Simon Johnson's Testimony to Senate Banking Committee

http://baselinescenario.files.wordpress.com/2011/02/sj-testimony-to-senate-budget-jan-31-2011-final.pdf

I have highlighted some of the statements by Johnson in his testimony on Tuesday:

Employment recovery from the Great Recession is very different from previous post war recessions. Employment fell 3-5% from its peak and returned to peak in 12-24 months during recovery in prior recessions. The 2001 recovery was an exception with employment falling 3% and recovery to peak taking 4 years. Employment fell 6% in the Great Recession but it is still down 5% after 3 years.

Non-financial corporate profits fell 20% from peak to trough during the Great Recession. By Q3 2010 they returned to the 2006 peak. There seems to be little incentive for corporations to resume hiring in the US. They see better opportunities in emerging markets.

The slowdown in new household formation may have an impact on the housing market. In the decade before the crisis 1.1 million new households were formed per annum. Since the crisis, new household formation has dropped to 600,000 per annum.

The largest 6 banks in the US are bigger than they were before the crisis. Their assets as a percent of GDP have increased from 56% before the crisis to 64% after the crisis. They were only 15% of GDP as recently as 1995. These banks have implicit support from the US government which lowers their cost of capital and has improved their credit ratings. They may becoming to big to save. Ireland provides an example of being to big to save. Loans from European banks to the three largest Irish banks fueled the housing bubble in Ireland. The European banks assumed that the Irish government would not permit them to fail. It turned out that the bail out of the Irish banks exceeded the capacity of the Irish government's finances. The IMF and the European Central Bank had to finance the rescue operation.

Fannie Mae and Freddie Mac failed as a result of poor risk management and they required a government rescue. They were not, however, the principle causes of the financial crisis. They were marginalized by the Wall Street Banks which captured the major portion of the mortgage backed securities market from them by bringing riskier products to the market.

Research indicates that US politicians share the values of America's wealthiest citizens and that lower and middle income Americans are not being heard. There are many reasons why this might have happened but the consequences are uncertain.