0.43

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Manufacturing jobs fell by 16,000 in Sep 2012 relative to Aug 2012, seasonally adjusted, and fell 40,000 in Sep 2012 relative to Aug 2012, not seasonally adjusted, as shown in Table I-10 in the text at http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html, because of the weaker economy and international trade. In the six months ending in Sep 2012, United States national industrial production accumulated growth of 0.6 percent at the annual equivalent rate of 1.2 percent, which is substantially lower than 2.8 percent growth in 12 months. Capacity utilization for total industry in the United States is 2.0 percentage points lower than the long-run average from 1972 to 2011. Manufacturing increased 0.1 percent in the six months ending in Sep or at the annual equivalent rate of 0.2 percent. Table I-13 provides national income by industry without capital consumption adjustment (WCCA). “Private industries” or economic activities have share of 86.5 percent in US national income in IQ2012 and 86.3 percent in IIQ2012. Most of US national income is in the form of services. In Sep 2012, there were 133.797 million nonfarm jobs NSA in the US, according to estimates of the establishment survey of the Bureau of Labor Statistics (BLS) (http://www.bls.gov/news.release/empsit.nr0.htm Table B-1). Total private jobs of 111.989 million NSA in Sep 2012 accounted for 83.7 percent of total nonfarm jobs of 133.797 million, of which 12.028 million, or 10.7 percent of total private jobs and 9.0 percent of total nonfarm jobs, were in manufacturing. Private service-producing jobs were 93.334 million NSA in Sep 2012, or 69.8 percent of total nonfarm jobs and 83.3 percent of total private-sector jobs. Manufacturing has share of 11.0 percent in US national income in IIQ2012, as shown in Table ESII-3. Most income in the US originates in services. Subsidies and similar measures designed to increase artificially and temporarily manufacturing jobs will not increase economic growth and employment and may actually reduce growth by diverting resources away from currently employment-creating activities because of the drain of taxation.

Table I-13, US, National Income without Capital Consumption Adjustment by Industry, Seasonally Adjusted Annual Rates, Billions of Dollars, % of Total

	SAAR IQ2012	% Total	SAAR IIQ2012	% Total
National Income WCCA	13,788.3	100.0	13,867.8	100.0
Domestic Industries	13,573.4	98.4	13,620.5	98.2
Private Industries	11,922.7	86.5	11,967.5	86.3
Agriculture	134.0	1.0	132.8	0.9
Mining	211.0	1.5	208.7	1.5
Utilities	211.9	1.5	214.7	1.6
Construction	585.6	4.3	585.8	4.2
Manufacturing	1521.9	11.0	1530.4	11.0
Durable Goods	865.2	6.3	877.3	6.3
Nondurable Goods	656.6	4.8	653.1	4.7
Wholesale Trade	831.6	6.0	852.8	6.2
Retail Trade	947.5	6.9	947.2	6.8
Transportation & WH	416.5	3.0	417.7	3.0
Information	486.7	3.5	497.0	3.6
Finance, insurance, RE	2301.3	16.7	2271.1	16.4
Professional, BS	1955.0	14.2	1983.5	14.3
Education, Health Care	1380.8	10.0	1382.7	10.0
Arts, Entertainment	541.1	3.9	542.7	3.9
Other Services	397.9	2.9	400.3	2.9
Government	1650.7	12.0	1653.0	11.9
Rest of the World	214.9	1.6	247.3	1.8

Notes: SSAR: Seasonally-Adjusted Annual Rate; WCCA: Without Capital Consumption Adjustment by Industry; WH: Warehousing; RE, includes rental and leasing: Real Estate; Art, Entertainment includes recreation, accommodation and food services; BS: business services

Source: US Bureau of Economic Analysis

http://www.bea.gov/iTable/index_nipa.cfm

IA Collapse of United States Dynamism of Income Growth and Employment Creation. Lucas (2011May) estimates US economic growth in the long-term at 3 percent per year and about 2 percent per year in per capita terms. There are displacements from this trend caused by events such as wars and recessions but the economy then returns to trend. Historical US GDP data exhibit remarkable growth: Lucas (2011May) estimates an increase of US real income per person by a factor of 12 in the period from 1870 to 2010. The explanation by Lucas (2011May) of this remarkable growth experience is that government provided stability and education while elements of “free-market capitalism” were an important driver of long-term growth and prosperity. The analysis is sharpened by comparison with the long-term growth experience of G7 countries (US, UK, France, Germany, Canada, Italy and Japan) and Spain from 1870 to 2010. Countries benefitted from “common civilization” and “technology” to “catch up” with the early growth leaders of the US and UK, eventually growing at a faster rate. Significant part of this catch up occurred after World War II. Lucas (2011May) finds that the catch up stalled in the 1970s. The analysis of Lucas (2011May) is that the 20-40 percent gap that developed originated in differences in relative taxation and regulation that discouraged savings and work incentives in comparison with the US. A larger welfare and regulatory state, according to Lucas (2011May), could be the cause of the 20-40 percent gap. Cobet and Wilson (2002) provide estimates of output per hour and unit labor costs in national currency and US dollars for the US, Japan and Germany from 1950 to 2000 (see Pelaez and Pelaez, The Global Recession Risk (2007), 137-44). The average yearly rate of productivity change from 1950 to 2000 was 2.9 percent in the US, 6.3 percent for Japan and 4.7 percent for Germany while unit labor costs in USD increased at 2.6 percent in the US, 4.7 percent in Japan and 4.3 percent in Germany. From 1995 to 2000, output per hour increased at the average yearly rate of 4.6 percent in the US, 3.9 percent in Japan and 2.6 percent in Germany while unit labor costs in USD fell at minus 0.7 percent in the US, 4.3 percent in Japan and 7.5 percent in Germany. There was increase in productivity growth in Japan and France within the G7 in the second half of the 1990s but significantly lower than the acceleration of 1.3 percentage points per year in the US. Long-term economic growth and prosperity are measured by the key indicators of growth of real income per capita, or what is earned per person after inflation. A refined concept would include real disposable income per capita, or what is earned per person after inflation and taxes.

Table IA-1 provides the data required for broader comparison of the cyclical expansions of IQ1983 to IVQ1985 and the current one from 2009 to 2012. First, in the 13 quarters from IQ1983 to IVQ1985, GDP increased 19.6 percent at the annual equivalent rate of 5.7 percent; real disposable personal income (RDPI) increased 14.5 percent at the annual equivalent rate of 4.3 percent; RDPI per capita increased 11.5 percent at the annual equivalent rate of 3.4 percent; and population increased 2.7 percent at the annual equivalent rate of 0.8 percent. Second, in the 13 quarters of the current cyclical expansion from IIIQ2009 to IIIQ2012, GDP increased 7.2 percent at the annual equivalent rate of 2.2 percent. In the 12 quarters of cyclical expansion from IIIQ2009 to IIQ2012, real disposable personal income (RDPI) increased 3.8 percent at the annual equivalent rate of 1.3 percent; RDPI per capita increased 1.4 percent at the annual equivalent rate of 0.5 percent; and population increased 2.3 percent at the annual equivalent rate of 0.8 percent. Third, since the beginning of the recession in IVQ2007 to IIIQ2012, GDP increased 2.2 percent, or barely above the level before the recession. Since the beginning of the recession in IVQ2007 to IIQ2012, real disposable personal income increased 3.5 percent; population increased 3.7 percent; and real disposable personal income per capita is 0.2 percent lower than the level before the recession. Real disposable personal income is the actual take home pay after inflation and taxes and real disposable income per capita is what is left per inhabitant. The current cyclical expansion is the worst in the period after World War II in terms of growth of economic activity and income. The United States grew during its history at high rates of per capita income that made its economy the largest in the world. That dynamism is disappearing. Bordo (2012 Sep27) and Bordo and Haubrich (2012DR) provide strong evidence that recoveries have been faster after deeper recessions and recessions with financial crises, casting serious doubts on the conventional explanation of weak growth during the current expansion allegedly because of the depth of the contraction from IVQ2007 to IIQ2009 of 4.7 percent and the financial crisis.

Table IA-1, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %

	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1985	13
GDP		19.6	5.7
RDPI		14.5	4.3
RDPI Per Capita		11.5	3.4
Population		2.7	0.8
IIIQ2009 to IIIQ2012	13
GDP		7.2	2.2
RDPI*		3.8	1.3
RDPI per Capita*		1.4	0.5
Population*		2.3	0.8
IVQ2007 to IIIQ2012	20
GDP		2.2	0.4
RDPI*		3.5	0.7
RDPI per Capita*		-0.2
Population*		3.7	0.8

*: To IIQ2012; RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

There are six basic facts illustrating the current economic disaster of the United States: (1) GDP maintained trend growth in the entire business cycle from IQ1980 to IV1985, including contractions and expansions, but is well below trend in the entire business cycle from IVQ2007 to IIQ2012, including contractions and expansions; (2) per capita real disposable income exceeded trend growth in the 1980s but is substantially below trend in IIQ2012; (3) the number of employed persons increased in the 1980s but declined into IIQ2012; (4) the number of full-time employed persons increased in the 1980s but declined into IIQ2012; (5) the number unemployed, unemployment rate and number employed part-time for economic reasons fell in the recovery from the recessions of the 1980s but not substantially in the recovery after IIQ2009; and (6) wealth of households and nonprofit organizations soared in the 1980s but declined into IIQ2012. There is a critical issue of whether the United States economy will be able in the future to attain again the level of activity and prosperity of projected trend growth. Growth at trend during the entire business cycles built the largest economy in the world but there may be an adverse, permanent weakness in United States economic performance and prosperity. Table IA-2 provides data for analysis of these five basic facts. The six blocks of Table IA-2 are separated initially after individual discussion of each one followed by the full Table IA-2.

1. Trend Growth.

i. As shown in Table IA-2, actual GDP grew cumulatively 17.7 percent from IQ1980 to IVQ1985, which is relatively close to what trend growth would have been at 18.5 percent. Rapid growth at 5.7 percent annual rate on average per quarter during the expansion from IQ1983 to IVQ1985 erased the loss of GDP of 4.8 percent during the contraction and maintained trend growth at 3 percent over the entire cycle.

ii. In contrast, cumulative growth from IVQ2007 to IIIQ2012 was 2.2 percent while trend growth would have been 15.1 percent. GDP in IIIQ2012 at seasonally adjusted annual rate is estimated at $13,616.2 percent by the Bureau of Economic Analysis (BEA) (http://www.bea.gov/iTable/index_nipa.cfm) and would have been $15,338.2 billion, or $1,722 billion higher, had the economy grown at trend over the entire business cycle as it happened during the 1980s and throughout most of US history. There is $1.7 trillion of foregone GDP that would have been created as it occurred during past cyclical expansions, which explains why employment has not rebounded to even higher than before. There would not be recovery of full employment even with growth of 3 percent per year beginning immediately because the opportunity was lost to grow faster during the expansion from IIIQ2009 to IIIQ2012 after the recession from IVQ2007 to IIQ2009. The United States has acquired a heavy social burden of unemployment and underemployment of 28.7 million people or 17.8 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html) that will not be significantly diminished even with return to growth of GDP of 3 percent per year because of growth of the labor force by new entrants. The US labor force grew from 142.583 million in 2000 to 153.124 million in 2007 or by 7.4 percent at the average yearly rate of 1.0 percent per year. The civilian noninstitutional population increased from 212.577 million in 2000 to 231.867 million in 2007 or 9.1 percent at the average yearly rate of 1.3 percent per year (data from http://www.bls.gov/data/). Data for the past five years cloud accuracy because of the number of people discouraged from seeking employment. The noninstitutional population of the United States increased from 231.867 million in 2007 to 239.618 million in 2011 or by 3.3 percent while the labor force increased from 153.124 million in 2007 to 153.617 million in 2011 or by 0.3 percent (data from http://www.bls.gov/data/). People ceased to seek jobs because they do not believe that there is a job available for them (Section I http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html).

Period IQ1980 to IVQ1985
GDP SAAR USD Billions
IQ1980	5,903.4
IVQ1985	6,950.0
∆% IQ1980 to IVQ1985	17.7
∆% Trend Growth IQ1980 to IVQ1985	18.5

Period IVQ2007 to IIIQ2012
GDP SAAR USD Billions
IVQ2007	13,326.0
IIIQ2012	13,616.2
∆% IVQ2007 to IIIQ2012 Actual	2.2
∆% IVQ2007 to IIIQ2012 Trend	15.1

2. Decline of Per Capita Real Disposable Income

i. In the entire business cycle from IQ1980 to IVQ1985, as shown in Table IA-2 trend growth of per capita real disposable income, or what is left per person after inflation and taxes, grew cumulatively 14.5 percent, which is close to what would have been trend growth of 12.1 percent.

ii. In contrast, in the entire business cycle from IVQ2007 to IIQ2012, per capita real disposable income fell 0.2 percent while trend growth would have been 9.3 percent. Income available after inflation and taxes is lower than before the contraction after 12 consecutive quarters of GDP growth at mediocre rates relative to those prevailing during historical cyclical expansions.

Period IQ1980 to IVQ1985

Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD	18,938
Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD	21,687
∆% IQ1980 to IVQ1985	14.5
∆% Trend Growth	12.1

Period IVQ2007 to IIQ2012

Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD	32,837
Real Disposable Personal Income per Capita IIQ2012 Chained 2005 USD	32,779
∆% IVQ2007 to IIQ2012	-0.2
∆% Trend Growth	9.3

3. Number of Employed Persons

i. As shown in Table IA-2, the number of employed persons increased over the entire business cycle from 98.527 million not seasonally adjusted (NSA) in IQ1980 to 107.819 million NSA in IVQ1985 or by 9.4 percent.

ii. In contrast, during the entire business cycle the number employed fell from 146.334 million in IVQ2007 to 143.202 million in IIQ2012 or by 2.1 percent. There are 28.7 million persons unemployed or underemployed, which is 17.8 percent of the effective labor force (Section I, Table I-4 http://cmpassocregulationblog.blogspot.com/2012/10/twenty-nine-million-unemployed-or.html).

Period IQ1980 to IVQ1985

Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IV1985 NSA End of Quarter	107.819
∆% Employed IQ1980 to IV1985	9.4

Period IVQ2007 to IIQ2012

Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIQ2012 NSA End of Quarter	143.202
∆% Employed IVQ2007 to IIQ2012	-2.1

4. Number of Full-Time Employed Persons

i. As shown in Table IA-2, during the entire business cycle in the 1980s, including contractions and expansion, the number of employed full-time rose from 81.280 million NSA in IQ1980 to 88.757 million NSA in IVQ1985 or 9.2 percent.

ii. In contrast, during the entire current business cycle, including contraction and expansion, the number of persons employed full-time fell from 121.042 million in IVQ2007 to 116.024 million in IIQ2012 or by minus 4.1 percent.

Period IQ1980 to IVQ1985

Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IV1985 NSA End of Quarter	88.757
∆% Full-time Employed IQ1980 to IV1985	9.2

Period IVQ2007 to IIQ2012

Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIQ2012 NSA End of Quarter	116.024
∆% Full-time Employed IVQ2007 to IIQ2012	-4.1

5. Unemployed, Unemployment Rate and Employed Part-time for Economic Reasons.

i. As shown in Table IA-2 and in the following block, in the cycle from IQ1980 to IVQ1985: (a) the rate of unemployment was virtually the same at 6.7 percent in IQ1985 relative to 6.6 percent in IQ1980; (b) the number unemployed increased from 6.983 million in IQ1980 to 7.717 million in IVQ1985 or 10.5 percent; and (c) the number employed part-time for economic reasons increased 49.1 percent from 3.624 million in IQ1980 to 5.402 million in IVQ1985.

ii. In contrast, in the economic cycle from IVQ2007 to IIQ2012: (a) the rate of unemployment increased from 4.8 percent in IVQ2007 to 8.4 percent in IIQ2012; (b) the number unemployed increased 78.9 percent from 7.371 million in IVQ2007 to 13.184 million in IIQ2012; (c) the number employed part-time for economic reasons increased 76.7 percent from 4.750 in IVQ2007 to 8.394 million in IIQ2012; and (d) U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA increased from 8.7 percent in IVQ2007 to 14.2 percent in IIQ2012.

Period IQ1980 to IVQ1985

Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IV1985 NSA End of Quarter	6.7
Unemployed IQ1980 Millions End of Quarter	6.983
Unemployed IV 1985 Millions End of Quarter	7.717
Employed Part-time Economic Reasons Millions IQ1980 End of Quarter	3.624
Employed Part-time Economic Reasons Millions IVQ1985 End of Quarter	5.402
∆%	49.1

Period IVQ2007 to IIQ2012

Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIQ2012 NSA End of Quarter	8.4
Unemployed IVQ2007 Millions End of Quarter	7.371
Unemployed IIQ2009 Millions End of Quarter	13.184
∆%	78.9
Employed Part-time Economic Reasons IVQ2007 Millions End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIQ2009 End of Quarter	8.394
∆%	76.7
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIQ2012	14.2

6. Wealth of Households and Nonprofit Organizations.

i. The comparison of net worth of households and nonprofit organizations in the entire economic cycle from IQ1980 (and also from IVQ1979) to IVQ1985 and from IVQ2007 to IIQ2012 is provided in the following block and in Table IA-2. Net worth of households and nonprofit organizations increased from $8,326.4 billion in IVQ1979 to $14,395.2 billion in IVQ1985 or 72.9 percent or 69.3 percent from $8,502.9 billion in IQ1980. The starting quarter does not bias the results. The US consumer price index not seasonally adjusted increased from 76.7 in Dec 1979 to 109.3 in Dec 1985 or 42.5 percent or 36.5 percent from 80.1 in Mar 1980 (using consumer price index data from the US Bureau of Labor Statistics at http://www.bls.gov/cpi/data.htm). In terms of purchasing power measured by the consumer price index, real wealth of households and nonprofit organizations increased 21.3 percent in constant purchasing power from IVQ1979 to IVQ1985 or 24.0 percent from IQ1980.

ii. In contrast, as shown in the following block and in Table IA-2, net worth of households and nonprofit organizations fell from $66,057.1 billion in IVQ2007 to $62,668.4 billion in IIQ2012 by $3,388.7 billion or 5.1 percent. The US consumer price index was 210.036 in Dec 2007 and 229.478 in Jun 2012 for increase of 9.3 percent. In purchasing power of Dec 2007, wealth of households and nonprofit organizations is lower by 13.2 percent in Jun 2012 after 12 consecutive quarters of expansion from IIIQ2009 to IIQ2012 relative to IVQ2012 when the recession began. The explanation is partly in the sharp decline of wealth of households and nonprofit organizations and partly in the mediocre growth rates of the cyclical expansion beginning in IIIQ2009. The average growth rate from IIIQ2009 to IIQ2012 has been 2.2 percent, which is substantially lower than the average of 6.2 percent in cyclical expansions after World War II and 5.7 percent in the expansion from IQ1983 to IVQ1985 (see Table I-5 http://cmpassocregulationblog.blogspot.com/2012/09/historically-sharper-recoveries-from.html). The US missed the opportunity of high growth rates that has been available in past cyclical expansions.

Period IQ1980 to IVQ1985
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ1979	8,326.4
IVQ1985	14,395.2
∆ USD Billions	+6,068.8
Period IVQ2007 to IIQ2012
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ2007	66,057.1
IIQ2012	62,668.4
∆ USD Billions	-3,388.7

Table IA-2, US, GDP and Real Disposable Personal Income per Capita Actual and Trend Growth and Employment, 1980-1985 and 2007-2012, SAAR USD Billions, Millions of Persons and ∆%


Period IQ1980 to IVQ1985
GDP SAAR USD Billions
IQ1980	5,903.4
IVQ1985	6,950.0
∆% IQ1980 to IVQ1985	17.7
∆% Trend Growth IQ1980 to IVQ1985	18.5
Real Disposable Personal Income per Capita IQ1980 Chained 2005 USD	18,938
Real Disposable Personal Income per Capita IVQ1985 Chained 2005 USD	21,687
∆% IQ1980 to IVQ1985	14.5
∆% Trend Growth	12.1
Employed Millions IQ1980 NSA End of Quarter	98.527
Employed Millions IV1985 NSA End of Quarter	107.819
∆% Employed IQ1980 to IV1985	9.4
Employed Full-time Millions IQ1980 NSA End of Quarter	81.280
Employed Full-time Millions IV1985 NSA End of Quarter	88.757
∆% Full-time Employed IQ1980 to IV1985	9.2
Unemployment Rate IQ1980 NSA End of Quarter	6.6
Unemployment Rate IV1985 NSA End of Quarter	6.7
Unemployed IQ1980 Millions NSA End of Quarter	6.983
Unemployed IV 1985 Millions NSA End of Quarter	7.717
∆%	11.9
Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIQ2009 NSA End of Quarter	8.394
∆%	76.7
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ1979	8,326.4
IVQ1985	14,395.2
∆ USD Billions	+6,068.8
Period IVQ2007 to IIQ2012
GDP SAAR USD Billions
IVQ2007	13,326.0
IIIQ2012	13,616.2
∆% IVQ2007 to IIIQ2012	2.2
∆% IVQ2007 to IIIQ2012 Trend Growth	15.1
Real Disposable Personal Income per Capita IVQ2007 Chained 2005USD	32,837
Real Disposable Personal Income per Capita IIQ2012 Chained 2005 USD	32,779
∆% IVQ2007 to IIQ2012	-0.2
∆% Trend Growth	9.3
Employed Millions IVQ2007 NSA End of Quarter	146.334
Employed Millions IIQ2012 NSA End of Quarter	143.202
∆% Employed IVQ2007 to IIQ2012	-2.1
Employed Full-time Millions IVQ2007 NSA End of Quarter	121.042
Employed Full-time Millions IIQ2012 NSA End of Quarter	116.024
∆% Full-time Employed IVQ2007 to IIQ2012	-4.1
Unemployment Rate IVQ2007 NSA End of Quarter	4.8
Unemployment Rate IIQ2012 NSA End of Quarter	8.4
Unemployed IVQ2007 Millions NSA End of Quarter	7.371
Unemployed IIQ2009 Millions NSA End of Quarter	13.184
∆%	78.9
Employed Part-time Economic Reasons IVQ2007 Millions NSA End of Quarter	4.750
Employed Part-time Economic Reasons Millions IIQ2009 NSA End of Quarter	8.394
∆%	76.7
U6 Total Unemployed plus all marginally attached workers plus total employed part time for economic reasons as percent of all civilian labor force plus all marginally attached workers NSA
IVQ2007	8.7
IIQ2012	14.2
Net Worth of Households and Nonprofit Organizations USD Billions
IVQ2007	66,057.1
IIQ2012	62,668.4
∆ USD Billions	-3,388.7

Note: GDP trend growth used is 3.0 percent per year and GDP per capita is 2.0 percent per year as estimated by Lucas (2011May) on data from 1870 to 2010.

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm US Bureau of Labor Statistics http://www.bls.gov/data/. Board of Governors of the Federal Reserve System. 2012Sep20. Flow of funds accounts of the United States. Washington, DC, Federal Reserve System.

IIA United States Housing Collapse. The objective of this section is to provide the latest data and analysis of US housing. Subsection IIA1 United New House Sales analyzes the collapse of US new house sales. Subsection IIA2 United States House Prices considers the latest available data on house prices. Subsection IIA3 Factors of US Housing Collapse provides the analysis of the causes of the housing crisis of the US.

IIA1 United States New House Sales. Data and other information continue to provide depressed conditions in the US housing market in a longer perspective with recent improvement at the margin. Table IIA-1 shows sales of new houses in the US at seasonally-adjusted annual equivalent rate (SAAR). House sales fell in nine of twenty one months from Jan 2011 to Sep 2012 but mostly concentrated in Jan-Feb 2011 and May-Aug 2011. In Jan-Apr 2012, house prices increased at the annual equivalent rate of 17.6 percent and at 22.3 percent in May-Sep 2012. There was significant strength in Sep-Dec 2011 with annual equivalent rate of 56.4 percent. The annual equivalent rate in May-Aug 2011 was minus 18.1 percent and minus 12.2 percent in Jan-Apr 2011 but after increase of 13.6 percent in Dec 2010.

Table IIA-1, US, Sales of New Houses at Seasonally-Adjusted (SA) Annual Equivalent Rate, Thousands and %

	SA Annual Rate Thousands	∆%
Sep 2012	389	5.7
Aug	368	-1.3
Jul	373	3.6
Jun	360	-2.4
May	369	3.1
AE ∆% May-Sep		22.3
Apr	358	1.7
Mar	352	-3.8
Feb	366	7.9
Jan	339	0.0
AE ∆% Jan-Apr		17.6
Dec 2011	339	3.7
Nov	327	4.1
Oct	314	2.6
Sep	306	4.8
AE ∆% Sep-Dec		56.4
Aug	292	-1.7
Jul	297	-2.3
Jun	304	-1.3
May	308	-1.3
AE ∆% May-Aug		-18.1
Apr	312	3.7
Mar	301	10.3
Feb	273	-11.4
Jan	308	-5.5
AE ∆% Jan-Apr		-12.2
Dec 2010	326	13.6

AE: Annual Equivalent

Source: US Census Bureau http://www.census.gov/construction/nrs/

There is additional information of the report of new house sales in Table IIA-2. The stock of unsold houses stabilized in Apr-Aug 2011 at average 6.6 monthly equivalent sales at current sales rates and then dropped to 4.5 in Jul and Aug 2012. Median and average house prices oscillate. In Sep 2012, median prices of new houses sold not seasonally adjusted (NSA) decreased 3.2 percent but after increasing revised 5.8 percent in Aug and increasing 1.8 percent in Jul. Average prices decreased 0.5 percent in Sep 2012 but after increasing 4.8 percent in Aug and 3.2 percent in Jul. Between Dec 2010 and Sep 2012, median prices increased 0.5 percent and average prices 0.2 percent. Median house prices increased 10.9 percent from Dec 2011 to Sep 2012 while average price houses increased 11.2 percent. Price increases concentrated in 2012. There are only seven months with price increases in both median and average house prices: Apr 2011 with 1.9 percent in median prices and 3.1 percent in average prices, Jun 2011 with 8.2 percent in median prices and 3.9 percent in average prices, Oct 2011 with 3.6 percent in median prices and 1.1 percent in average prices, Dec 2011 with 2.0 percent in median prices and 5.2 percent in average prices, Jan 2012 with 1.4 percent in median prices and 1.1 percent in average prices, Feb 2012 with 8.2 percent in median prices and 3.1 percent in average prices, Jul with 1.8 percent in median and 3.2 percent in average and Aug 2012 with 5.8 percent in median prices and 4.8 percent in average prices. Median prices of new houses sold in the US fell in ten of the 20 months from Jan 2011 to Aug 2012 and average prices fell in eleven months.

Table IIA-2, US, New House Stocks and Median and Average New Homes Sales Price

	Unsold* Stocks in Equiv. Months of Sales SA %	Median New House Sales Price USD NSA	Month ∆%	Average New House Sales Price USD NSA	Month ∆%
Sep	4.5	242,400	-3.2	292,400	-0.5
Aug	4.7	250,400	5.8	293,900	4.8
Jul	4.6	236,700	1.8	280,500	3.2
Jun	4.8	232,600	-2.8	271,800	-3.2
May	4.7	239,200	1.2	280,900	-2.4
Apr	4.9	236,400	-1.4	287,900	1.5
Mar	4.9	239,800	0.0	283,600	3.5
Feb	4.8	239,900	8.2	274,000	3.1
Jan	5.3	221,700	1.4	265,700	1.1
Dec 2011	5.4	218,600	2.0	262,900	5.2
Nov	5.7	214,300	-4.7	250,000	-3.2
Oct	6.1	224,800	3.6	258,300	1.1
Sep	6.3	217,000	-1.2	255,400	-1.5
Aug	6.6	219,600	-4.5	259,300	-4.1
Jul	6.7	229,900	-4.3	270,300	-1.0
Jun	6.6	240,200	8.2	273,100	3.9
May	6.6	222,000	-1.2	262,700	-2.3
Apr	6.7	224,700	1.9	268,900	3.1
Mar	7.1	220,500	0.2	260,800	-0.8
Feb	8.0	220,100	-8.3	262,800	-4.7
Jan	7.3	240,100	-0.5	275,700	-5.5
Dec 2010	7.0	241,200	9.8	291,700	3.5

*Percent of new houses for sale relative to houses sold

Source: US Census Bureau http://www.census.gov/construction/nrs/

The depressed level of residential construction and new house sales in the US is evident in Table IIA-3 providing new house sales not seasonally adjusted in Jan-Sep of various years. Sales of new houses in Jan-Sep 2012 are substantially lower than in any year between 1963 and 2012 with the exception of 2010 and 2011. There is only one increase of 11.3 percent between Jan-Sep 2011 and Jan-Sep 2012. Sales of new houses in 2012 are lower by 2.1 percent relative to Jan-Sep 2009, 28.8 percent relative to 2008, 54.7 percent relative to 2007, 65.9 percent relative to 2006 and 71.6 percent relative to 2005. The housing boom peaked in 2005 and 2006 when increases in fed funds rates to 5.25 percent in Jun 2006 from 1.0 percent in Jun 2004 affected subprime mortgages that were programmed for refinancing in two or three years on the expectation that price increases forever would raise home equity. Higher home equity would permit refinancing under feasible mortgages incorporating full payment of principal and interest (Gorton 2009EFM; see other references in http://cmpassocregulationblog.blogspot.com/2011/07/causes-of-2007-creditdollar-crisis.html). Sales of new houses in Jan-Sep 2012 relative to the same period in 2004 fell 69.5 percent and 66.4 percent relative to the same period in 2003. Similar percentage declines are also observed for 2012 relative to years from 2000 to 2004. Sales of new houses in Jan-Sep 2012 fell 45.4 per cent relative to the same period in 1995. The population of the US was 179.3 million in 1960 and 281.4 million in 2000 (Hoobs and Snoops 2012, 16). Detailed historical census reports are available from the US Census Bureau at (http://www.census.gov/population/www/censusdata/hiscendata.html). The US population reached 308.7 million in 2010 (http://2010.census.gov/2010census/data/). The US population increased by 129.4 million from 1960 to 2010 or 72.2 percent. The final row of Table IIA-3 reveals catastrophic data: sales of new houses in Jan-Sep 2012 of 285 thousand units are lower by 36.1 percent relative to 446 thousand units houses sold in Jan-Sep 1963, the first year when data become available, while population increased 72.2 percent.

Table IIA-3, US, Sales of New Houses Not Seasonally Adjusted, Thousands and %

	Not Seasonally Adjusted Thousands
Jan-Sep 2012	285
Jan-Sep 2011	234
∆%	21.8
Jan-Sep 2010	256
∆% Jan-Sep 2012/ Jan-Sep 2010	11.3
Jan-Sep 2009	291
∆% Jan-Sep 2012/ Jan-Aug 2009	-2.1
Jan-Sep 2008	400
∆% Jan-Sep 2012/ Jan-Sep 2008	-28.8
Jan-Sep 2007	629
∆% Jan-Sep 2012/ Jan-Sep 2007	-54.7
Jan-Sep 2006	835
∆% Jan-Sep 2012/Jan-Sep 2006	-65.9
Jan-Sep 2005	1,005
∆% Jan-Sep 2012/Jan-Sep 2005	-71.6
Jan-Sep 2004	935
∆% Jan-Sep 2012/Jan-Sep 2004	-69.5
Jan-Sep 2003	848
∆% Jan-Sep 2012/ Jan-Sep 2003	-66.4
Jan-Sep 2002	753
∆% Jan-Sep 2012/ Jan-Sep 2001	-62.2
Jan-Sep 2001	709
∆% Jan-Sep 2012/ Jan-Sep 2001	-59.8
Jan-Sep 2000	679
∆% Jan-Sep 2012/ Jan-Sep 2000	-58.0
Jan-Sep 1995	522
∆% Jan-Sep 2012/ Jan-Sep 1995	-45.4
Jan-Sep 1963	446
∆% Jan-Sep 2012/ Jan-Sep 1963	-36.1

Source: US Census Bureau http://www.census.gov/construction/nrs/

Table IIA-4 provides the entire available annual series of new house sales from 1963 to 2011. The revised level of 306 thousand new houses sold in 2011 is the lowest since 560,000 in 1963 in the 48 years of available data. In that period, the population of the US increased 129.4 million from 179.3 million in 1960 to 308.7 million in 2010, or 72.2 percent. In fact, there is no year from 1963 to 2011 in Table IIA-4 with sales of new houses below 400 thousand with the exception of the immediately preceding years of 2009 and 2010.

Table IIA-4, US, New Houses Sold, NSA Thousands

1963	560
1964	565
1965	575
1966	461
1967	487
1968	490
1969	448
1970	485
1971	656
1972	718
1973	634
1974	519
1975	549
1976	646
1977	819
1978	817
1979	709
1980	545
1981	436
1982	412
1983	623
1984	639
1985	688
1986	750
1987	671
1988	676
1989	650
1990	534
1991	509
1992	610
1993	666
1994	670
1995	667
1996	757
1997	804
1998	886
1999	880
2000	877
2001	908
2002	973
2003	1,086
2004	1,203
2005	1,283
2006	1,051
2007	776
2008	485
2009	375
2010	323
2011	306

Source: US Census Bureau http://www.census.gov/construction/nrs/

Chart IIA-1 of the US Bureau of the Census shows the sharp decline of sales of new houses in the US. Sales rose temporarily until about mid 2010 but then declined to a lower plateau.

Chart IIA-1, US, New One-Family Houses Sold in the US, SAAR (Seasonally-Adjusted Annual Rate)

Source: US Census Bureau

http://www.census.gov/briefrm/esbr/www/esbr051.html

Chart IIA-2 of the US Bureau of the Census provides the entire monthly sample of new houses sold in the US between Jan 1963 and Sep 2012 without seasonal adjustment. The series is almost stationary until the 1990s. There is sharp upward trend from the early 1990s to 2005-2006 after which new single-family houses sold collapse to levels below those in the beginning of the series in the 1960s.

Chart IIA-2, US, New Single-family Houses Sold, NSA, 1963-2012

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Percentage changes and average rates of growth of new house sales for selected periods are shown in Table IIA-5. The percentage change of new house sales from 1963 to 2011 is minus 45.4 percent. Between 1991 and 2001, sales of new houses rose 78.4 percent at the average yearly rate of 5.9 percent. Between 1995 and 2005 sales of new houses increased 92.4 percent at the yearly rate of 6.8 percent. There are similar rates in all years from 2000 to 2004. The boom in housing construction and sales began in the 1980s and 1990s. The collapse of real estate culminated several decades of housing subsidies and policies to lower mortgage rates and borrowing terms (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009b), 42-8). Sales of new houses sold in 2011 fell 54.1 percent relative to the same period in 1995.

Table IIA-5, US, Percentage Change and Average Yearly Rate of Growth of Sales of New One-Family Houses

	∆%	Average Yearly % Rate
1963-2011	-45.4	NA
1991-2001	78.4	5.9
1995-2005	92.4	6.8
2000-2005	46.3	7.9
1995-2011	-54.1	NA
2000-2011	-65.1	NA
2005-2011	-76.1	NA

NA: Not Applicable

Source: US Census Bureau

http://www.census.gov/construction/nrs/

The available historical annual data of median and average prices of new houses sold in the US between 1963 and 2010 is provided in Table IIA-6. On a yearly basis, median and average prices reached a peak in 2007 and then fell substantially.

Table IIA-6, US, Median and Average Prices of New Houses Sold, Annual Data

Year	Median	Average
1975	$39,300	$42,600
1976	$44,200	$48,000
1977	$48,800	$54,200
1978	$55,700	$62,500
1979	$62,900	$71,800
1980	$64,600	$76,400
1981	$68,900	$83,000
1982	$69,300	$83,900
1983	$75,300	$89,800
1984	$79,900	$97,600
1985	$84,300	$100,800
1986	$92,000	$111,900
1987	$104,500	$127,200
1988	$112,500	$138,300
1989	$120,000	$148,800
1990	$122,900	$149,800
1991	$120,000	$147,200
1992	$121,500	$144,100
1993	$126,500	$147,700
1994	$130,000	$154,500
1995	$133,900	$158,700
1996	$140,000	$166,400
1997	$146,000	$176,200
1998	$152,500	$181,900
1999	$161,000	$195,600
2000	$169,000	$207,000
2001	$175,200	$213,200
2002	$187,600	$228,700
2003	$195,000	$246,300
2004	$221,000	$274,500
2005	$240,900	$297,000
2006	$246,500	$305,900
2007	$247,900	$313,600
2008	$232,100	$292,600
2009	$216,700	$270,900
2010	$221,800	$272,900
2011	$227,200	$267,900

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Percentage changes of median and average prices of new houses sold in selected years are shown in Table IIA-7. Prices rose sharply between 2000 and 2005. In fact, prices in 2011 are higher than in 2000. Between 2006 and 2011, median prices of new houses sold fell 7.8 percent and average prices fell 12.4 percent. Between 2010 and 2011, median prices increased 2.4 percent and average prices fell 1.8 percent.

Table IIA-7, US, Percentage Change of New Houses Median and Average Prices, NSA, ∆%

	Median New Home Sales Prices ∆%	Average New Home Sales Prices ∆%
∆% 2000 to 2003	15.4	18.9
∆% 2000 to 2005	42.5	43.5
∆% 2000 to 2011	34.4	29.4
∆% 2005 to 2011	-5.7	-9.8
∆% 2000 to 2006	45.9	47.8
∆% 2006 to 2011	-7.8	-12.4
∆% 2009 to 2011	4.8	-1.1
∆% 2010 to 2011	2.4	-1.8

Source: http://www.census.gov/construction/nrs/

Chart IIA-3 of the US Census Bureau provides the entire series of new single-family sales median prices from Jan 1963 to Sep 2012. There is long-term sharp upward trend with few declines until the current collapse. Median prices increased sharply during the Great Inflation of the 1960s and 1970s and paused during the savings and loans crisis of the late 1980s and the recession of 1991. Housing subsidies throughout the 1990s caused sharp upward trend of median new house prices that accelerated after the fed funds rate of 1 percent from 2003 to 2004. There was sharp reduction of prices after 2006 with recovery recently toward earlier prices.

Chart IIA-3, US, Median Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1963-2012

Source: US Census Bureau

http://www.census.gov/construction/nrs/

Chart IIA-4 of the US Census Bureau provides average prices of new houses sold from the mid 1970s to Sep 2012. There is similar behavior as with median prices of new houses sold in Chart II-3. The only stress occurred in price pauses during the savings and loans crisis of the late 1980s and the collapse after 2006 with recent recovery.

Chart IIA-4, US, Average Sales Price of New Single-family Houses Sold, US Dollars, NSA, 1975-2012

Source: US Census Bureau

http://www.census.gov/construction/nrs/

IIA3 Factors of United States Housing Collapse. The explanation of the sharp contraction of United States housing can probably be found in the origins of the financial crisis and global recession. Let V(T) represent the value of the firm’s equity at time T and B stand for the promised debt of the firm to bondholders and assume that corporate management, elected by equity owners, is acting on the interests of equity owners. Robert C. Merton (1974, 453) states:

“On the maturity date T, the firm must either pay the promised payment of B to the debtholders or else the current equity will be valueless. Clearly, if at time T, V(T) > B, the firm should pay the bondholders because the value of equity will be V(T) – B > 0 whereas if they do not, the value of equity would be zero. If V(T) ≤ B, then the firm will not make the payment and default the firm to the bondholders because otherwise the equity holders would have to pay in additional money and the (formal) value of equity prior to such payments would be (V(T)- B) < 0.”

Pelaez and Pelaez (The Global Recession Risk (2007), 208-9) apply this analysis to the US housing market in 2005-2006 concluding:

“The house market [in 2006] is probably operating with low historical levels of individual equity. There is an application of structural models [Duffie and Singleton 2003] to the individual decisions on whether or not to continue paying a mortgage. The costs of sale would include realtor and legal fees. There could be a point where the expected net sale value of the real estate may be just lower than the value of the mortgage. At that point, there would be an incentive to default. The default vulnerability of securitization is unknown.”

There are multiple important determinants of the interest rate: “aggregate wealth, the distribution of wealth among investors, expected rate of return on physical investment, taxes, government policy and inflation” (Ingersoll 1987, 405). Aggregate wealth is a major driver of interest rates (Ibid, 406). Unconventional monetary policy, with zero fed funds rates and flattening of long-term yields by quantitative easing, causes uncontrollable effects on risk taking that can have profound undesirable effects on financial stability. Excessively aggressive and exotic monetary policy is the main culprit and not the inadequacy of financial management and risk controls.

W = Y/r (1)

Equation (1) shows that as r goes to zero, r →0, W grows without bound, W→∞.

Lowering the interest rate near the zero bound in 2003-2004 caused the illusion of permanent increases in wealth or net worth in the balance sheets of borrowers and also of lending institutions, securitized banking and every financial institution and investor in the world. The discipline of calculating risks and returns was seriously impaired. The objective of monetary policy was to encourage borrowing, consumption and investment but the exaggerated stimulus resulted in a financial crisis of major proportions as the securitization that had worked for a long period was shocked with policy-induced excessive risk, imprudent credit, high leverage and low liquidity by the incentive to finance everything overnight at close to zero interest rates, from adjustable rate mortgages (ARMS) to asset-backed commercial paper of structured investment vehicles (SIV).

The consequences of inflating liquidity and net worth of borrowers were a global hunt for yields to protect own investments and money under management from the zero interest rates and unattractive long-term yields of Treasuries and other securities. Monetary policy distorted the calculations of risks and returns by households, business and government by providing central bank cheap money. Short-term zero interest rates encourage financing of everything with short-dated funds, explaining the SIVs created off-balance sheet to issue short-term commercial paper to purchase default-prone mortgages that were financed in overnight or short-dated sale and repurchase agreements (Pelaez and Pelaez, Financial Regulation after the Global Recession, 50-1, Regulation of Banks and Finance, 59-60, Globalization and the State Vol. I, 89-92, Globalization and the State Vol. II, 198-9, Government Intervention in Globalization, 62-3, International Financial Architecture, 144-9). ARMS were created to lower monthly mortgage payments by benefitting from lower short-dated reference rates. Financial institutions economized in liquidity that was penalized with near zero interest rates. There was no perception of risk because the monetary authority guaranteed a minimum or floor price of all assets by maintaining low interest rates forever or equivalent to writing an illusory put option on wealth. Subprime mortgages were part of the put on wealth by an illusory put on house prices. The housing subsidy of $221 billion per year created the impression of ever increasing house prices. The suspension of auctions of 30-year Treasuries was designed to increase demand for mortgage-backed securities, lowering their yield, which was equivalent to lowering the costs of housing finance and refinancing. Fannie and Freddie purchased or guaranteed $1.6 trillion of nonprime mortgages and worked with leverage of 75:1 under Congress-provided charters and lax oversight. The combination of these policies resulted in high risks because of the put option on wealth by near zero interest rates, excessive leverage because of cheap rates, low liquidity because of the penalty in the form of low interest rates and unsound credit decisions because the put option on wealth by monetary policy created the illusion that nothing could ever go wrong, causing the credit/dollar crisis and global recession (Pelaez and Pelaez, Financial Regulation after the Global Recession, 157-66, Regulation of Banks, and Finance, 217-27, International Financial Architecture, 15-18, The Global Recession Risk, 221-5, Globalization and the State Vol. II, 197-213, Government Intervention in Globalization, 182-4).

There are significant elements of the theory of bank financial fragility of Diamond and Dybvig (1983) and Diamond and Rajan (2000, 2001a, 2001b) that help to explain the financial fragility of banks during the credit/dollar crisis (see also Diamond 2007). The theory of Diamond and Dybvig (1983) as exposed by Diamond (2007) is that banks funding with demand deposits have a mismatch of liquidity (see Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 58-66). A run occurs when too many depositors attempt to withdraw cash at the same time. All that is needed is an expectation of failure of the bank. Three important functions of banks are providing evaluation, monitoring and liquidity transformation. Banks invest in human capital to evaluate projects of borrowers in deciding if they merit credit. The evaluation function reduces adverse selection or financing projects with low present value. Banks also provide important monitoring services of following the implementation of projects, avoiding moral hazard that funds be used for, say, real estate speculation instead of the original project of factory construction. The transformation function of banks involves both assets and liabilities of bank balance sheets. Banks convert an illiquid asset or loan for a project with cash flows in the distant future into a liquid liability in the form of demand deposits that can be withdrawn immediately.

In the theory of banking of Diamond and Rajan (2000, 2001a, 2001b), the bank creates liquidity by tying human assets to capital. The collection skills of the relationship banker convert an illiquid project of an entrepreneur into liquid demand deposits that are immediately available for withdrawal. The deposit/capital structure is fragile because of the threat of bank runs. In these days of online banking, the run on Washington Mutual was through withdrawals online. A bank run can be triggered by the decline of the value of bank assets below the value of demand deposits.

Pelaez and Pelaez (Regulation of Banks and Finance 2009b, 60, 64-5) find immediate application of the theories of banking of Diamond, Dybvig and Rajan to the credit/dollar crisis after 2007. It is a credit crisis because the main issue was the deterioration of the credit portfolios of securitized banks as a result of default of subprime mortgages. It is a dollar crisis because of the weakening dollar resulting from relatively low interest rate policies of the US. It caused systemic effects that converted into a global recession not only because of the huge weight of the US economy in the world economy but also because the credit crisis transferred to the UK and Europe. Management skills or human capital of banks are illustrated by the financial engineering of complex products. The increasing importance of human relative to inanimate capital (Rajan and Zingales 2000) is revolutionizing the theory of the firm (Zingales 2000) and corporate governance (Rajan and Zingales 2001). Finance is one of the most important examples of this transformation. Profits were derived from the charter in the original banking institution. Pricing and structuring financial instruments was revolutionized with option pricing formulas developed by Black and Scholes (1973) and Merton (1973, 1974, 1998) that permitted the development of complex products with fair pricing. The successful financial company must attract and retain finance professionals who have invested in human capital, which is a sunk cost to them and not of the institution where they work.

The complex financial products created for securitized banking with high investments in human capital are based on houses, which are as illiquid as the projects of entrepreneurs in the theory of banking. The liquidity fragility of the securitized bank is equivalent to that of the commercial bank in the theory of banking (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65). Banks created off-balance sheet structured investment vehicles (SIV) that issued commercial paper receiving AAA rating because of letters of liquidity guarantee by the banks. The commercial paper was converted into liquidity by its use as collateral in SRPs at the lowest rates and minimal haircuts because of the AAA rating of the guarantor bank. In the theory of banking, default can be triggered when the value of assets is perceived as lower than the value of the deposits. Commercial paper issued by SIVs, securitized mortgages and derivatives all obtained SRP liquidity on the basis of illiquid home mortgage loans at the bottom of the pyramid. The run on the securitized bank had a clear origin (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 65):

“The increasing default of mortgages resulted in an increase in counterparty risk. Banks were hit by the liquidity demands of their counterparties. The liquidity shock extended to many segments of the financial markets—interbank loans, asset-backed commercial paper (ABCP), high-yield bonds and many others—when counterparties preferred lower returns of highly liquid safe havens, such as Treasury securities, than the risk of having to sell the collateral in SRPs at deep discounts or holding an illiquid asset. The price of an illiquid asset is near zero.”

Gorton and Metrick (2010H, 507) provide a revealing quote to the work in 1908 of Edwin R. A. Seligman, professor of political economy at Columbia University, founding member of the American Economic Association and one of its presidents and successful advocate of progressive income taxation. The intention of the quote is to bring forth the important argument that financial crises are explained in terms of “confidence” but as Professor Seligman states in reference to historical banking crises in the US the important task is to explain what caused the lack of confidence. It is instructive to repeat the more extended quote of Seligman (1908, xi) on the explanations of banking crises:

“The current explanations may be divided into two categories. Of these the first includes what might be termed the superficial theories. Thus it is commonly stated that the outbreak of a crisis is due to lack of confidence,--as if the lack of confidence was not in itself the very thing which needs to be explained. Of still slighter value is the attempt to associate a crisis with some particular governmental policy, or with some action of a country’s executive. Such puerile interpretations have commonly been confined to countries like the United States, where the political passions of democracy have had the fullest way. Thus the crisis of 1893 was ascribed by the Republicans to the impending Democratic tariff of 1894; and the crisis of 1907 has by some been termed the ‘[Theodore] Roosevelt panic,” utterly oblivious of the fact that from the time of President Jackson, who was held responsible for the troubles of 1837, every successive crisis had had its presidential scapegoat, and has been followed by a political revulsion. Opposed to these popular, but wholly unfounded interpretations, is the second class of explanations, which seek to burrow beneath the surface and to discover the more occult and fundamental causes of the periodicity of crises.”

Scholars ignore superficial explanations in the effort to seek good and truth. The problem of economic analysis of the credit/dollar crisis is the lack of a structural model with which to attempt empirical determination of causes (Gorton and Metrick 2010SB). There would still be doubts even with a well-specified structural model because samples of economic events do not typically permit separating causes and effects. There is also confusion is separating the why of the crisis and how it started and propagated, all of which are extremely important.

In true heritage of the principles of Seligman (1908), Gorton (2009EFM) discovers a prime causal driver of the credit/dollar crisis. The objective of subprime and Alt-A mortgages was to facilitate loans to populations with modest means so that they could acquire a home. These borrowers would not receive credit because of (1) lack of funds for down payments; (2) low credit rating and information; (3) lack of information on income; and (4) errors or lack of other information. Subprime mortgage “engineering” was based on the belief that both lender and borrower could benefit from increases in house prices over the short run. The initial mortgage would be refinanced in two or three years depending on the increase of the price of the house. According to Gorton (2009EFM, 13, 16):

“The outstanding amounts of Subprime and Alt-A [mortgages] combined amounted to about one quarter of the $6 trillion mortgage market in 2004-2007Q1. Over the period 2000-2007, the outstanding amount of agency mortgages doubled, but subprime grew 800%! Issuance in 2005 and 2006 of Subprime and Alt-A mortgages was almost 30% of the mortgage market. Since 2000 the Subprime and Alt-A segments of the market grew at the expense of the Agency (i.e., the government sponsored entities of Fannie Mae and Freddie Mac) share, which fell from almost 80% (by outstanding or issuance) to about half by issuance and 67% by outstanding amount. The lender’s option to rollover the mortgage after an initial period is implicit in the subprime mortgage. The key design features of a subprime mortgage are: (1) it is short term, making refinancing important; (2) there is a step-up mortgage rate that applies at the end of the first period, creating a strong incentive to refinance; and (3) there is a prepayment penalty, creating an incentive not to refinance early.”

The prime objective of successive administrations in the US during the past 20 years and actually since the times of Roosevelt in the 1930s has been to provide “affordable” financing for the “American dream” of home ownership. The US housing finance system is mixed with public, public/private and purely private entities. The Federal Home Loan Bank (FHLB) system was established by Congress in 1932 that also created the Federal Housing Administration in 1934 with the objective of insuring homes against default. In 1938, the government created the Federal National Mortgage Association, or Fannie Mae, to foster a market for FHA-insured mortgages. Government-insured mortgages were transferred from Fannie Mae to the Government National Mortgage Association, or Ginnie Mae, to permit Fannie Mae to become a publicly-owned company. Securitization of mortgages began in 1970 with the government charter to the Federal Home Loan Mortgage Corporation, or Freddie Mac, with the objective of bundling mortgages created by thrift institutions that would be marketed as bonds with guarantees by Freddie Mac (see Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 42-8). In the third quarter of 2008, total mortgages in the US were $12,057 billion of which 43.5 percent, or $5423 billion, were retained or guaranteed by Fannie Mae and Freddie Mac (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 45). In 1990, Fannie Mae and Freddie Mac had a share of only 25.4 percent of total mortgages in the US. Mortgages in the US increased from $6922 billion in 2002 to $12,088 billion in 2007, or by 74.6 percent, while the retained or guaranteed portfolio of Fannie and Freddie rose from $3180 billion in 2002 to $4934 billion in 2007, or by 55.2 percent.

According to Pinto (2008) in testimony to Congress:

“There are approximately 25 million subprime and Alt-A loans outstanding, with an unpaid principal amount of over $4.5 trillion, about half of them held or guaranteed by Fannie and Freddie. Their high risk activities were allowed to operate at 75:1 leverage ratio. While they may deny it, there can be no doubt that Fannie and Freddie now own or guarantee $1.6 trillion in subprime, Alt-A and other default prone loans and securities. This comprises over 1/3 of their risk portfolios and amounts to 34% of all the subprime loans and 60% of all Alt-A loans outstanding. These 10.5 million unsustainable, nonprime loans are experiencing a default rate 8 times the level of the GSEs’ 20 million traditional quality loans. The GSEs will be responsible for a large percentage of an estimated 8.8 million foreclosures expected over the next 4 years, accounting for the failure of about 1 in 6 home mortgages. Fannie and Freddie have subprimed America.”

In perceptive analysis of growth and macroeconomics in the past six decades, Rajan (2012FA) argues that “the West can’t borrow and spend its way to recovery.” The Keynesian paradigm is not applicable in current conditions. Advanced economies in the West could be divided into those that reformed regulatory structures to encourage productivity and others that retained older structures. In the period from 1950 to 2000, Cobet and Wilson (2002) find that US productivity, measured as output/hour, grew at the average yearly rate of 2.9 percent while Japan grew at 6.3 percent and Germany at 4.7 percent (see Pelaez and Pelaez, The Global Recession Risk (2007), 135-44). In the period from 1995 to 2000, output/hour grew at the average yearly rate of 4.6 percent in the US but at lower rates of 3.9 percent in Japan and 2.6 percent in the US. Rajan (2012FA) argues that the differential in productivity growth was accomplished by deregulation in the US at the end of the 1970s and during the 1980s. In contrast, Europe did not engage in reform with the exception of Germany in the early 2000s that empowered the German economy with significant productivity advantage. At the same time, technology and globalization increased relative remunerations in highly-skilled, educated workers relative to those without skills for the new economy. It was then politically appealing to improve the fortunes of those left behind by the technological revolution by means of increasing cheap credit. As Rajan (2012FA) argues:

“In 1992, Congress passed the Federal Housing Enterprises Financial Safety and Soundness Act, partly to gain more control over Fannie Mae and Freddie Mac, the giant private mortgage agencies, and partly to promote affordable homeownership for low-income groups. Such policies helped money flow to lower-middle-class households and raised their spending—so much so that consumption inequality rose much less than income inequality in the years before the crisis. These policies were also politically popular. Unlike when it came to an expansion in government welfare transfers, few groups opposed expanding credit to the lower-middle class—not the politicians who wanted more growth and happy constituents, not the bankers and brokers who profited from the mortgage fees, not the borrowers who could now buy their dream houses with virtually no money down, and not the laissez-faire bank regulators who thought they could pick up the pieces if the housing market collapsed. The Federal Reserve abetted these shortsighted policies. In 2001, in response to the dot-com bust, the Fed cut short-term interest rates to the bone. Even though the overstretched corporations that were meant to be stimulated were not interested in investing, artificially low interest rates acted as a tremendous subsidy to the parts of the economy that relied on debt, such as housing and finance. This led to an expansion in housing construction (and related services, such as real estate brokerage and mortgage lending), which created jobs, especially for the unskilled. Progressive economists applauded this process, arguing that the housing boom would lift the economy out of the doldrums. But the Fed-supported bubble proved unsustainable. Many construction workers have lost their jobs and are now in deeper trouble than before, having also borrowed to buy unaffordable houses. Bankers obviously deserve a large share of the blame for the crisis. Some of the financial sector’s activities were clearly predatory, if not outright criminal. But the role that the politically induced expansion of credit played cannot be ignored; it is the main reason the usual checks and balances on financial risk taking broke down.”

In fact, Raghuram G. Rajan (2005) anticipated low liquidity in financial markets resulting from low interest rates before the financial crisis that caused distortions of risk/return decisions provoking the credit/dollar crisis and global recession from IVQ2007 to IIQ2009. Near zero interest rates of unconventional monetary policy induced excessive risks and low liquidity in financial decisions that were critical as a cause of the credit/dollar crisis after 2007. Rajan (2012FA) argues that it is not feasible to return to the employment and income levels before the credit/dollar crisis because of the bloated construction sector, financial system and government budgets.

IIA2 United States House Prices. The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, provides the FHFA House Price Index (HPI) that “is calculated using home sales price information from Fannie Mae and Freddie Mac-acquired mortgages” (http://fhfa.gov/webfiles/24216/q22012hpi.pdf 1). Table IIA2-1 provides the FHFA HPI for purchases only, which shows behavior similar to that of the Case-Shiller index but with lower magnitudes. House prices catapulted from 2000 to 2003, 2005 and 2006. From IIQ2000 to IIQ2006, the index for the US as a whole rose 59.5 percent, with 75.3 percent for New England, 79.4 percent for Middle Atlantic, 73.5 for South Atlantic but only by 31.6 percent for East South Central. Prices fell relative to 2012 from all years since 2005 with some exceptions for 2011. From IIQ2000 to IIQ2011, prices rose for the US and the four regions in Table IIA2-1.

Table IIA2-1, US, FHFA House Price Index Purchases Only NSA ∆%

	United States	New England	Middle Atlantic	South Atlantic	East South Central
2Q2000 to 2Q2003	22.9	40.8	34.1	24.2	9.9
2Q2000 to 2Q2005	48.6	71.9	66.6	57.2	21.9
2Q2000 to 2Q2006	59.5	75.3	79.4	73.5	31.6
2Q2005 t0 2Q2012	-9.9	-13.3	-1.7	-14.1	4.6
2Q2006 to 2Q2012	-16.1	-14.9	-8.7	-22.1	-3.1
2Q2007 to 2Q2012	-17.2	-13.7	-10.2	-23.7	-7.5
2Q2010 to 2Q2012	-2.6	-3.4	-3.5	-3.5	-1.3
2Q2011 to 2Q2012	3.1	-1.2	-0.6	4.1	3.2
2Q2000 to 2Q2012	33.8	49.1	63.8	35.1	27.6

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Data of the FHFA HPI for the remaining US regions are provided in Table IIA-2. Behavior is not very different than in Table IIA-2 with the exception of East North Central. House prices in the Pacific region doubled between 2000 and 2006. Although prices of houses declined sharply from 2005 to 2012, there was still appreciation relative to 2000.

Table IIA2-2, US, FHFA House Price Index Purchases Only NSA ∆%

	West South Central	West North Central	East North Central	Mountain	Pacific
2Q2000 to 2Q2003	12.0	18.1	14.6	17.4	40.7
2Q2000 to 2Q2005	22.4	31.8	25.2	50.7	104.2
2Q2000 to 2Q2006	31.2	37.2	28.0	69.8	124.6
2Q2005 to 2Q2012	16.1	-2.8	-13.2	-15.3	-30.6
2Q2006 to 2Q2012	8.2	-6.6	-15.1	-24.8	-36.9
2Q2007 to 2Q2012	2.7	-8.1	-14.4	-27.1	-35.1
2Q2010 to 2Q2012	1.5	-2.4	-2.3	-2.6	-5.7
2Q2011 to 2Q2012	3.5	3.3	2.8	7.0	3.6
2Q2000 to 2Q2012	39.8	27.4	5.5	22.0	38.2

Source: Federal Housing Finance Agency http://fhfa.gov/Default.aspx?Page=14

Chart IIA2-1 of the Federal Housing Finance Agency shows the Housing Price Index four-quarter price change from IQ2001 to IQ2012. House prices appreciated sharply from 1998 to 2005 and then fell rapidly. Recovery began already after IIQ2008 but there was another decline after IIQ2010. The rate of decline improved in the second half of 2011 and into 2012 with movement into positive territory in IIQ2012 and IIIQ2012.

Chart IIA2-1, US, Federal Housing Finance Agency House Price Index Four Quarter Price Change

Source: Federal Housing Finance Agency

http://www.fhfa.gov/default.aspx?Page=14

Monthly and 12-month percentage changes of the FHFA House Price Index are provided in Table IIA2-3. Percentage monthly increases of the FHFA index were positive from Feb to Aug 2011 while 12 months percentage changes improved steadily from more or equal to minus 6 percent in Mar to May 2011 to minus 4.4 percent in Jun 2011. The FHFA house price index fell 0.9 percent in Oct 2011 and fell 3.3 percent in the 12 months ending in Oct. There was significant recovery in Nov 2012 with increase in the house price index of 0.7 percent and reduction of the 12-month rate of decline to 2.1 percent. The house price index rose 0.3 percent in Dec 2011 and the 12-month percentage change fell to minus 1.3 percent. There was further improvement with revised decline of 0.4 percent in Jan 2012 and decline of the 12-month percentage change to minus 1.1 percent. The index changed to positive change of 0.2 percent in Feb 2012 and increase of 0.2 percent in the 12 months ending in Feb 2012. There was strong improvement in Mar 2012 with gain in prices of 1.5 percent and 2.5 percent in 12 months. The house price index of FHFA increased 0.7 percent in Apr 2012 and 3.0 percent in 12 months and improvement continued with increase of 0.6 percent in May 2012 and 3.7 percent in the 12 months ending in May 2012. Improvement consolidated with increase of 0.7 percent in Jun 2012 and 3.9 percent in 12 months. In Jul 2012, the house price index increased 0.1 percent and 3.8 percent in 12 months. Strong increase of 0.7 percent in Aug 2012 pulled the 12-month change to 4.8 percent.

Table IIA2-3, US, FHFA House Price Index Purchases Only SA. Month and NSA 12-Month ∆%

	Month ∆% SA	12 Month ∆% NSA
Aug 2012	0.7	4.8
Jul	0.1	3.8
Jun	0.7	3.9
May	0.6	3.7
Apr	0.7	3.0
Mar	1.5	2.5
Feb	0.2	0.2
Jan	-0.4	-1.1
Dec 2011	0.3	-1.3
Nov	0.7	-2.1
Oct	-0.9	-3.3
Sep	0.4	-2.5
Aug	-0.4	-3.8
Jul	0.2	-3.6
Jun	0.5	-4.4
May	0.0	-6.0
Apr	0.2	-6.0
Mar	-0.7	-6.1
Feb	-1.1	-5.3
Jan	-0.6	-4.7
Dec 2010		-4.0
Dec 2009		-1.9
Dec 2008		-9.7
Dec 2007		-3.1
Dec 2006		2.5
Dec 2005		9.8
Dec 2004		10.2
Dec 2003		8.0
Dec 2002		7.8
Dec 2001		6.7
Dec 2000		7.2
Dec 1999		6.2
Dec 1998		5.9
Dec 1997		3.4
Dec 1996		2.8
Dec 1995		2.9
Dec 1994		2.6
Dec 1993		3.1
Dec 1992		2.4

Source: Federal Housing Finance Agency http://fhfa.gov/default.aspx?Page=14

The bottom part of Table IIA2-4 provides 12-month percentage changes of the FHFA house price index since 1992 when data become available for 1991. Table IIA2-4 provides percentage changes and average rates of percent change per year for various periods. Between 1992 and 2011, the FHFA house price index increased 74.9 percent at the yearly average rate of 3.0 percent. In the period 1992-2000, the FHFA house price index increased 39.4 percent at the average yearly rate of 4.2 percent. The rate of price increase accelerated to 7.5 percent in the period 2000-2003 and to 8.5 percent in 2000-2005 and 7.5 percent in 2000-2006. At the margin the average rate jumped to 10.0 percent in 2003-2005 and 7.5 percent in 2003-2006. House prices measured by the FHFA house price index declined 18.6 percent between 2006 and 2011 and 16.6 percent between 2005 and 2011.

Table IIA2-4, US, FHFA House Price Index, Percentage Change and Average Rate of Percentage Change per Year, Selected Dates 1992-2011

Dec	∆%	Average ∆% per Year
1992-2011	74.9	3.0
1992-2000	39.4	4.2
2000-2003	24.3	7.5
2000-2005	50.4	8.5
2003-2005	21.0	10.0
2005-2011	-16.6	NA
2000-2006	54.2	7.5
2003-2006	24.1	7.5
2006-2011	-18.6	NA

Source: Source: Federal Housing Finance Agency

Federal Housing Finance Agency http://fhfa.gov/default.aspx?Page=14

IIB United States Commercial Banks Assets and Liabilities. Subsection IIB1 Transmission of Monetary Policy recapitulates the mechanism of transmission of monetary policy. Subsection IIB2 Functions of Banking analyzes the functions of banks in modern banking theory. Subsection IIB3 United States Commercial Bank Assets and Liabilities provides data and analysis of US commercial bank balance sheets in report H.8 of the Board of Governors of the Federal Reserve System on Assets and Liabilities of Commercial Banks in the United States (http://www.federalreserve.gov/releases/h8/current/default.htm).

IIB1 Transmission of Monetary Policy. The critical fact of current world financial markets is the combination of “unconventional” monetary policy with intermittent shocks of financial risk aversion. There are two interrelated unconventional monetary policies. First, unconventional monetary policy consists of (1) reducing short-term policy interest rates toward the “zero bound” such as fixing the fed funds rate at 0 to ¼ percent by decision of the Federal Open Market Committee (FOMC) since Dec 16, 2008 (http://www.federalreserve.gov/newsevents/press/monetary/20081216b.htm). Second, unconventional monetary policy also includes a battery of measures to also reduce long-term interest rates of government securities and asset-backed securities such as mortgage-backed securities.

When inflation is low, the central bank lowers interest rates to stimulate aggregate demand in the economy, which consists of consumption and investment. When inflation is subdued and unemployment high, monetary policy would lower interest rates to stimulate aggregate demand, reducing unemployment. When interest rates decline to zero, unconventional monetary policy would consist of policies such as large-scale purchases of long-term securities to lower their yields. A major portion of credit in the economy is financed with long-term asset-backed securities. Loans for purchasing houses, automobiles and other consumer products are bundled in securities that in turn are sold to investors. Corporations borrow funds for investment by issuing corporate bonds. Loans to small businesses are also financed by bundling them in long-term bonds. Securities markets bridge the needs of higher returns by savers obtaining funds from investors that are channeled to consumers and business for consumption and investment. Lowering the yields of these long-term bonds could lower costs of financing purchases of consumer durables and investment by business. The essential mechanism of transmission from lower interest rates to increases in aggregate demand is portfolio rebalancing. Withdrawal of bonds in a specific maturity segment or directly in a bond category such as currently mortgage-backed securities causes reductions in yield that are equivalent to increases in the prices of the bonds. There can be secondary increases in purchases of those bonds in private portfolios in pursuit of their increasing prices. Lower yields translate into lower costs of buying homes and consumer durables such as automobiles and also lower costs of investment for business. There are two additional intended routes of transmission.

1. Unconventional monetary policy or its expectation can increase stock market valuations (Bernanke 2010WP). Increases in equities traded in stock markets can augment perceptions of the wealth of consumers inducing increases in consumption.

2. Unconventional monetary policy causes devaluation of the dollar relative to other currencies, which can cause increases in net exports of the US that increase aggregate economic activity (Yellen 2011AS).

Monetary policy can lower short-term interest rates quite effectively. Lowering long-term yields is somewhat more difficult. The critical issue is that monetary policy cannot ensure that increasing credit at low interest cost increases consumption and investment. There is a large variety of possible allocation of funds at low interest rates from consumption and investment to multiple risk financial assets. Monetary policy does not control how investors will allocate asset categories. A critical financial practice is to borrow at low short-term interest rates to invest in high-risk, leveraged financial assets. Investors may increase in their portfolios asset categories such as equities, emerging market equities, high-yield bonds, currencies, commodity futures and options and multiple other risk financial assets including structured products. If there is risk appetite, the carry trade from zero interest rates to risk financial assets will consist of short positions at short-term interest rates (or borrowing) and short dollar assets with simultaneous long positions in high-risk, leveraged financial assets such as equities, commodities and high-yield bonds. Low interest rates may induce increases in valuations of risk financial assets that may fluctuate in accordance with perceptions of risk aversion by investors and the public. During periods of muted risk aversion, carry trades from zero interest rates to exposures in risk financial assets cause temporary waves of inflation that may foster instead of preventing financial instability (http://cmpassocregulationblog.blogspot.com/2012/08/world-inflation-waves-loss-of-dynamism.html). During periods of risk aversion such as fears of disruption of world financial markets and the global economy resulting from collapse of the European Monetary Union, carry trades are unwound with sharp deterioration of valuations of risk financial assets. More technical discussion is in IA Appendix: Transmission of Unconventional Monetary Policy at http://cmpassocregulationblog.blogspot.com/2012/10/world-inflation-waves-stagnating-united.html.

declines.

W = Y/r (1)

IIB2 Functions of Banks. Modern banking theory analyzes three important functions provided by banks: monitoring of borrowers, provision of liquidity services and transformation of illiquid assets into immediately liquid assets (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 51-60). These functions require valuation of alternative investment projects that may be distorted by zero interest rates of monetary policy and artificially low long-term interest rates. The QE∞ trap frustrates essential banking functions.

3. Monitoring. Banks monitor projects to ensure that funds are allocated to their intended projects (Diamond 1984, 1996). Banks issue deposits, which are secondary assets, to acquire loans, which are primary assets. Monitoring reduces costs of participating in business projects. Acting as delegated monitor, banks obtain information on the borrower, allowing less costly participation through the issue of unmonitored deposits. Monitoring of borrowers provides enhanced less costly participation by investors through the issue of deposits. There is significant reduction of monitoring costs by delegating to a bank. If there are many potential investors, monitoring by the bank of a credit name is less costly than the sum of individual monitoring of the same credit name by all potential investors. Banks permit borrowers to reach many investors for their projects while affording investors less costly participation in the returns of projects of bank borrowers.

4. Transformation of Illiquid Loans into Liquid Deposits. Diamond and Dybvig (1986) analyze bank services through their balance sheets.

iv. Assets. Banks provide loans to borrowers. The evaluation of borrowers prevents “adverse selection,” which consists of banks choosing unsound projects and failing to finance sound projects. Monitoring of loans prevents “moral hazard,” which consists of borrowers using the funds of the loan for purposes other than the project for which they were lent, as for example, using borrowed bank funds for speculative real estate instead of for the intended industrial project. Relationship banking improves the information on borrowers and the monitoring function.

v. Liabilities. Banks provide numerous services to their clients such as holding deposits, clearing transactions, currency inventory and payments for goods, services and obligations.

vi. Assets and Liabilities: Transformation Function. The transformation function operates through both sides of the balance sheet: banks convert illiquid loans in the asset side into liquid deposits in the liability side. There is rich theory of banking (Diamond and Rajan 2000, 2001a,b). Securitized banking provides the same transformation function by bundling mortgage and other consumer loans into securities that are then sold to investors who finance them in short-dated sale and repurchase agreements (Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 61-6).

Banking was important in facilitating economic growth in historical periods (Cameron 1961, 1967, 1972; Cameron et al. 1992). Banking is also important currently because small- and medium-size business may have no other form of financing than banks in contrast with many options for larger and more mature companies that have access to capital markets. Personal consumptions expenditures have share of 71.0 percent of GDP in IIQ2012 (Table I-10 http://cmpassocregulationblog.blogspot.com/2012/07/decelerating-united-states-recovery.html). Most consumers rely on their banks for real estate loans, credit cards and personal consumer loans. Thus, it should be expected that success of monetary policy in stimulating the economy would be processed through bank balance sheets.

IA3 United States Commercial Banks Assets and Liabilities. Data and analysis on US commercial bank assets and liabilities are introduced below in two forms: two tables provide not seasonally adjusted (NSA) assets and liabilities from Sep 2011 to Sep 2012 and seasonally adjusted annual rates of percentage change (SAAR); and a group of charts permits different perspectives of longer historical series.

Selected assets and liabilities of US commercial banks, not seasonally adjusted, in billions of dollars, from Report H.8 of the Board of Governors of the Federal Reserve System are provided in Table IIB-1. Data are not seasonally adjusted to permit comparison between Sep 2011 and Sep 2012. Total assets of US commercial banks grew 3.2 percent from $12,479 billion in Sep 2011 to $12,874 billion in Sep 2012. US GDP in 2011 is estimated at $15,076 billion (http://www.bea.gov/iTable/index_nipa.cfm). Thus, total assets of US commercial banks are equivalent to around 80 percent of US GDP. Bank credit grew 5.9 percent from $9288 billion in Sep 2011 to $9836 billion in Sep 2012. Securities in bank credit increased 8.2 percent from $2473 billion in Sep 2011 to $2677 billion in Sep 2012. A large part of securities in banking credit consists of US Treasury and agency securities, growing 10.2 percent from $1675 billion in Sep 2011 to $1846 billion in Sep 2012. Credit to the government that issues or backs Treasury and agency securities of $1846 in Sep 2012 is about 18.8 percent of total bank credit of US commercial banks of $9836 billion. Mortgage-backed securities, providing financing of home loans, grew 11.4 percent, from $1203 billion in Sep 2011 to $1340 billion in Sep 2012. Loans and leases were less dynamic, growing 5.0 percent from $6816 billion in Sep 2011 to $7160 billion in Sep 2012. The only dynamic class is commercial and industrial loans, growing 13.3 percent from Sep 2011 to Sep 2012 and providing $1464 billion or 20.5 percent of total loans and leases of $7160 billion in Sep 2012. Real estate loans increased only 1.6 percent, providing $3541 billion in Sep 2012 or 49.5 percent of total loans and leases. Consumer loans increased only 2.3 percent, providing $1114 billion in Sep 2012 or 15.6 percent of total loans. Cash assets “include vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks” (http://www.federalreserve.gov/releases/h8/current/default.htm). Cash assets in US commercial banks fell 6.9 percent from $1721 billion in Sep 2011 to $1603 billion in Sep 2012 but a single year of the series masks exploding cash in banks as a result of unconventional monetary policy, which is discussed below. Bank deposits increased 6.7 percent from $8343 billion to $8898 billion. The difference between bank deposits and total loans and leases in banks increased from $1527 billion in Sep 2011 to $1738 billion in Sep 2012 or by $211 billion, which is roughly equal to the increase in securities in bank credit by $201 billion from $2450 billion in Sep 2011 to $2651 billion in Sep 2012 and to the increase in Treasury and agency securities by $204 billion from $2473 billion in Sep 2011 to $2677 billion in Sep 2012. Loans and leases increased $344 billion from $6816 billion in Sep 2011 to $7160 billion in Sep 2012. Banks expanded both lending and investment in lower risk securities partly because of the weak economy and credit disappointments during the global recession that has resulted in an environment of fewer sound lending opportunities. Lower interest rates resulting from monetary policy may not necessarily encourage higher borrowing in the current loss of dynamism of the US economy with real disposable income per capita in IIQ2012 lower than in IVQ2007 (Table IIB-3) in contrast with long-term growth of per capita income in the United States at 2 percent per year from 1870 to 2010 (Lucas 2011May).

Table IIB-1, US, Assets and Liabilities of Commercial Banks, NSA, Billions of Dollars

	Sep 2011	Sep 2012	∆%
Total Assets	12,479	12,874	3.2
Bank Credit	9288	9836	5.9
Securities in Bank Credit	2473	2677	8.2
Treasury & Agency Securities	1675	1846	10.2
Mortgage-Backed Securities	1203	1340	11.4
Loans & Leases	6816	7160	5.0
Real Estate Loans	3486	3541	1.6
Consumer Loans	1089	1114	2.3
Commercial & Industrial Loans	1297	1464	12.9
Other Loans & Leases	944	1041	10.3
Cash Assets*	1721	1603	-6.9
Total Liabilities	11,039	11,380	3.1
Deposits	8343	8898	6.7

Note: balancing item of residual assets less liabilities not included

*”Includes vault cash, cash items in process of collection, balances due from depository institutions and balances due from Federal Reserve Banks.”

Source: Board of Governors of the Federal Reserve System http://www.federalreserve.gov/releases/h8/current/default.htm

Seasonally adjusted annual equivalent rates (SAAR) of change of selected assets and liabilities of US commercial banks from the report H.8 of the Board of Governors of the Federal Reserve System are provided in Table IIB-2 annually from 2007 to 2011 and for Aug and Sep 2012. The global recession had strong impact on bank assets as shown by declines of total assets of 6.0 percent in 2009 and 2.7 percent in 2010. Loans and leases fell 10.2 percent in 2009 and 5.8 percent in 2010. Commercial and industrial loans fell 18.6 percent in 2009 and 8.9 percent in 2011. Unconventional monetary policy caused an increase of cash assets of banks of 157.3 percent in 2008, 47.9 percent in 2009 and 47.6 percent in 2011 and at the SAAR of 30.3 percent in Aug 2012 but contraction by 65.1 percent in Sep 2012. Acquisitions of securities for the portfolio of the central bank injected reserves in depository institutions that were held as cash and reserves at the central banks because of the lack of sound lending opportunities and the adverse expectations in the private sector on doing business. The truly dynamic investment of banks has been in securities in bank credit, growing at the SAAR of 15.4 percent in Jul 2012 and 6.7 percent in Sep 2012. Throughout the crisis banks allocated increasing part of their assets to the safety of Treasury and agency securities, or credit to the US government and government-backed credit, with growth of 15.5 percent in 2009 and 15.1 percent in 2010 and at the rate of 16.2 percent in Jul 2012, declining to the rate of 4.7 percent in Aug 2012 and 2.7 percent in Sep 2012. Deposits grew at the rate of 10.5 percent in Jul 2012, with the rate declining as for most assets of commercial banks to the rate of 5.4 percent in Aug 2012 and 7.7 percent in Sep 2012. The credit intermediation function of banks is broken because of adverse expectations on future business and is not easily mended simply by monetary and fiscal policy. Incentives to business and consumers are more likely to be effective in this environment in recovering willingness to assume risk on the part of the private sector, which is the driver of growth and job creation.

Table IIB-2, US, Selected Assets and Liabilities of Commercial Banks, Seasonally Adjusted Annual Rate, ∆%

	2007	2008	2009	2010	2011	Aug 12	Sep 12
Total Assets	10.4	7.9	-6.0	-2.7	5.3	2.5	-5.3
Bank Credit	9.3	2.2	-6.6	-2.8	1.8	2.9	3.4
Securities in Bank Credit	6.1	-2.1	6.8	6.8	1.7	2.9	6.7
Treasury & Agency Securities	-6.4	3.0	15.5	15.1	2.8	4.7	2.7
Other Securities	26.7	-8.4	-5.1	-7.0	-0.7	-1.3	15.6
Loans & Leases	10.2	3.4	-10.2	-5.8	1.8	2.9	2.2
Real Estate Loans	7.1	-0.1	-5.6	-5.6	-3.8	-0.7	2.1
Consumer Loans	5.4	5.1	-3.3	-6.9	-0.6	2.3	1.3
Commercial & Industrial Loans	18.1	12.9	-18.6	-8.9	9.6	8.8	1.4
Other Loans & Leases	19.2	1.7	-23.3	0.1	18.8	7.4	4.3
Cash Assets	-0.1	157.3	47.9	-7.8	47.6	30.0	-65.1
Total Liabilities	11.2	10.5	-7.3	-3.5	5.4	0.6	-2.5
Deposits	9.1	5.4	5.2	2.4	6.6	5.4	7.7

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-1 of the Board of Governors of the Federal Reserve System provides quarterly seasonally adjusted annual rates (SAAR) of cash assets in US commercial banks from 1973 to 2012. Unconventional monetary policy caused an increase in cash assets in late 2008 of close to 500 percent at SAAR and also in following policy impulses. Such aggressive policies were not required for growth of GDP at the average rate of 5.7 percent in 13 quarters of cyclical expansion from IQ1983 to IV1985 while the average rate in 12 quarters of cyclical expansion from IIIQ2009 to IIQ2012 has been at the rate of 2.2 percent (Table I-5). The difference in magnitude of the recessions is not sufficient to explain weakness of the current cyclical expansion. Bordo (2012Sep27) and Bordo and Haubrich (2012DR) find that growth is higher after deeper contractions and contractions with financial crises. There were two consecutive contractions in the 1980s with decline of 2.2 percent in two quarters from IQ1980 to IIIQ1980 and 2.7 percent from IIIQ1981 to IVQ1982 that are almost identical to the contraction of 4.7 percent from IVQ2007 to IIQ2009 (Table IIB-3). There was also a decade-long financial and banking crisis during the 1980s. The debt crisis of 1982 (Pelaez 1986) wiped out a large part of the capital of large US money-center banks. Benston and Kaufman (1997, 139) find that there was failure of 1150 US commercial and savings banks between 1983 and 1990, or about 8 percent of the industry in 1980, which is nearly twice more than between the establishment of the Federal Deposit Insurance Corporation in 1934 through 1983. More than 900 savings and loans associations, representing 25 percent of the industry, were closed, merged or placed in conservatorships (see Pelaez and Pelaez, Regulation of Banks and Finance (2008b), 74-7). The Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) created the Resolution Trust Corporation (RTC) and the Savings Association Insurance Fund (SAIF) that received $150 billion of taxpayer funds to resolve insolvent savings and loans. The GDP of the US in 1989 was $5482.1 billion (http://www.bea.gov/iTable/index_nipa.cfm), such that the partial cost to taxpayers of that bailout was around 2.7 percent of GDP in a year. US GDP in 2011 is estimated at $15,075.7 billion, such that the bailout would be equivalent to cost to taxpayers of about $412.5 billion in current GDP terms. A major difference with the Troubled Asset Relief Program (TARP) for private-sector banks is that most of the costs were recovered with interest gains whereas in the case of savings and loans there was no recovery.

Chart IIB-1, US, Cash Assets, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-2 of the Board of Governors of the Federal Reserve System provides quarterly SAARs of bank credit at US commercial banks from 1973 to 2012. Rates collapsed sharply during the global recession as during the recessions of the 1980s and then rebounded. In both episodes rates of growth of bank credit did not return to earlier magnitudes.

Chart IIB-2, US, Bank Credit, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-3 of the Board of Governors of the Federal Reserve System provides deposits at US commercial banks from 1973 to 2012. Deposits fell sharp during and after the global recession but then rebounded in the cyclical expansion.

Chart IIB-3, US, Deposits, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

There is similar behavior in the 1980s and in the current cyclical expansion of SAARs holdings of Treasury and agency securities in US commercial banks provided in Chart IIB-4 of the Board of Governors of the Federal Reserve System for the period 1973 to 2012. Sharp reductions of holdings during the contraction were followed by sharp increases.

Chart IIB-4, US, Treasury and Agency Securities in Bank Credit, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-5 of the Board of Governors of the Federal Reserve System provides SAARs of change of total loans and leases in US commercial banks from 1973 to 2012. The decline in the current cycle of SAARs was much sharper and the rebound did not recover earlier growth rates. Part of the explanation originates in demand for loans that was high during rapid economic growth at 5.7 percent per year on average in the cyclical expansion of the 1980s in contrast with lower demand during tepid economic growth at 2.2 percent per year on average in the current weak expansion.

Chart IIB-5, US, Loans and Leases in Bank Credit, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

There is significant difference in the two cycles of the 1980s and the current one in quarterly SAARs of real estate loans in US commercial banks provided in Chart IIB-6 of the Board of Governors of the Federal Reserve System. The difference is explained by the debacle in real estate after 2006 compared to expansion during the 1980s even in the midst of the crisis of savings and loans and real estate credit. In both cases, government policy tried to influence recovery and avoid market clearing.

Chart IIB-6, US, Real Estate Loans in Bank Credit, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

There is significant difference in quarterly SAARs of change of consumer loans in US commercial banks in the 1980s and during the current cycle as shown in Chart IIB-7 of the Board of Governors of the Federal Reserve System. Quarterly SAARs of consumer loans in US commercial banks fell sharply during the contraction of 1980 and oscillated with upward trend during the contraction of 1983-1984 but increased sharply in the cyclical expansion. In contrast, SAARs of consumer loans in US commercial banks collapsed to high negative magnitudes during the contraction and have increased at very low magnitudes during the current cyclical expansion.

Chart IIB-7, US, Consumer Loans in Bank Credit, Commercial Banks, Seasonally Adjusted Annual Rate, Monthly, 1973-2012, ∆%

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

The explanation of this diverging behavior of consumer loans is in Table IIB-3. In the cyclical expansion from IQ1983 to IVQ1985, real disposable personal income per capita, or what is left per inhabitant after inflation and taxes, increased 11.5 percent, at annual equivalent rate of 3.4 percent. Consumers were richer in income and demanded more consumer loans. In contrast, real disposable income per capita increased 3.8 percent in the current cyclical expansion from IIIQ2009 to IIQ2012 at the annual equivalent rate of 1.3 percent. In fact, the consumer is still worst off than before the global recession: real disposable per capita income in IIQ2012 is 0.2 percent below the level in IVQ2007. Consumers demand fewer loans currently and low interest rates may be insufficient to recover confidence and growth.

Table IIB-3, US, GDP, Real Disposable Personal Income, Real Disposable Income per Capita and Population in 1983-85 and 2007-2011, %

	# Quarters	∆%	∆% Annual Equivalent
IQ1983 to IVQ1985	13
GDP		19.6	5.7
RDPI		14.5	4.3
RDPI Per Capita		11.5	3.4
Population		2.7	0.8
IIIQ2009 to IIIQ2012	13
GDP		7.2	2.2
RDPI*		3.8	1.3
RDPI per Capita*		1.4	0.5
Population*		2.3	0.8
IVQ2007 to IIIQ2012	20
GDP		2.2	0.4
RDPI*		3.5	0.7
RDPI per Capita*		-0.2
Population*		3.7	0.8

*: To IIQ2012; RDPI: Real Disposable Personal Income

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

Chart IIB-8 of the Board of Governors of the Federal Reserve System provides cash assets in commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Acquisitions of securities for the portfolio of the central bank were processed by increases in bank cash reserves. There is no comparable experience in US economic history and such flood of money was never required to return US economic growth to trend of 3 percent per year and 2 percent per year in per capita income after events such as recessions and wars (Lucas 2011May). It is difficult to argue that higher magnitudes of monetary and fiscal policy impulses would have been more successful. Selective incentives to the private sector of a long-term nature could have been more effective.

Chart IIB-8, US, Cash Assets in Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-9 of the Board of Governors of the Federal Reserve System provides total assets of Federal Reserve Banks in millions of dollars on Wednesdays from 2002 to 2012. This is what is referred as the leverage of the central bank balance sheet in monetary policy (Pelaez and Pelaez, Financial Regulation after the Global Recession (2009a), 157-62, Regulation of Banks and Finance (2009b) 224-27). Consecutive rounds of unconventional monetary policy increased total assets by purchase of mortgage-backed securities, agency securities and Treasury securities. Bank reserves in cash and deposited at the central bank swelled as shown in Chart IIB-8. The central bank created assets in the form of securities financed with creation of liabilities in the form of reserves of depository institutions.

Chart IIB-9, US, Total Assets of Federal Reserve Banks, Wednesday Level, Millions of Dollars, 2002 to 2012

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1

Chart IIB-10 of the Board of Governors of the Federal Reserve System provides deposits in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Deposit growth clearly accelerated after 2001 and continued during the current cyclical expansion after bumps during the global recession.

Chart IIB-10, US, Deposits in Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-11 of the Board of Governors of the Federal Reserve System provides Treasury and agency securities in US commercial banks, not seasonally adjusted, in billions of dollars from 1973 to 2012. Holdings stabilized between the recessions of 2001 and after IQ2007. There was rapid growth during the global contraction especially after unconventional monetary policy in 2008 and nearly vertical increase without prior similar historical experience during the various bouts of unconventional monetary policy. Banks hoard cash and less risky Treasury and agency securities instead of risky lending because of the weakness of the economy and the lack of demand for financing sound business projects.

Chart IIB-11, US, Treasury and Agency Securities in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-12 of the Board of Governors of the Federal Reserve System provides total loans and leases in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Total loans and leases of US commercial banks contracted sharply and have stalled during the cyclical expansion.

Chart IIB-12, US, Loans and Leases in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-13 of the Board of Governors of the Federal Reserve System provides real estate loans in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Housing subsidies and low interest rates caused a point of inflexion to higher, nearly vertical growth until 2007. Real estate loans have contracted in downward trend partly because of adverse effects of uncertainty on the impact on balance sheets of the various mechanisms of resolution imposed by policy.

Chart IIB-13, US, Real Estate Loans in Bank Credit, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Chart IIB-14 of the Board of Governors of the Federal Reserve System provides consumer loans in US commercial banks not seasonally adjusted in billions of dollars from 1973 to 2012. Consumer loans even increased during the contraction then declined and increased vertically to decline again. There was high demand for reposition of durable goods that exhausted and limited consumption again with increase in savings rates in recent periods.

Chart IIB-14, US, Consumer Loans in Bank Credit, Not Seasonally Adjusted, US Commercial Banks, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

Finally, Chart IIB-15 of the Board of Governors of the Federal Reserve System provides commercial and industrial loans not seasonally adjusted in billions of dollars from 1973 to 2012. Commercial and industrial loans fell sharply during both contractions in 2001 and after IVQ2007 and then rebounded with accelerated growth. Commercial and industrial loans have not reached again the peak during the global recession.

Chart IIB-15, US, Commercial and Industrial Loans in Bank Credit, US Commercial Banks, Not Seasonally Adjusted, Monthly, 1973-2012, Billions of Dollars

Source: Board of Governors of the Federal Reserve System

http://www.federalreserve.gov/releases/h8/current/default.htm

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Sunday, October 28, 2012

Mediocre and Decelerating United States Economic Growth, Exiting Quantitative Easing QE∞, United States Housing Collapse, Commercial Banks Assets and Liabilities, Global Economic Deceleration, International Financial Risks and the Global Recession Risk: Part I

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