war i museum in kansas city missouri. president woodrow wilson signed a declaration of war against germany on april 6, 1917. more than 4 million men and women served and more than 1000 died. un-american history tv, here on c-span3. on lectures in history, university of chicago professor jonathan levy teaches a class on the great recession from 2007-2009. the worst crisis since the great desk since the 1930's. he traces the origins of the looks at how the housing market of the 2000 mimics some of the same patterns. he also talks about some of the exotic financial instruments developed during this time. the practice of banks using overnight short-term credit theets to stay afloat and

unprecedented actions taken by the president reserve to rescue the economy after it collapsed. his class is about an hour. professor levy: ok. in our lecture on the great depression, i talked about the origins of any financial crisis, it is always important to look at the resolution to the last crisis. when we think about the great recession, we have two moments of origin. the 1970's, the crisis of industrial capitalism and thinking about whether or not the american economy has gotten out of that crisis. we have been talking about this. the second point of origin i think is the late 1990's, the new economy, and how the bubble crash sets of a pattern that goes across the 2000's. into the great depression. so we ended our last lecture with alan greenspan before

congress in 1998. it is in the midst of the new economy euphoria. here is what he said. you read this, but i will read it out loud. "in short, our economy is still enjoying a virtuous cycle, in which, in the context of subdued inflation and generally supportive credit conditions, rising equity values are providing impetus for spending and in turn the expansion of output, employment and productivity enhancing capital investment. the hopes for accelerated productivity growth has been bolstered expectations of future corporate earnings and thereby fueling the further increases in equity values." this is his virtuous cycle, describing an economy in which low interest rates, what he calls generally supportive credit conditions, which the fed controls. as well as abundance finance capitals in the u.s. market which has been seen since the early 1980's, the inflow of

capital from around the world into the u.s., as well as what i called on monday, the wealth effect. the soaring stock market prices, the creation of more wealth and asset depreciation. that dynamic channeling investment into the new i.t. investments and fixed capital, information technology, which will then, greenspan expects, will lead to higher business productivity, higher output, higher profits, which will then justify the high stock market valuations to begin with, therefore fueling this virtuous cycle. so drawing from the list, i will call this an asset price -- you are raising aggregate demand, because of the website -- wealth effect of these rising values in the stock market. this is not the kind of raising

through public debt and public spending or even public investment, but rather raising aggregate demand and therefore output, as greenspan explained to, through depreciation and financial markets. fueled by what greenspan again calls generally supportive credit conditions. which is another way of saying, debt. but, greenspan believed in the new economy. financial markets. he believed that this cycle would be virtuous instead of vicious. ok, switching gears. 1998, there is another context of his remarks before congress. he is justifying to congress why at the fed, the fed is sponsoring lili -- sponsoring generally supportive credit conditions and greenspan damages before the congress, of

financial disturbances over the globe economy. a crisis had broken out in east asia in 1997. and many east asian economies, thailand and indonesia, singapore, south korea, they had developed rapidly throughout the 1980's and 1990's and they were hot on the heels of japan and germany's postwar industrial takeoff. same model, export led growth, fueled by exports and manufacturers. except now with this system over, there is virtually no control over global capital movement. in 1997, and 1998, for various reasons global finance capital became suspicious of the east asian economies and they fled. on a computer screen, virtually overnight. that is panic in the global financial markets and the financial system seizes up. and it u.s. financial markets in 1997 and 1998 were also rattled. i think this is a big pivot and

there are two things that happened. as a consequence of the east asian financial crisis, which would have enormous consequence, first was china was paying attention. communist china during the 1990's, they were in the midst of their own manufacturing, export led industrial takeoff and they looked around in 1998 at places like indonesia, the gdp in indonesia was plummeting by 25%, there were riots, political turmoil, and the rulers in china say, how do we avoid something like this from ever threatening the legitimacy of our regime? the answer was the horde a lot of u.s. dollars. the answer was the horde a lot like gold before, the u.s. dollar is now safe harbor, the world's reserve currency. and greenspan controls the supply of dollars. the way to get dollars, if you

are a country like china, is to buy dollars denominated financial assets, like u.s. debt, public debt, u.s. treasuries. so foreign countries, especially china, realized -- we need to get our hands on a lot of u.s. debt, a lot of assets. it is a way of hoarding dollars in remaining liquid, even when a crisis strikes. that leads to a surge here of even more inflows of global capital into u.s. financial markets. same pattern we have seen the last 20 or 30 years since 1980, capital running uphill to the u.s., to the most developed country in search of security and stability. in 1998, because of the east asian financial crisis, the fed really comes to the rescue of the global economy.

said greenspan, before congress, is explaining why, with the u.s. economy booming, he is still anding interest rates throwing dollars into the financial system. he is doing it for two reasons. one, keep the global financial system from seizing up, given the east asian crisis. and cutting rates, maintaining that the u.s. consumer market, which are already battered producers, the east asian economies were export economies. so we have another pattern, which is set in place by the end of the 1990's, which american consumers have become sort of last resort. we will buy your flatscreen tvs, if no one else will. so in the late 1990's, you can see that the u.s. trade deficit, which is financed by the global capital inflows, the u.s. trade

deficit really explodes. now, greenspan reasons, think about his reasoning, he said i can do this because of this virtuous cycle. the u.s. stock market, given by new economy stocks was in orbit, you can see it here. again, greenspan believed in the new economy. there is one problem here, which you can think about as rather obvious. this virtuous cycle was premised upon future expectations as greenspan put it, of future profits being realized because of these i.t. investments, but how long? how long can the stock market levitate in the air without the realization of actual profits, actual earnings? you can see here they share price ratio really going up across the 1990's. the ratio of the price of the stock to the actual earnings of

the company. the answer turned out to be a few years. the u.s. stock market tanked in 2000. and studies came out after, i will cite a couple of them. the ocd did a study after the popping of the bubble of the 242 leading internet companies, of those 242, only 37 of them made profit in the third quarter of 1999. and of those to which a 42 company's, two of them accounted for 60% of the profit of all 242 companies. so, of the 205 companies that lost money during that quarter, they had a market capitalization at the height of the bubble of 621 billion dollars. this gives you a sense of all corporate profit, you can see a flat lining in the late 1990's.

so what is going on? between 1994-1998, 50% of all purchases of stock were simply buybacks, company buying their own stock. so a lot of the activity, the bubble, is corporations purchasing their own stock, giving themselves stock options, watching the stocks go up, even though the businesses were not actually making profit, then cashing out the stock options before the music stopped. this, to me, there is no other way to describe this, it is massive looting. i will give you one more statistic. from 1995 to 2000, u.s. investment banks organized 167,000 mergers and acquisitions and telecommunications. and investment banks earned a total of $13 billion in fees

from those mergers and acquisitions. in 2001, the utilization rate in the amount ofion, telecommunication infrastructure actually used was 2.5%. that is bad. i mean, that is a sign of real illness and the underlying dynamics of the economy. the corporations often times are going into debt to buy their own stocks as part of the bubble. it is also true that families, household and individuals had gone on a binge of debt during the late 1990's, to purchase, to make the stock market purchases. because if you own stock, they keep going up and up, in your private account or your pension or 401k, why save? you see the u.s. savings rate really just plummet in this time as well. and volcanic, unprecedented

volcanic growth in household debt. another metric of it right here. and the stock market bubble pops 2001, 2000 and technically the u.s. entered into a recession. actually, gdp growth, not much a victim of it gdp growth reappeared in 2001. -- not much of it, but gdp growth reappeared in 2001. and essentially the housing market replaces the stock market. the dynamics look very, very similar to me. it is true after 9/11, military spending increased. so you get the return of a classic -- bush also cut taxes, you can see the u.s. budget going into surplus in the late 1990's, back into debt after the recession of 2001 and after 9/11. so public debt is now back.

and it is also true greenspan famously flashed interest rates again, three times between 2001-2003. it was known as the greenspan put. so greenspan was not going to let u.s. asset prices free fall, he was going to provide credit to keep the value of assets up, because as i've explained the value of assets are the hinge through the wealth effect, at this point, through the entire global economy. it is also true it was a miserable recovery after the 2001 recession. it was a jobless recovery. you can see the red line. inflation however remained low. greenspan's injecting more dollars into the economy to try to stimulate a sluggish

recovery. still, not getting much bang for the buck. again, very troubling dynamics. you can debate it, but i think if you want to date the great recession, arguably, you can say it goes back to 2001. we have troubling signs of over all macroeconomic health coming out of the stock market bubble. so at the same time, during the 2000's, with the greenspan put, you can see the capital, still running uphill from around the world into the u.s. capital markets. the u.s. financial system is awash in liquidity and credit and capital. credit, capital, interest rates are low, and credit capital is cheap. it is at this moment that the financial system in the u.s., it really takes off. and again, it did not have to but it centered on the housing market.

this is the u.s. housing price index. so now housing, residential housing, is going to become the asset class that will drive the asset price, which i was describing across the 1990's. how did this work? basically, to fund consumer demand and consumption, with wage growth, this is debt again. where is my, where is the slide i want? i want this one. with wage growth, you can see the median family income flat across the 1990's and 2000's. households begin to withdraw stupendous amounts of cash from their homes. i will go all the way back. up, up, up, with home equity loans, cashing up the value of

the rising market price of your home as a loan. mortgage equity withdrawals, home equity loans accounted for 27.1% of gdp growth between 2001-2007. and more of the wealth effect, credit sponsoring increases, and asset prices. again coming out of the housing market. greenspan, you look at his comments, he is not stupid. he knew that, he knew about this, he knew there was a housing bubble. and he is still running around in the 2000's talking about growth. and you see it across the 2000, productivity growth is still high. and you can save rising rates of investment and information technology. and unlike across the late 1990's, across 2000's you see a big uptick in corporate

profits. said greenspan is actually arguing the new economy is realizing itself finally. you got a problem though. you have housing prices going through the roof. and you cannot get around this slide. right? you cannot get around flat, median income growth. because without growth in incomes, with negative savings, people cannot pay back their mortgages, pay off the home equity loans, and by all the world's stuff, unless u.s. housing prices continue to soar to infinity. it is that simple. ok, there is a housing bubble, but what i'm try to argue is, the possibility of the bubble, just like the stock market bubble before, is sort of hardwired into the global

political economy. into the kind of finance driven capitalism of our age of chaos. the wealth effect of rising u.s. asset prices, 1990 stocks, 2000 houses, raising the aggregate demand in the u.s. economy. which has become the consumer market of last resort. for the global economy. for all global manufacturing producers. that debt is sustained by the global capital inflows into the u.s. financial system, because the dollar has become, it is, still is the world's leading reserve currency, if there is a crisis, everybody wants hands-on dollars. and the federal reserve, which controlled the money supply essentially for the world, is holding interest rates low to provide those credit conditions that greenspan referred to in 1998.

ok, so now i will shift gears and scales a little bit. the housing market was bound to cool off. to some degree. and it did in 2007. you can see the little blip. and now we have a different question, which is -- why, by the fall of 2008, and did the cooling-off of the housing i am nothich to betterng, leads ? nancial apocalypse september 2008, the u.s. financial system, let me be clear, it imploded. it ceased to function.

so why? here again, we need to change scale and go from the big picture of political economy, including the global political economy, and get nitty-gritty into how finance worked, until it stopped working. right? ok, you can see it on the handout, but in the postwar era there was 3-6-3 banking. which bankers took deposits, paying depositors 3% interest. they lend out money to customers at 6% interest. and they hit the golf course by 3:00 p.m. very simple. during the 1970's, this model was disrupted. inflation that came about in the 1970's ate into the value of those loans. and with manufacturing profits falling and the international competition, many corporations, including banks, started to do more creative things financially. banks began to create new

products. instead of taking deposits, waiting for repayment for loans, they began to originate and distribute. originate and distribute. you do not make a loan and hold the loan. you originate the loan and then you sell the loan, and you make money that way. for you originate a derivative and you sell the derivative and make money that way. so the derivative is a financial product whose price is a derivative of an underlying asset. you do not buy the house, the bushel of wheat, the derivative is simply a bet on the price movement. you do not have to buy the thing itself.

and what wall street did, since the 1980's, was to find new something elses to bet on. all kinds of stuff. different types of loans, mortgages, credit cards loans, student loans. you could mix different loans together, chop them up, securitize them into a new synthetic derivative. to do that, you need complex mathematical formulas. so wall street banks start minting these new financial products and selling them to one another, but also to their clients. it is not regulated. it is outside the framework of the new deal financial regulatory architecture. so this is sometimes called shadow banking. ok, so stay with me. a bank, a business needs cash from time to time. to pay the workers, to pay the

debts, and in an old world you have cash on deposit in a bank and to draw from it. now you don't so much have cash on deposit in the shadow banking world. you can get cash through the repo market. the repo market, this is a market where all the trouble happens. banks simply let each other borrow their assets overnight for cash, then the next day they repossess or repurchase, repo their assets back. and you end up with billions of dollars moving around every night. banks and other institutions pledging assets as collateral for overnight short-term cash flow. so the wall street investment bank, bear-stersn, by the end of 2007, they were barring around

$50 billion and $70 billion overnight in the repo market. so wall street banks, investment banks like this one, where relying upon the repo market to stay afloat, to stay solvent, because to make profit they were taken on as much leverage as possible. ok, so we have originated and distribute, financial derivatives, the repo market and now we have something else, leverage.commands the banks were in debt. which is why they needed $70 billion every night in loans to roll over and finance the debts. what is leverage? a bank leverage is the ratio of assets, the loans and investments out in the world, relative to their equity. it is reserve capital, the

cushion you can draw on when things go wrong. the more leverage you have, the more profit you can make, because you are putting up less of your own money to make money. but the more leverage you have, the quicker you can become solvent, because you do not have anything to cover your losses. by 2007, the five major u.s. investment banks, including goldman sachs, lehman brothers and morgan stanley, had leverage ratios between 30-40-1. that is a joke. it means that leslie and 3% -- that a less than 3% drop of asset values, the stuff you own on your books, less than 3% can wipe you out. it can make you insolvent. to meet your obligations, these banks are relying upon debt financing like the short-term credit markets, like repo. ok, the banks are originating these assets, the derivatives,

the securities trading profit and they are using them as collateral in the repo market to get loans to finance operations, which often include producing and synthesizing more mortgage-backed securities. it could work, so long as those assets were worth what everybody thought they were worth. and as long as markets stayed liquid, and -- in other words, you can borrow $70 billion overnight, using the mortgage-backed securities as collateral. in 2007, housing prices were stalling and american homeowners themselves were in debt and beginning to default on mortgages, wall street them began to question the value of the stuff it had been creating. and once the value of those derivatives were thrown into doubt, two things happen. starting in late 2007, first it turned out the banks had a lot

of these assets, they thought they were originating and disturbing to clients, they had a lot of these assets on their own books. when you are leveraging the highly, 40-1, only a 1% or 2% in asset values, you are basically wiped out. second, perhaps you are insolvent, but nobody has to know if you still have access to the short-term credit markets through repo to cover your daily obligations. then you can hope, hope that the stuff that is on the books is currently worthless, might become worth more tomorrow. if you can stay alive through getting access to credit. so this is referring to an early moment in the class, this is a confidence game. the problem, moving into 2008, was that the repo market finally just shut down. it became fully illiquid, no one is willing to accept collateral

for any price whatsoever. now we have a twofold problem, a problem of insolvency and illiquidity. and if the banks had tapped into the repo market, that market, the origin of the market, would also use critically by business firms. so the lehman brothers failed in the fall of 2008, that was the moment of the financial apocalypse. the ceo of general electric called up hank paulson, who is the u.s. treasury secretary, and he said, i am the ceo of general electric and i do not think i can make payroll next week because i need the repo market to raise cash to pay my workers. so the ceo of general electric, the company with a $369 billion market capitalization, and i am afraid i cannot make payroll next week. so, the end was near.

remember what i said about confidence games, there is never enough truth in a capitalist financial system to compensate for all of the fiction at one moment in time. fictions which may or may not someday become reality, but in the present remains fiction. so fall, 2008 was a moment of truth. when wall street stopped believing in its own fictions, and the only truth became cash. once again, the u.s. dollar. everybody wanted to get their hands on cash, which means sell everything, which only makes markets go down, down, down. so panic. wall street stopped trading with itself, no liquidity, financial apocalypse, october 2008.

that is what happened. the fed, the treasury had bailed out the investment bank bear stearns, they financed itself to jpmorgan. the bush administration decided to let the lehman brothers failed to make an example cannot get into a too big to fail moral hazard situation and it brought down the entire global financial system. and without intervention of the federal government, that meltdown would have been complete. they, fall 2008, to sort of solve the panic or the crisis, the bush administration acted on two fronts. the fed injected enormous amount of liquidity, dollars and credit, into the financial system. definitely pushing the limit on the legal mandate. so the fed, the lender of last resort, dropped interest rates to 0% and began to accept a broad range of assets for

collateral, essentially interest-free loans. and the fed's own balance sheet, the stuff it up as collateral, just absolutely exploded. furthermore, i add that the fed did this not only for u.s. institutions, but for the rest of the world. the contagion spread and the fed ended up giving a lot of free dollars to the central banks across the world. so the fed, it was really a global fire brigade. that in itself was not enough to get wall street to start trading with itself again. the fed was pumping dollars and liquidity, but its powers are limited when it comes to insolvency. but that was the debate of early 2009. to what degree where the banks insolvent? to what degree would they need

capital to become solvent again? in the final days of the bush administration, congress authorized the troubled assets relief program, which authorized treasury to inject up to $700 billion of capital and equity into the u.s. financial system. october 13, 2008 paulson ferneki, -- would become obama's treasury secretary and met with the big banks and explained they would be injecting capital into them. and the government decided to to try toting shares avoid the sense of government ownership or anything like nationalization. of private banks they do not want to rebuild the financial system from the ground up, they just want to put humpty dumpty back together again.

and that is what they did. you can see the appeals in the confidence, geithner's idea was to conduct stress tests to demonstrate that although a few institutions were broke, they might need injections of state capital, that the u.s. financial system as a whole was fundamentally not insolvent. institutions were broke, they and that is what the may 2009 stress test tried to prove. and did prove, by saying that they had proved it. again, this is a confidence game. at that moment, may 2009, that is when the treasury announces the results of the stress tests, saying that the bank is solvent and that is when normal trading began again. and in immediate financial crisis, the panic of 2008, was over. may 2009, i think we can date

it. the great recession itself was not. i do not have too much time left. i cannot give an overview of the great recession, but what i want to do is sort of talk about three themes i can leave you with. those themes are topics, they are these, their institutions, value, and work. i want to start with institutions. with one institution we studied in this class, across the centuries, and that is the family. to do so, i want to look at a life, and economic life from inside the great recession. granted it is a fictional one from the film we watched from this week, that is "magic mike." he is a stripper. he is an entrepreneur.

what is his dream? not to dance, it is custom furniture concepts. he wants to be a craftsman, he wants to make furniture from industrial waste, from the bygone industrial capitalism. handcrafted furniture, you know what i mean? he wants to own his own business and he was to be a proprietor. you can see the hope of free labor, as abraham lincoln once put it. the hope to become an independent proprietor. abraham lincoln, magic mike. magic mike cannot do that. why not? because the bank will not give him a loan. the banker tells him in the wake of the recession that mike is a distressed borrower. if you recall, mike says, i read the papers. the only thing that is distressed is y'all.

that is right. the banks might have passed the stress test of 2009, but they do not start lending again. at least not to the little guy, not to the magic mikes of the world, the frustrated entrepreneurs, they are not getting small business loans despite the trillions of dollars of credit and liquidity that the fed is throwing into the big banks. so, sorry, mike. you do not have access to capital. and the fed discount window is not open to you. >> so what else can mike do to ? ke a living he lives in florida. think the george packard reading for this week, the business model of the florida boom across the 2000's, real estate development, is spot on. as the movie starts, magic mike works in construction for a roofing crew. but new home construction,

especially in florida, plummeted after 2007, so he is not going to get a lot of employment there. so magic mike strips, he dances for the ladies of tampa. and he makes money off of his body. of course, stripping in the past has been a feminized occupation, but he will do it because he is a good dancer, but the high-paying jobs that have been coded as male, the blue-collar jobs, that anchored the families of the industrial society, those jobs obama's completely left the economy. it is true, the fastest-growing employment sector today are typically feminized service jobs -- waitresses, sex workers,

nurses. mike hold onto the sort of male ideal of entrepreneurship, the female character, his love interest, she is not shirley mcclain, the office girl of the apartment. she is not the frustrated female office worker of "9 to 5." she has a post secondary degree and holds a steady job as a nurse, while her brother, adam, sits at home playing video games. until he meets magic mike. you can see in the film the breadwinner and homemaker family is thrown into utter confusion. and i think the movie is spot on. let me give you statistics. increasingly men like adam do not do the work. the prime age men my 35-54, in 1970, the labor force participation rate, only 5% of

men in that age group were not in the labor force. by 2000, it was 11%. today, it is 16% and climbing. here is a picture of the phenomena. men without jobs in 2000 and here is 2014. you can see the graphic. and today, furthermore, mothers with children age 6-17, the demographic group that was drawn from the labor force during industrialization, mothers with children have the highest labor force participation rate of any demographic group. you can see here the gap in the participation rate according to gender, closing. clearly, a higher male unemployment rate, or male, men not in the labor force, looks to be in the future.

for that reason alone, the institution of the family today, economically is very much in a transitional state. ok, so institutions, the state itself, another institution we have been tracking, here i think we have continuity across the age of chaos. the continuity being institutional failure. with that said, one continuity, the fed cents the 1980's, the fed is very much at the home of -- helm of economic policymaking. janet yellen now controls the supply of u.s. dollars in the world. policymaking. janet yellen now controls the supply of u.s. dollars in the world. i think we have seen limits to monetary policy, how much monetary policy can stimulate the economy, it has been a lesson of the great recession. with respect to fiscal policy, here what has happened has been remarkable. between 2009-2011, after the financial crisis, a pretty

classic fiscal stimulus package has kind of again, classic ideas returning to prominence. 2009 stimulus was called the american recovery and reinvestment act. then in 2010, with the rise of the tea party, a shift away from stimulus and into austerity. we can debate which is the right one, but i think you want to note the policy schizophrenia that is occurring. no determinant political economy at the level the federal government. furthermore, since 2008, given the scale of the crisis which was not much less than 1932, a real sort of policy incoherence and a kind of policy liquidity combined with intense ideological opposition. right? policy incoherence, intense

opposition, those are telltale signs i would say of institutional paralysis and failure. which clearly explains the rise, not just donald trump, but the rise of the kind of populist social movements critical of institutions, which i think in many cases, given the kind of economic performance across the last 30 years, that is kind of critique is very much warranted. it is an open question whether the state, whether the nationstate, a democratic nationstate i will add, will be the institution to govern and regulate capital in the 21st century. is democracy, our democratic institutions and values, up to the task? i will leave those open questions. you start to think about it, how

might democracy be engaged with capital? here we have questions of value, the second topic. here we have a little bit of discontinuity. since the great recession, since 2008, in terms of political values that we associate with democracy, inequality, economic inequality has become an issue of some political concern. we have, this is the top 1%, we have the data and we know what it looks like. there is no big secret. the question is, why is this the case? let me point to two reasons. that i think are important. one, income increasingly flowing, not from wages, but from asset appreciation. that is built into the political economy of asset prices. and flowing not so much from earning wages, but owning financial assets.

second, even more fundamental, is this -- this is a worrisome chart. since the 1970's, the link doing productivity growth and average hourly compensation, wages, has been severed and it diverges. not just income from asset depreciation going to the top, but whatever income accrues from productivity gains in a productive economy going upward as well. so this is changed in part because of capitalism moving from industrial to new form, especially financial form, and adds valuation in economic life. we are back to the new economy idea we talked about on monday. the idea comes first, then the capital, creating a financial valuation and income gains from asset appreciation as opposed to

gains from actually employing people and paying them wages for work. so since the 1980's, and a lot of capital, a lot of finance capital is turning. and to reproduce itself, it relies on short-term debt, things like the repo market, and also the provision of liquidity and a generally supported credit conditions from the fed. but that capital is not so much employing people and paying them wages that share in the actual productivity gains achieved by the economy, to the extent to which those productivity gains are achieved. so thus far, valuation in the new economy has not translated into jobs, good jobs, people who want to have -- the kind people want to have. instead, income and wealth increasingly come out of asset

appreciation, financial markets, real estate, they have gone upward to the rich. ok we have two sort of choices two ways of approaching these problems, there is a third choice, which is to go on like this, probably not a good option. one possibility is finding some way to relink economic valuation and work. i think you would have to design new institutions to do that, to fix this slide up here. attic above all it involves getting capital to become more concrete. getting capital out of the financial form, out of asset price appreciation, out of financial bubbles, and getting it on the ground, literally on the ground, embodied in fixed

and physical structures, that will lead to profit and also the employment of people, paying them wages that share in product -- productivity growth, if nothing else. again, think about the fed. this is one thing the great recession has demonstrated. the fed can lower interest rates, pump dollars into the economy, but it cannot direct where the capital and credit goes. or what form it takes. you cannot control whether or not the magic mikes of the world get the small business loans for proprietary shops. ok, i think, to make america great again it has a lot to do with this. it is nostalgia for a moment, especially for manufacturing in which growth and productivity growth were linked. that is not coming back, it is not coming back. if only because those manufacturing jobs have been moved to ottomans asian --

automazation. the need to employ this people does not exist. so it calls for creative thinking. new institutional design. you guys are the best and the brightest, this is a job for you. perhaps regulation can do this, perhaps we could redesign corporations towards this end. it could happen, this is one of the ideas, that the state needs to become an arm of investment to determine where capital goes, for public investment. you can see this in the discourse during the election and even after with donald trump, of being in favor of infrastructure investment club public investment and infrastructure mode which would put capital on the ground. moving into financial forms into better concrete forms. the second option is more radical. just to say, forget it. we will not move economic value

to work anymore. a change of possibilities for our grandchildren, you, by the way generally showing -- generationally. what is wrong with lifting the curse? let the robots do the work and let's focus on what is called the art of living. this would clearly call for even more radical institutional innovations. would that even still be capitalism? would the capitalist gain we have discussed over the course still dominant economic life? capitalism, i hope you learned from taking this course, the form it takes is not written into the start. if you look at human history, capitalism has only been on the scene for a very short period of human existence. capitalism does not have to exist, but capitalism can exist

if we want it to. the history of capitalism is about the shifting relationship between the logic of capital, the forms it takes, and other social political cultural and moral values. despite whatever pessimism someone might have about the economy, we have plenty of resources across all those contacts, to create the kind of economy that all of us would want to live in. when i teach this class, or something like it, 30 years from now, i'm not that old i could make 30 years. i hope there will be a lecture on what will be your adult economic lives, and you are welcome to come back to chicago and hear that lecture. i hope you will be proud to do so. it is always a privilege for me to teach this class and i thank you for your efforts and your attention and wish you the best of luck.

so at the end of class, the last class, i'm always happy to take questions. we can do that now, if you like. i understand time is up, some of you will need to leave. any questions? i see a hand. they want to use the microphone. >> to what extent did the recession and mortgage pricing -- what was the federal incentive in the 1990's, how did it affect the prices and availability of the subprime mortgages? not blaming the banks or the government. but the narrative as the bank false. professor levy: the question is, how much did the federal government incentives, how much did it play a role in sponsoring the run-up of the housing prices?

let's put aside the question of blame and responsibility and think about the dynamics. there are two cuts to the question. we know from the new deal, it started with farmers and ended up being housing prices. part of the economy is to subsidize credit. it has been there since the 1930's, fannie mae has had a role. it plays a role, but you know, it has been there since at least the 1950's after one or two. -- after world war ii. so it can explain a little bit, but not the run-up, the complete run-up. the second part is the comparative question, there were countries, spain is one of them, that had a boom in housing prices across the 2000. without any governmental support really, whatsoever. nothing like the kind of government subsidies you would see in the united states. said that dynamic of capital moving across borders and blowing asset bubbles is

something we see everywhere. it plays a role, but i would be cautious in assigning a primary role. >> it seems like our capitalist system has been growth centric for the past couple decades. if we do change to something different than capitalism, do you think the metrics for the measurement of success would be sustainability, or maybe something further disconnected from quality-of-life? or would we find something else to connect the quality-of-life? the metric of: growth, you are right, it is intrinsic to the capitalist economy. gdp growth is something that emerged out of the 1930's and 1940's, and was part of the revolution in macroeconomics. as we know, the goal was to increase output, so as to increase employment. he assumed if you increase output, you increase the

aggregate level of income and he would get something called full employment. one thing that has happened in the economy that we do not understand, is the degree to which we have growth in output, it is not matched by the resulting achievement of full employment. so, what i'm trying to say is, the metric itself on its own terms no longer seems plausibly to guide policymaking or how we think about the economy. then the question about what other metrics we might use, that is an open question. there are other metrics, measures of happiness, satisfaction, and then finally which i've not mentioned in the lecture, climate change produces other kinds of metrics that might be perhaps more important than things like gdp growth. let's take two more questions. one in the back, then the front.

>> um, it seems as though janet yellen is expected to raise rates later this year, for the first time substantially since it was set at zero. the fed has decided to do this after months and months of building expectations, which they had previously done and decided not to raise rates at the last minute because of a random shock in the economy. it seems this time they will, but do you think the trepidation of the fed poses a significant problem with the leading designer of economic policy for the united states going forward? professor levy: another issue where the kind of relationship, the macro economic relationships that we thought existed in the economy, for some reason do not so much. the trade-off between employment that we thought existed in the and inflation used to think that when unemployment went down, that would put pressure on inflation.

the official implement rate in the economy right now is quite low, yet we have zero interest rates and inflation is remaining calm, so think about raising the rates, there is a confusion of the fed about what to do. and you are right, the politics of it are international. the constituencies that are upset about the low interest rates are the economies outside the united states that think there has been asset bubbles in land values, and the u.s. government, the fed has the ability to control other governments. so the politics of it is complex paid element to one more thought. one of the problems is, with interest rates already being so low, with another financial crisis, they have no room to lower rates. this is, they do not have a long runway. ok. one more.

>> so, if we are looking at the response to the last crisis. and if we have flexible accumulation, and using the regulation across the board, what is the emphasis on regulation? do you see as being able to move past into a new -- what do you project? professor levy: i mean, there are two ways to think about change. change at the margin, and i think the new regulations including dodd frank, which i did not talk about, set caps on leverage and the kind of equity the banks need to stay in business. and those changes are significant and they matter. i think the continuity that matters the most is the global

configuration of the political economy. a situation in which capital flows into the u.s., the financing of the trade deficit, and the rest of the world developed through manufacturing booms or commodity booms, selling things to the u.s. and until, which is a global problem, no national government has the capacity to really address. and until that sticks, i do not know, i would really argue that what we used in this class, the 1970's opening up the present moment, i think that will continue to be the case. ok. we will stop there. thank you all very much. [applause] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. visit ncicap.org] >> join us every saturday evening at 8:00 p.m. and midnight eastern as we join students in college classrooms

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