THE AMERICAN ECONOMIC AND FINANCIAL MODEL

Bibliographie

Daniel Boorstin, Histoire des Américains (essais sur des éléments historiques importants)

Gary Cross, An all-consuming century

Stiglitz Quand le capitalisme perd la tête

Emmanuel Todd, Après l’empire. Essai sur la décomposition du système américain

Galbraith, Economie Heterodoxe, Seuil 2007

 Introduction

The American economic model is the capitalistic model. The economy in the US is mixed with the
American culture, civilization and identity. The Americans believe that there is no equivalent of
their economic model in the world. The American identity is based on economic achievement and
on their economic system. Understanding this system, its creation, the beliefs and values that
founded this system, is something necessary to understand the American identity. But this system
is not universal. To talk about the economic model is to talk about exchange, about our vision of
work, wealth, success and failure. The economic system in which we live has a great impact upon
the way we live.

The capitalist system is the putting-in-common of economic resources with the aim of creating
new wealth. At the very origin, the capitalist system is a generous idea and isn’t very different
from communism. The fundamental difference is that the driving force behind the collective use
of these resources is self-interest. This gives us the difference between a market society and
capitalism. The market society existed long before capitalism.

How economic factors affect the US economy?

The US economic system is not a standard. There is no one single way to organize it. There are great
similarities between the US capitalist system and the other capitalist countries.

Nowadays, there are many economic factors affecting the US economy. For instance, the president of
the European Commission, Durao Barroso, and Barack Obama
have stated about the issue of payment given to traders and
decided that there has to be a limit for the additional payment of
traders. Those additional payments, or bonuses, are closely
linked with the economic crisis. Traders are given extra money
depending on how much they bring back to the bank they trade
for. As a result, traders are encouraged to do risky actions
because it is on their personal interest. The most profitable
investments are also the most risky. Barroso and Obama issued
the possibility of regulating bonuses, but it brings an ethical issue,
as regulating them would go against the tradition and the
custom. From the point of view of the economic aspect of the
crisis, how culture and civilization, politic and religious values are
affected? Societies have a degree of resistance. The communities
should take measures to adapt the economy to their culture or
the other way round, so for the next crisis they are able to pay their loans.
 1. Foundations

a. The Ethic of prosperity: a critical approach to Max Weber's thesis

Capitalism is the product of western cultures. Protestantism is said to be at the origin of capitalism.
According to the Protestants, personal gratification should be connected with the public good. If you
have wealth, you should use it to produce more wealth. The Calvinist ethic creates the mental
structures that are necessary for capitalism. Calvinism is the teaching of John Calvin, laying emphasis
on mankind's inability to repent and believe in Christ without God's help, and on predestination. But
capitalism already existed in Europe before Protestantism.

Protestantism emerges along with rationality. Financial capitalism already existed in some parts of
Europe before the protestant revolt, like in Venice. There are two reasons for the emergence of
Protestantism against Catholicism in the US:

- The Protestants criticized the Catholic Church for being rich and having a magical vision of the
world (miracles, virtues of the different Saints, visions…). The Protestants thought it was
comparable to idolatry.
- There should be no medium between God and the people; there is a strong concept of
individualism. They thought the way people acted towards religion had to be more rational.

Capitalism greatly benefited from the rejection of the Catholic Church: it gained an international
realm.

Weber’s rationalist element in capitalism and the organization of economy explained that the input of
rationality in economy thanks to capitalism made rationality accepted by people. The capitalist system
was based on an attempt to rationalize economic consumption while maximizing the efficiency of the
activity.

How does this affect the birth of capitalism in the US?

Protestants of different nationalities saw themselves as members of a community as they were often
oppressed by the others. The concept of community led to a concept of internationalisation beneficial
to capitalism. This enabled the development of a business spirit and a fast development of capitalism
within protestant countries.

According to Protestants’ settlements, their project was to create a new country based on Calvinist
principles. As a consequence, the early settlers in the US were not motivated by tolerance and
freedom. Those who disagreed with the community were left apart from the community. The early
settlers were in America to strictly apply the rules of Calvinism. Besides, the conditions they found
when they arrived were harsh so life was very difficult. They realised that, because of the terrible
climate (cold winter, hot summer), the crops they brought from Europe didn’t grow. To survive in such
a harsh environment, they had to work collectively and to put their personal interests after the
interests of the community. They had to maximize their efficiency, that’s why Taylorism and Fordism
were born in the US.

The ideological basis of a spirit that encourages prosperity affects capitalism, and produces a profound
link between the spiritual and ideological sphere and the material sphere of production, wealth…
Because of the Calvinist ideology, the production of wealth and its accumulation became a central
element of the American identity that brought economic growth. In the US, being wealthy is seen in a
much more positive way than in Europe. It is very American to become wealthy.

The Calvinist ideology contains a contradiction within itself: it is good to accumulate wealth and
accumulating wealth to use it correctly gives a measure of your moral quality; but wealth can also very
easily provoke your moral downfall. Wealth makes you vulnerable to temptation. This contradiction is
still very much alive in the American society. As an example, the extreme difference between the
moral rigid attitude of religious conservative movement which is very much alive in the Bible belt and
unrestrained hedonism in the east and west coast. This causes a society that is in perpetual imbalance.
This imbalance is the reason for many of the problems we can note in the American society, but it is
also the reason for its dynamism. Nevertheless, within the protestant community people spent less
and reinvested more (bourgeoisie increased their wealth by reinvesting).

b. Two visions of capitalism: the open field and the zero sum game

The capitalist organization of activities started mainly in Europe but in the US capitalism is seen in a
much more positive way than in the old continent. One reason for that is that capitalism is seen as part
of the American experience. The way it developed in the US is much different from the way it
developed in Europe, but both of them share the principle of profit.

In Europe, countries were fully developed, production systems already existed. There was a vast scope
of activities operating with employees working under a weak hierarchy and in a decentralized
organization. But that was about to change. Industrialization produced goods much cheaper than what
the craftsmen produced. As a consequence, working as a craftsman became impossible. It was also
impossible to live from the land as it did not produce enough. So, people left their land and moved to
the cities to work in factories. Some people became much richer because they had a Master’s and
worked as supervisors of employees or teams; others became much poorer and lost their statement of
an individual worker as he usually worked in a team. They were impoverished both economically and
socially. They lost their independence and their freedom. Capitalism and industrialization in Europe
seemed to work as a zero-sum game: when somebody wins, somebody else has to lose. Basically, a
new class took the money from another class. Nevertheless, this class was the larger one in society.

In the US, industrialization made it possible to open the new territories that were little by little
conquered towards the west and to have the railroad industry, which enabled the connection between
companies from west to east of the country. Capitalism opened a vast new range of economic
opportunities for many people. These are conditions of economic growth, giving a large amount of
opportunities to many people. The development of wealth of successful businessmen opened new
opportunities for other potential businessmen. Here capitalism works as an open field game. But as in
all games, there are winners and losers. There were victims of capitalism in the US. The main losers
were the newly arrived immigrants and the Indians, who were invisible for the Americans. Some of
them were facing the issue of survival. The development of fortune came along with the establishment
of service. When somebody became rich, everyone benefitted from it. It gave opportunities to others
(job opportunities, for example in transportation).

At the end of World War II, there were a number of opportunities that had to be filled. So it was much
more difficult to fail, everyone could easily find a job in something else. There was a very high growth
rate of economy: when someone was not satisfied with their activity, they could easily change to do
other things. And today it still is quite difficult to fail in the US, but if you are not being your own boss,
you are then a belonging of a lower society. It is easier to succeed at the early stages of economic
growth.

c. The frontier spirit

The best illustration of the myth can be seen in westerns movies about the conquest of the West. The
frontier is the limit between the part of America that has been “civilised” and the part that hasn’t
been, it is a scene where good and evil forces take place. The American civilisation has been given a
mission to civilise the land. The myth of the frontier spirit gives a positive value to strength and
violence (cowboy).

In westerns, exploring and achieving new territory brings the necessity to fight evil only by gaining-in
the explored territory.

This can be extrapolated to today’s economic markets and technologies. It is also the idea that creating
something new is one of the main functions of business. In 1998, China and the US had a deal about
internet but Chinese government complained to the American government about the fact that the
infrastructure of the internet was in the hands of American companies. The response of the US was:
“Just like the Wild West, the one who gets first on the internet rules it”; which is a reference to the
myth of the frontier spirit. Ronald Reagan made reference to this myth many times.

Competition is part of war and part of the game: the competitor who loses is eliminated or not.
Economic rules balance the relation between competition and survival. The only rule about economic
competition is that it should exist. The vocabulary of war is very present in economy (crush…). Bill
Gates said: “Microsoft deserves a fair share of the market”, which will bring an attempt to crush the
competitor, to try to eliminate them and obtain the monopoly.

The American market is a very competitive place, where the operative quality of the myth is obvious,
as it has to be conquered. It is a country with a demographically large and efficient workforce, where
pays go to retirement pensions. Therefore competition is linked with morality, whereas in Europe
there is a different view – harsh competition is seen as an immoral aspect of capitalism (ex: in the 80s,
many European companies felt that they had to fight against Japanese competitors when Japan lived
its very fast transition).
 d. The self-made man

The self-made man is another important myth to which many Americans have been linked (Charlie
Chaplin, Buster Keaton...). The self-made man is hard-working, persistent and he has got a certain
amount of moral rectitude.

He experienced life from rags (no education, protestant background…) to riches because he is cleverer
than others, even though cleverness is not his main feature in the US. He felt something or saw
something that pushed them to decide to reach a particular goal that he will achieve. It is related to
God’s election through luck. This concept is preferred to the “new rich” concept, which has no
equivalent in the US because for them it’s not a reason of laughter, but a reason of pride. In fact, he is
not a new rich, as he doesn’t act like a rich man. Throughout the 19th century, it became the dominant
model of success. The success was linked to the ability of creating and running successfully your own
business. Failure was seen as a lack of quality at a man’s level, so if someone failed, there was
something wrong with them. This concept didn’t disqualify some people because of their religion or
moral values. At the time in the US, many things needed to be created so it was easy to find its own
specific field of action.

The problem is that this model is sustainable only in the context of early economic development.
When an economy is mature, it becomes harder and harder to create its own business. 90% of newly
opened businesses fail, because there is no room for these businesses as the economic conditions are
less and less operative in the concrete world.

How the self made man is connected to the economy today?

The model of the self-made man still is one of the major imaginary constructions of success in the US.
The consequence is a tendency to glorify the achievement of great success starting from nothing (Ex:
Bill Gates and his Microsoft empire, built to supply the operating system for the IBM monopole for
some time with some help of his father, a lawyer; Steve Jobs and Apple).

Organisations that employ people have to provide some amount of progression in the course of the
professional life of the employees, not just financially, but also socially. In the evolution of this model
of success and achievement, consumers play an important role. Success is not just the matter of
improving economically, but also socially. It is essentially true in a culture marked by Calvinist values.
Becoming wealthy is not good in itself, what counts is what we do with our wealth. Wealth opens the
door to new social statuses. In the US, you might say that becoming wealthy allows you to define the
taste habits and style of the upper-class. In that sense, the Americans live in a classless society. Of
course this is not true; there are classes in the American society. But because of this vision of what
defines the upper-class, the Americans are not prepared to look at themselves in terms of classes. In
that way, we might hold a key of some phenomenons in the US (ex: the gated communities). One
essential quality of consumerism, at least at the beginning, is to blur the difference.

Both the myths of the self-made man and the frontier spirit embody various technological fears. The
myth of the self-made man is a major embodiment of a success story. A myth can only operate if it is
seen as a common belief of the people, but it can’t really become true.
 2. The advent of modern business

a. The railroad industry: from businessmen to professional managers

The railroad industry enabled the extreme embodiment of the self-made men. It was the first industry
that required a big amount of resources. This industry triggered a huge development in the steel
industry and brought major social changes, positive and negative. The advent of the railroad industry
in the US took place in a context of rapid development of the population, largely due to immigration
and rapid urbanization (in the background of economic development).

In 1860, the population in the US was 31 million people.

In 1900, the population in the US was 76 million people.

This industry concerned all sectors as it helped the development of other industries. There was a great
need for transportation. In that context, the railroad industry became the first legend of phenomenal
success. In 50 years, there was an economic yearly growth of 4% because of the emergence of new
jobs and the industrial development provided by railroad industry, which multiplied by more than 5. In
the last 30 years of the 19th century, the whole economic growth had been of 300%.

In 1850, there were 48,000 kms of railroad.

In 1900, there were 320,000 kms of railroad, more than all the railroads together in the rest of the
world.

American railroads were built by 100 companies but in 1900, 2/3 belonged to only 7 companies. Only
the most dominant companies will survive. Companies fought at all cost using over investment which
was financed by financial markets to raise fast money (heavy debts).

We can note a difference between the legend and reality. Bold adventurers risked all they had in
extremely uncertain enterprises. In reality, they might have risked some of their money, but also the
money of many other people, because the project was largely sponsored by the State. The Federal
government granted to the railroad companies stripes of land along the railroads. At the time, many
lands were unclaimed. People and industries started establishing around the railroad to get connected
to the web and the land became very valuable. This gave much money to the railroad industry.

The railroads were confronted to problems that no other companies had faced before. They had to
organize long-distance transportations, with logistical issues. So, many people had to be employed,
doing a large number of different jobs, with a need to coordinate all of this very strictly, in order to
provide reliable services. People who organized it looked for a model facing the same kind of
problems. At the time, the only organization to do that was the army. Hierarchy was introduced. The
army defined the basic model of management of big corporations. A worker who was hired at the
bottom of the pyramid was facing a number of steps that led towards the top. The pyramid
organization made it possible to offer promotion possibilities. It was possible to motivate the workers
by giving them hope that, little by little, they were going to move up the pyramid, become managers,
increase their salaries and increase their social status. This supposed a huge change for them, as
before the advent of the railroad industry, companies were typically small (the founder, business
associates and the workers) and an ambitious worker had very little chance to be promoted.

The railroad industry also offered a possibility for life-time employment. The model was spectacularly
successful and influential. The concept of professional manager was created with the railroad industry.
In small businesses, the director could keep an eye on the organization: he had a small number of
associates (shareholders) who assisted him in managing the company. In the railroad industry, the
organization was much too big for a man to manage it, so managers paid people to supervise the
workers. This was a completely new way of managing, inspired by the army’s organization.

Before the railroad industry the way companies were credited limited the number of partners who ran
it, who put much of their money in that company. With the growth of the industry, motivated
investors became the managers of the companies and they paid themselves with the dividends of the
company. After 1850, the investment needs of the industry were much bigger than anything that had
existed before: it was more than what investors could bring and so it limited the number of people
able to manage the whole scope of the company in a whole new type of work organization. The money
was found by issuing bonds and shares on the stock-exchange. The investment became profitable only
when the railroads were built and in use. Wall Street became a large international market place thanks
to the railroad industry. The investors were not just Americans but international, mostly Europeans,
who weren’t comfortable keeping their assets in Europe as it brought less profit than in the US. It
brought a rush from the railroads companies and investors to gain the largest possible market bonds,
which enabled a bigger control of their companies. The money carried from the first wave of bonds
was quickly spent by mortgage bonds (if the money wasn’t reimbursed, they would sell off assets of
the company). In 1850, 100,000 of these shares/bonds were trade on the market.

Traders began to use new techniques (short selling: vente à découvert). This situation led companies to
acquire market shares to all cost and many of them went into an increasing debt. At the end of the
century, with overinvestment (many of the railroad structures became redundant) and all the debts,
the market collapsed and many companies went bankrupt and freed from their obligations towards
their debtors. As time went by, part of the debt accumulated moved and the investors got a larger
squeeze in the process in the 1990s.

In the United States, finance is highly linked to the frontier spirit and it has a democratic access for any
man who wants to participate in the business. Business is seen as operative for the improvement of
the community. It is also a republican matter: government can buy a land on which there is a railroad
to then sell it to private investors, so it is a 0-cost investment. There are also investment organizations
that pick up the project of a new company and finance it until it reaches profitable status. Therefore
the railroad industry was the cleverer way to make money, as it gave huge value to the land. In Europe
they have a different vision of the economy as the protestant and the catholic approach has influenced
differently economic models.

To avoid a new crisis, some people have thought of regulating the banking system but bankers have
issued 3 arguments to prevent it:
- It’s really hard to put in place
- Derivatives (produits dérivés: products deriving their value from other underlying assets and
that derivative traders agree to exchange it for cash or other assets at another date) are good
because it raises the level of liquidity on the market. Liquidity means that is easy to buy or
sell an active asset (un actif). For instance, shares and buildings are not liquidities, but stock-
options or securitized loans (titrisation: transformation de dettes en titres) are. This is a silly
argument because to increase liquidity on the market limits the risk, but too much liquidity
brings a risk too. We use derivatives to protect ourselves from the fluctuation of the market.
It’s a vicious circle, instable and volatile.
- Increasing reserves in relation to loans that the banks have issued increases the stability of the
bank but reduces the loans handed out.

Difference between shares, bonds and dividends:

Share (actions): a small part of the profit generated by the company that somebody buys. As a
shareholder you may sell your actions to somebody else so you can get the money that you paid for
back. You have the right to vote about the management of the company. They are anonymous
because of that. Americans are comfortable with anonymous share-holdings because they see
business as operative for the improvement of society. The attractiveness of the shares appears when
the prices of the shares increase. There are also ordinary shares, which are shares that can’t be sold.
The disadvantage is that it creates a capital delusion: as the company grows, people own a smaller and
smaller part of the company without noticing it.

Bond (obligations, financements privés): debt security, in which the authorized issuer of the bond in
need of money (usually the government or companies) owes the holders of the bond (the ones who
buy the bonds, usually individuals) a debt and, depending on the terms of the bond, is obliged to pay
interest and/or to repay the principal amount at a later date given, called “maturity” (ex: the
government needs money so he asks individuals to lend him money in exchange of a “bond”, which is
a paper declaring that the government will pay back). A bond is a formal contract to repay borrowed
money with interest at fixed intervals; it is a loan with interest rates from individuals to governments
or companies that are in need of money. Like with all loans, a bond has a default risk (risque de
défaut): the issuer of the bond (who can be the government or a company) may not be in the position
to pay back. The higher the risk of non-payment, the higher the interest rate is. The very safe loans
(those from government or very large corporations, like IBM) pay low interests rates. If the issuer of
bond can’t reimburse it, bonds can be turned into shares. Bonds are more beneficial than shares,
which take time to bring money back and are not practical if they belong to a company far away, so
shareholders are afraid of lose control of their shares. With bonds people are sure that they will be
paid back. It is a much more stable value.

Dividend (dividendes): small part of the profit done by the company that is given to shareholders to
“reward them for their loyalty”.
Venture capitalism: venture capitalist companies are financial companies. Their business is to look for
newly created businesses which are developing an entirely new product or service. When they find one,
they become the majority shareholders of the business. For 4 or 5 years, they finance the business
entirely and they provide the business with advice. They help people developing their product until it
can be presented to the market.

IPO (Initial Public Offering) is the process through which a company sells its shares to the stock-
exchange for the first time. When a company has generated a lot of interest, people are interested in
buying the shares. The venture capitalist, during the IPO, will get rid of its shares and will sell them in
the stock-exchange. The shares climb and he makes a huge profit (ex: Google). It’s a business
specialised in newness. The unexploited is an opportunity for profits.

The railroad industry in the US was responsible for the establishment of the contemporary capitalist
organization and had an impact on finance management, business and workforce concentration.

b. The oil industry: “concentration” or the dilemma of success

Concentration is a process through which the dominating companies in a sector tend to eliminate
smaller companies. As an example, the automobile industry started with hundreds of car
manufacturers but today, there aren’t so many car manufacturers all over the world. This process
happened with the railroad industry. Today, there are 7 companies leading the market.

It is difficult for people to achieve full employment. This feeling is due to a fundamental change in the
US economy. The change of mind of the Americans is closely linked with the advent of consumerism.

How can the myth of the businessmen (rags-to-riches) and concentration be both connected
and fuelled by real events? How did it stimulate the imagination of the people?

The development of the oil industry in the US stimulated the collective imagination of the people. It
produced examples that seemed to prove that America did offer anyone the opportunity to become a
millionaire. As a result, it is not surprising that today the oil industry is so important is the US, as it is a
very rich and influential industry. Oil is considered to be a myth in itself and its influence goes beyond
its real weight. It was easy for the oil industry to influence other industries, such as the aerospace
industry.
Oil was known by the Indians and was used for medical purposes, as a curative product. It was
gathered at the surface of the ground or lakes by throwing fabrics on the flooding oil, so that it could
be absorbed.

In 1830, a small group of businessmen acquired brine wealth (saumure), which was a valuable asset at
that time. They realised that brine wealth was useless as it was contaminated with oil. To save money,
they extracted the oil from the brine wealth. It was the first commercial effort with oil. Several other
companies did the same. But quickly, some managerial problems appeared: large quantities of brine
were collected, whereas the medical market for oil was small, so profits were not important. They
needed to find a new market that would absorb the large quantities of oil.

In 1850, people discovered that burning oil produced smoke and that oil was a good product for
lighting.

In 1854, the Pennsylvania Rock Oil Company of New York was created by Mr Bissell. His goal was to
find a way to increase the production of oil. The oil naturally gathered at the surface of the lakes was
enough for medicine but not for lighting.

Edwin Drake created his own company, and hired William ‘Uncle Billy’ Smith, who was an experienced
driller (foreur). His reasoning was: “if you see oil appear at the surface of lakes, rivers or ground, it has
to come from somewhere under. Why not drill and find the source of oil?” That is what they started
doing in Pennsylvania. The first derrick (from “Drake”) was created. All this triggered an oil rush. Edwin
Drake turned to Wall Street and became an oil trader.

In the meantime, there was another businessman who, at 20, was already a millionaire: John
Rockefeller. He was not involved in oil but he noticed that, in the mid 1850s, a drill could produce
more than 1,000 litres a day. There were rumours that you could become a millionaire overnight if you
found the right spot of oil.

In 1860, everyone was trying to produce oil. But few people were interested in carrying and exploiting
oil.

The prices of oil collapsed, because too many people were drilling. Rockefeller knew the profits were
not in the drilling. He invested in oil refineries that processed the crude oil and he took shares in these
refineries. Then he sold his shares in 1863. After only 2 years, he had made a profit of $1.2m. He
created his own carrier company which had barrels and wagons but no transportation system. That is
why he had to go through the railroad to have all the barrels carried. He obtained the lowest prices
which created a monopoly for the train transportation of oil between the drills and the cities. He could
dictate the prices to the oil producers. With the profits, he bought forests to hold the wood for the
manufacturing of the barrels. He gathered all these activities (refineries, transportation, distribution…)
in one company: the Standard Oil Company. He said to the producers how much they had to sell their
oil and how they had to control the production of oil to avoid over-capacity. He had many enemies and
became very unpopular as the oil producers realised they were under his control. However, he was
convinced he avoided anarchy.

But he did not anticipate the backlash: in 1892, the Sherman Act made it illegal for one company to
use its dominating position so as to fix prices to avoid competition, and made trusts illegal (so the
Standard Oil was dismantled). Rockefeller managed to create a holding company (whose aim was to
hold shares in different companies) which enabled him to keep control on his dismantled companies.

Two movements appeared following Rockefeller’s success:

Pros: Rockefeller was the symbol of the US success. It was un-American to take away from
him what he had gained through entrepreneurship. His imperialistic approach was one of
the bases of the American success.

Cons: What Rockefeller had done was un-American because he let no equal opportunities
for other people because of his monopoly. The same criticism can be heard today about
Microsoft.

Another fundamental contradiction in the American identity (along with the contradiction
hedonism/Puritanism) is that:

- On the one hand, there should be no constraint on aggressive entrepreneurship because people
should be free to succeed, and governments should not interfere.
- On the other hand, free aggressive entrepreneurship necessarily results on a stifling (étouffement)
of the market under the domination of very few entities.

c. Taylor and Ford: mass production and consumerism

Taylor and Ford are closely connected as they represent a specific interpretation of American
positivism which is the focus on efficiency. Very quickly in the US a link appeared between progress
and efficiency. The focus of the Americans was much more on efficiency than quality, because of the
challenges the American society was facing. The American economy and society lived under a regime
of workforce deficit, because in an economy that was developing, there were huge needs. Many things
had to be done, such as infrastructures. You need to produce more to improve services for the
population. Taylor introduced the rationalization of work in view of efficiency. Being efficient means
using the resources at their best. This became a new priority.

In this context, Taylor, a young engineer, in the late 19th and early 20th century, devised a number of
principles known as the “scientific management of work”. He created the basis of a system. At the
time, all human activities were working at the Bethlehem Steel’s (steel corporation). This company
employed many unskilled workers. Taylor spent 5 months studying how they used their shovels
(pelles). He managed to define the best possible shovels and gestures so that the workers could be
very efficient. There were 600 men employed and 3 years and a half later, they were only 140 doing
the same job. Their salaries were 60% higher, while the company was making more money. Many
people had lost their jobs but in a context of workforce deficit, they could work somewhere else.

In the 19th century, the Europeans who travelled to the US attributed the higher efficiency of the
industry and the resulting higher standards of living to a disregard for habits and routine and a general
sense of initiative. However, in the context of the scientific management of work, initiative meant a
loss of time and efficiency. Each process was divided in basic units. Each unit was defined precisely and
the workers had to execute these tasks in a precise way. This was a basis for the scientific
management of work. If a good is produced more efficiently, its price decreases. The scientific
management of work resulted into an increased production of cheap standardized goods.

Workers were confined to extremely repetitive and unimaginative processes: they had to do the same
things, the same way, over and over again.

This fundamental change in the organisation of work and society would change the vision of the world
and the expectations people had. The gratification of the self-made-man came from an increased
social status. And for the salaried man, standardised gratification gave him the illusion of an
equalitarian society. It was the very beginning of mass consumption.

Within a generation, the change was completed: the American society was not equalitarian, as there
was a large number of poor immigrants living in terrible poverty and a small class of very rich people;
but the perception of reality for a large number of people was that, all of a sudden, a large amount of
goods associated with the upper-class became affordable by the middle-class (ex: the automobile).

The problem was that in that case, work became a completely ungratifying and not very motivating
experience. The advantage of an empirical approach is that giving initiative to the workers creates an
emotional link. Some researchers tried to work on this issue: how do you make work more appealing in
a Taylorist process? Many experiments were carried out.

In 1930, Elton Mayo worked for the Western Electric Corporation. During weeks he studied female
workers working on the assembly lines. He tried to change some factors (breaks length, temperature of
the rooms, different seats…), but this had no direct effect on the way the workers did their work. But
during the whole experiment, they worked more efficiently than the other workers. The conclusion of
Mayo was: that the crucial factor regarding their efficiency is that they had been studied. To increase
the efficiency of the workers, you have to give them the feeling that you pay attention to them. This
theory made Mayo become a pioneer in human resources.

The advent of consumerism turned a historical page for capitalism. The most specific feature for the
change between the modern era (1980s) and the post-modern era (1990s) is the dematerialisation of
the economy.

There are 4 different phases in the development of the capitalist market, defined by researchers:

Phase 1: Prices and profit merges are high. Production is mostly local. Markets are
fragmented because of the high costs of transportations. (Taylor)
 Phase 2: The railroad unifies the markets thanks to cheap transportation. This allows massive
centralised production with low profit merges. (Ford)

Phase 3, the Marketing Phase: Markets are analysed and segmented along numerous criteria
which allows the producers to target their customers more specifically (age groups,
features...), this along with technical progress that allows a less standardised production,
more diversified, a higher level of personalisation without losing the advantage of mass-
production. The other feature of this phase is that profit merges depend on what the
consumer is ready to pay: market analysis determines how much you can take from the
consumer. There is no relation between the production cost and the price of the products.

Phase 4, the Internet phase / Immaterial Phase: The organization of markets has changed
because people have access to a whole new range of information (for instance, purchasing an
object depends on the different prices on the internet). There is an immaterial quality of the
economy from that phase: internet reinforces the bond between supplier and consumer.

Ford (XXth) was trained as an engineer from 1891 and, before founding the Ford Motor Company in
1903 with $150,000 of capital, he had already worked in other fields like the Thomas Edison’s company
in Detroit in 1891. When he set up his company, his goal was to sell cars for the great multitude, below
600 dollars. This was a very ambitious goal. At that time, cars were luxury items, unaffordable for the
masses. In effect, only a car was a definite sign that you belonged to the upper-class. Ford was
interested in taking this symbol of luxury and making it available to the average American. Ford
initiated the very first marketing approach to production (he defined a market he wanted to reach and
developed his product specifically with his target in mind). This was entirely new at the time.

He had to divide the production costs of the cars by ten. To do this, he had to change the production
method completely. He did not invent the assembly line at that point, but later on. The production was
fully standardised to save time and money, so Ford could apply the Taylorist methods to his hierarchy
of workers. He had to try many different things to finally pick the right production method, as the car is
a high-tech product, not simple to produce. The first Ford-T cars were only produced in 1908 as he
spent years trying to find a proper production method. The Ford-T was not a revolutionary model but a
highly customized item, whose selling price was between $850 and $950, which was a revolutionary
point compared with standard cars which were between $5,000 and $7,000. Each one of his cars at
$600 was worth 1.5 years of income for an average worker. He brought a deep change into the
method use to produce cars and companies were advice to use the same type of standardization. As
production increased, the Ford-T was worth $290. More than 15 million copies were sold and the car
was produced for 19 years. He had maximised the cars production with a less effort made.

Ford triggered a revolution:

In 1910, 180,000 cars were produced in the US.

In 1924, 4 million cars were produced in the US.

In 1927, the US produced 85% of all cars in the world.

In 1929, there was 1 car for every 5 citizens in the US, 1 car for every 43 citizens in GB and 1 car for
every 335 citizens in Italy.

Ford did not just innovate in production but also in distribution. He initiated a system of exclusive
contracts with dealers, giving big discounts to those who were willing to buy large numbers of cars. He
believed that when a consumer was ready to buy a car, he should not wait. Ford also invented the
assembly line. He thought the work should come to the man, not the contrary.

His major contribution is in social economic field. One severe problem was worker turnover. In 1929,
for 1 job you created, you had to fire 4 workers. Ford thought his company couldn’t work that way,
because he was wasting the cost of the 4 people he had fired. Workers also left the companies they
were working in, because they were in high demand and could find better opportunities somewhere
else. Ford increased the wage paid to the workers to $5 a day (more than twice the average salary).
The Wall Street Journal called it an economic crime at the time. In the three years after Ford took this
measure, its after tax profits were $30m the first year, $20m the second year and $60m the third year
(huge profits). The reason was that his training costs for the employees diminished as the workers he
hired stayed in the company thanks to high wages. Because of this initiative, Ford became so popular
that he did not have to pay any advertisement to promote his cars for years.

The advent of Ford and the establishment of mass-production and mass-consumption are due to
various factors:

 The rapid growth of the American population put pressure on the production system. There was a
need for radical changes in production, especially in a context of lack of workforce.
 The size of the American territory created a big demand for cheap individual transportation.
 The closing of the frontiers (end of wilderness and no more places to conquer) had a great
psychological impact.
 At the same time, the American economy reached a stage of economic maturity: it became much
harder to set up your own business successfully as nearly everything had already been done. This
caused the end of a model of success based on the myth of the self-made man, of which Ford was
one of the lasts to succeed.
 There was very little chance in terms of social and personal improvement. Simple workers didn’t
really have a chance of becoming rich businessmen and their work was usually frustrating and not
gratifying. At that time, Ford arrived and offered the ultimate luxury item to the lower-middle-
class and he “reinjected” respect into the average experienced worker. In doing this, he achieved
several goals: he made technical progress the new frontier and triggered a thirst for novelty
(transposition of the frontier spirit into technology). This was one step in solving the frustration of
the middle-class at the term of the century.
 He created a system where the acquisition of new goods that were previously unavailable, was all
of a sudden possible. The acquisition of these goods became associated with social improvement.
More and more people could afford these objects because they became much cheaper. An
 equalitarian feeling was created (Calvinist ideology). He basically brought purchasing power to the
working class and created the first mass-market in history.

None of this would have been possible without the advent of something Ford did not like: the credit,
which is the driving force of American economy. For people, granting credits for cars represented a
huge potential for profit. But for Ford, it had no guaranty because many objects bought could lose
value and because credits could be hidden (pack and leave if no way to pay it back).

The mass consumption initiated by Ford brought cultural changes (20th century). Between 1905 and
1920, there were economic consequences based on sociological changes: mass consumption,
consumer credit, centrality in consumption…

d. The advent of credit: perfecting consumerism

Between 1910 and 1920, electric appliances became available for the average American. Consumerism
allowed the embodiment of the American beliefs in a completely different environment. Life became
more comfortable.

In 1905, some banks began to understand the advantage they could take from credit. Credit existed
already, but it was used for the payment of very expensive items, not easy to displace (houses for
example). Bankers thought the profits they could win with credit were worth the risk so they started
analyzing the revenues and the expenses of the client and seeing if they were compatible with the
reimbursement of the credit. Credits became very quickly successful to buy more expensive valuables,
like houses or cars.

In 1923, 80% of cars bought in the US were bought on credit (Instalment Plan, which means a monthly
payment). This also brought a profound change of attitude towards work and money. Credit made
instant gratification possible. Within the public and the press, the idea that credit was good emerged.
In effect, credit benefited consumerism and the economy in general. The one who bought was
considered as a good citizen. Credit dematerializes money and creates a link between the reward you
get from your work (salary) and how you can convert this reward into consumption.

But, in the 1930s, the level of indebtedness among American households was high and people began
saving less money. And again in the mid 1990s, American households were spending more money than
they were making. This is a burden which is growing little by little. One reason why American
households would save money was to hand something to their children. Nowadays, a lot of people do
not hand anything.

The idea of home equity extraction (extraction de la valeur immobilière) was born at that time. It
happens when an ordinary man buys a house with a mortgage credit, which was the case of more and
more people at the beginning of the 20th century. Let’s say that he buys the house for $100,000 with
the mortgage credit. With the flow of mortgage credits that are on the market, his house is now
estimated at $150,000. That means that, as more and more people want to buy houses, the prices of
houses increases, along with the price of mortgage credit. That’s because houses have an increasing
value asset but, unless you sell the house, you don’t have money that you can use. A broker (courtier)
comes to his and offers him a loan for the $50,000 extra value of his house: it’s a home equity
extraction loan. That loan will be used for individual consumption and that makes the owner of the
house happy even if they don’t win anything else than the excess value of the house. The concept of
home equity extraction means that loans are given based on the asset of the house. When the market
collapses and the house loses value, the borrower has a default risk. So now there are two issuers of
loans that fight to get the money that the man won’t be able to pay: the bank that issued the initial
mortgage credit and the broker who issued the home equity extraction loan. The problem is that if
there is no mass demand, the system collapses. This is why there is a strong link between this concept
and the demand crisis, like in the 80s (see conclusion of the course).

e. Consumerism: redefining success and social achievement

If we look at the social structure of the American society in the 1920s, compared with Great Britain, we
can see that skilled workers (blue-collars) were much better off in the US than in Great Britain. In
effect, in Great Britain their lifestyle tended to be identical to the white-collar workers’. On the other
hand, British unskilled workers were in a better position than the American unskilled workers. This
creates a different perception of class-identity: in Great Britain, there is a strong class consciousness,
whereas in the US, there is a weak class consciousness and a high consumer consciousness.

As a consequence, there is a disconnection from patrimony (construction du patrimoine) through

credit. Parents no longer save money to help their children achieve a better status than they have
because now anyone can buy his way up by acquiring the symbols of the upper-class. This
phenomenon that started in the 1920s has not reached its total effect until the 1990s.

All of these phenomenons linked with credit are still at work today. But there is just a sharp difference:
in the 1920s, these phenomenons were reinforcing the equalitarian feeling of the society. Today, the
gap between the upper-class and the middle-class seems to be increasing.
 3. US financial markets : the great
depression

How the US economy has functioned since the 1920s?

a. Speculation: the panics of 1907 and 1929

In the 1907 crisis, there were problems in technical aspects of banking (compensation). The bank
JPMorgan Chase did a great job saying that bank deposit will not be lost and it brought trust back into
the system, with no massive money withdrawal to the clients.

The 1929 crisis applies to what has happened recently. It was one of the major financial and economic
crises in the US and has become a major event in American history, as important as WW2.

In the 1920s, during the Roaring 20s, an unprecedented cycle of fast growth took place in the US and
possessed the market with a consumerist fever. This growth gave great confidence to the economic
system. There were many innovations: automobiles, growth of the movies industry (first golden age of
Hollywood), airplanes, air-conditioning, the radio industry (stations, manufacturers...), phones… All
that emerging industries created new markets and therefore new job opportunities, which gave a
sense of endless optimism.This brings a parallel between the 1920s crisis and the 1990s crisis:
technology changed how people traded on the stock-exchange. Radio systems that allowed the instant
transmission of telegrams made it possible for people far away from Wall Street to give orders to the
brokers. It also provided instant information for all the country. Brokerage firms (firmes de courtage)
began to open offices all over the country, which brought many new clients. The 1927 market was
called “the great bull market”.

People thought it would continue endlessly. But after a period of growth, there is necessarily a period
of recession; economists studied the question and this phenomenon has been proved several times.
They warned that there was too much speculation in the new markets, which were too high to be real,
and they advised the public to stop investing because the stock-exchange was over-valued. This
warning had no effect and the stock-exchange continued to increase. The prices of shares increased
very fast because of the high demand. When the speculation craze really started (1928), there were
distinct signs that the economy was entering a recession phase.

But where did the huge amounts of money invested in the stock-exchange come from?
At the beginning of the 20th century, there was an equilibrium between the buyers of and the sellers of
cars (Chicago industry). But in the 1920s, there was an inflow of money in the stock exchange because
of a group of powerful speculators from the car market who had already made a huge amount of
money buying too much shares thanks to the large profits they had made and that had to be
reinvested. The reason why brokers (courtiers en bourse, who sell shares for their clients) had obtained
so much money was because they had given the shares they were trading as guarantees for their
bankers. This worked as long as shares increased. The speculative fever should have stopped in a
natural way as speculative leaders were exhausted.

What triggered the peak of the speculative craze was a phenomenon of euphoria from ordinary people,
who seeing that, started wanting to be part of the game and to invest money. Their success fed new
speculation and so on (snowball effect). When new investors enter the market, the demand was higher,
so it pushed up the prices. Therefore, people needed more money to invest again on new shares. That’s
why credits started to be very demanded too. This phenomenon is called the leverage effect (effet
levier): euphoric speculators have the opportunity to borrow money to invest on assets that they feel
will generate more money. Because the economic growth is fine, bankers say yes to a collateral credit
(prêt garanti). The problem with credit is that it helps hiding the problems and distorts the economy. At
the beginning of the stock exchange success, 20% of the money flowing in the stock exchange was
borrowed money and 80% was real investment. Right before the krach of 1929, 80% of the money
flowing in the stock exchange was borrowed money. The leverage effect fed the speculative bubble
and when the bubble bursted, people couldn’t reimburse the money they have borrowed.

There is another way of getting money; it’s the mutual funds, financial entities with capital divided in
shares. It sells shares to people interested in it. When a company is going well, the share price’s
increases, shareholders receive a dividend.

Beginning of 1928, unemployment was higher than at any other time since the World War. “Soup
kitchens” were created.

The Federal Reserve (Banque Centrale) was the only authority that could do something to avoid the
leverage system and limit speculative bubbles. When people wanted a loan, they went to the bank.
Usually, banks did not have much cash in their buildings and asked money to the Federal Reserve. The
Federal Reserve had to increase the interest rates (“discount rates” or taux d’escompte) on the loans
they gave to the banks. It decided to increase the base rate from 3.5% to 4.5% because they knew that
a lot of money that was fueling the 1928 rise was borrowed money. This caused a brief slowdown and
then the stock-exchange went on again. This fluctuation is one of the signs of a market collapse.

Herbert Hoover, a notorious business candidate, won the November 1928 election by a large majority.
That caused the market to break all expectative, because Hoover’s policies were favorable to
economy. On February 1929, he issued a statement that forbade banks to give loans with the money
of the Federal Reserve to their clients if the purpose was to invest in the stock-exchange. It was a
clever move, that didn’t affect all of the economy, but the market went down.
In response to that, a group of New York banks decided to create a fund to help banks to finance
speculators, in order to replace the Federal Reserve. The market recovered, however it implemented
very high rates (to make profits but also because they agreed with Hoover on the need of limiting
speculation). But the craze was so out of control that people bought shares of companies they did not
even know. The government was not able to sustain the economy; its efforts have been defeated by
the financial industry. Less and less shares found buyers, which is the starting point of the crisis. A
small number of large investors became scared and decided to leave the market. In a speculative
game, the first who gets out makes a lot of money as shares are sold at the right moment.

To give an idea of the role of investment trusts at that stage, they had bought about 500M dollars in
stocks but they had sold shares out to the public for about $3b. This represents a leverage effect of 6.

On September 2nd, market reached an ultimate peak and at that point the behavior of the stock
exchange weakened.

A few days later, “Black Thursday” occurred: on October 29th, 13 million shares were thrown into the
market and only half of them were bought. This was the beginning of the collapse. People who had
gone into extreme speculation were not very numerous. Unfortunately, they had triggered a
phenomenon that had a great impact on what happened next.

The collapse of the financial markets does not necessarily trigger a large-scale economic recession. The
decreases of the revenues and of the prices of the shares are signs of economic recession. The collapse
will obviously affect demand, but it doesn’t necessarily affect demand on a large scale and for a long
period of time. In the case of the 1929 crisis, the demand was affected. There are many different kinds
of investors in the stock exchange, all pursuing different goals. Some are speculators who want to
make large profits in the short term, while others invest to make savings for their retirement; they
invest in the long term and are usually careful. When these investors are profoundly hurt by the
collapse of the market, this is most likely to hurt demand. The crisis of 1929 was a combination of
ordinary people who had lost money and, as a consequence, stopped consuming.

When a bank gives out loans, by law it must have some cash in guarantee. But, in the 1920s, the banks
invested their own reserves in the stock exchange.

For example, there is an investment of $20,000 and $10,000 of them is borrowed money. The price of
stocks decreases (deflation, which is more dangerous than inflation) and the parts that the investor had
bought with the $20,000 are only worth $7,000. Banks ask the investor to pay the difference of price
($3,000 left to pay to the bank). To reimburse it, the investor is going to have to sell other shares
(deleveraging effect: levier inversé) at a high price to avoid selling the one at $7,000. This important
sale decreases the prices again, and the investor’s share is only worth $5,000 now, so he has to sell
again and again, pushing each time the share prices down. The massive sale of stocks from different
investors decreases the stock price, and therefore brings the collapse of the market. Banks have no
money left because their clients-investors couldn’t pay back the loan. This provokes a chain reaction of
banks going bankrupt and a destruction of money.
Banks tried to limit the crisis by back-firing the shares not sold or by buying other banks. As banks
collapsed, a bank panic occurred. A bank panic is when clients “line up” and ask the bank to withdraw
their money. The payments were in loans so people couldn’t take back their money. The banker forced
the investors to face their loss and asked them to reimburse the margin (deleveraging). As a result,
banks could not survive. Besides, even if the banks were healthy, clients asked their money back
because they were afraid of losing everything (paranoiac atmosphere).

The example of the American investment bank Goldman Sachs represents one of the most problematic
elements of the 1929 crisis. The company was one of the first banks to collapse. The federal
government had an overbeating influence on the rest of the industries but Goldman Sachs held a key
position in economy and finance, so they did some things they way they wanted and not the way they
should. For example, they paid bonuses to top employees like no one had seen before. This is one of
the elements that took the company to bankruptcy.

In 1929, 659 banks defaulted. The total loss was $200m.

1930: 1350 banks called for bankruptcy.

In 1931, there were 2294 banks that filed for bankruptcy, with a total loss of $2b (vicious circle).

b. The Great Depression

These events were the starting point of the Great Depression. The economic growth had started to
slow down long before the market collapsed but the speculation in the stock exchange made this
depression invisible. But there were signs of a crisis: house building slowed down after 1927, there was
a deep crisis in agriculture… In 1910, the average farmer revenue was only 40% of the average urban
revenue. In 1930, it was only 30%. The farming population was in a state of impoverishment. Recovery
was thought to be impossible.

In 1930, there was a liquidity crisis: there was no liquidity to reimburse loans and people lost all their
savings. Banks were extremely vulnerable to clients. So people stopped consuming except for the
absolute necessity (food for example). In 1932, wholesale prices (prix de gros) decreased by 31% and
consumer prices decreased by 25%. Quite logically, this deflationist spiral caused damage: the salaries
went down the same way and less money was produced. The liquidity crisis affected not only the
selling sectors but also the building sectors, because if people didn’t have money to buy houses or cars
then there were no houses nor cars built.

There are 2 ways of looking at this:

Monetarist explanation: the decrease of the money supply caused the loss in demand and as a result,
the depression.

Keynesian view: the loss in demand is at the heart of the depression.

What could have been done to avoid the depression?

Nevertheless, there was no State intervention in 1929. The Hoover Administration adopted a “Laissez-
Faire” program. They did not realise the scope of the depression. Some people thought that any
intervention of the State was counter-productive. Besides, according to the logic of cycles, there is a
growth cycle after a depression cycle. According to the Keynesians, the government should have tried
to do something in order to slow down the collapse of the banks by guarantying the savings in the
banks (this would have brought confidence back to the banking industry). They should also have
produced more money, even if there was a risk of creating inflation. The protectionist wave that
followed the crisis made the situation even worse.

In the 1930s, the Glass Steagall Act finally regulated the banking industry in the US. This is an initiative
the Hoover Administration had never taken before in order to guarantee bank deposit but people
were starting to think that banks have taken advantage of their clients, hence the compulsory
separation in a very strict way of the activities of the investment (or business) banking and the deposit
banking. The deposit branch had become extremely capitalized with the crisis because it was used to
recover the investment branch so it collapsed. The Glass Steagall Act restricted the ability of banks to
speculate.

An ordinary bank client has a savings account and his bank is both a business and a deposit bank.
Banks want to sell the shares of their business clients. So, they ask ordinary people if they want to
invest in shares (business bank) instead of saving money (deposit bank). Money of ordinary people can
be found in trust funds for example. When the bank goes bankrupt, people lose all their savings. Ex:
when French EDF was privatized, French banks tried to influence people to buy shares but a few months
later, shares were devaluated.

After the separation, deposit banks’ and investment banks’ role were very clearly defined:

- Deposit banks: could receive deposits and order consumer or housing loans for ordinary clients.
The deposit banks finances the operations of the bank of investment.
- Business banks: could issue trust loans with very high interest rates to powerful investors and
corporations. They were completely banned from taking any deposit. They run trust funds. It is
useful to the stock exchange.

In 1934 and because of the liquidity crisis, ¼ of the wealth in the USA had just disappeared. The GNP
decreased of 25%.
The Great Depression was experienced by the American society as a deep trauma. It is the only period
in the Hollywood production when many films had no happy ending. Besides, the movies contained
many economic hints. Maybe, what people experienced in the late 1920s and early 1990s was not very
different, but the two crises did not affect people the same way.

c. The end of the 1930s and the 1940s

The market in the 1920s was going up as the economy was going down. People who had a lot of
money were looking for new places to invest their money and not reinvest it in the real economy
because it wasn’t profitable. The labor unions power increased in 1932 with the Norris-La Guardia Act.
After WW2, collective bargaining became very usual between trade unions and CEOs to renegotiate
the conditions of the employees in a collective agreement valid for 2 years. This brought stability to
the economic system. Between 1945 and 1970, there were no speculative bubbles and there was a
stable economic growth which helped the rise again of trade unions after the war.

The Roosevelt administration reacted to the 30s crisis by a strictly Keynesian analysis of the crisis: a
systemic unbalancing doesn’t correct on its own so help was to be provided:

- Regulation of the finances by the government: it established long term conditions to avoid piling-up
of savings in the hands of few, because that created stagnation in economy.
- Regulation between providers of supply and providers of demand (bosses and public).

If the free-enterprise and economically liberal system before the crisis worked well, why was
it dismantled?

One of the reasons is the investment interest, because the system enabled a way of piling up wealth
that was impossible previously. There was a general shift in values, perspectives and culture that made
the change possible.

If companies are trying to increase their profitability, their trying to reduce their production costs,
usually by avoiding salary increases. Companies think that they are becoming more competitive in the
short term this competitive improvement is off-set by the stagnation and diminishing demand, and
therefore, salaries. People who are at the top of the economic pyramid are on the contrary making very
good profit. They are not connected to the demand. They can maintain the corporate level and
redistribute it for company shareholders. This is called the unequalitarian imbalance (déséquilibre
inégalitaire): people at the top of society, which represent a minority of people, are interested in the
fact that corporations remain wealthy and profitable. What keeps the system running healthy is the
way profits of corporations are distributed: a bit of it goes to economy and a part of it goes to the top
classes of society.

In the 20s, no one had come with an explanatory framework to how this system could be thrown off-
balance. The common thought was that the free market automatically balanced the system because
there was a fundamental link between supply and demand: if there is a change between the 2 that
caused disequilibrium, this one would be balanced by market forces. Depression, recessions and crisis
were seen as temporary unbalances that were fixed on their own by market forces, without any other
help.

Explaining how profit may be used depends on the economic situation:

- It can be reinvested within the corporation.

- It can be used as payment for shareholders.

The system goes from creating real wealth to creating a delusionary wealth in the speculative bubble.
It forces people to reinvest in real economy and rebalance the economy (because the speculative
bubble is linked to a system of unbalanced economy).

d. 1950s-1970s: the peak of the Keynesian model

The period starts with the triumph of Keynesian ideas and ends with their collapse. These ideas were
brought by the traumas of the great depression and WW2, which produced new economic policies as
the population was realizing that the US were not invincible.

The very basic foundations of Keynesian ideas insist in a perception of capitalism which is obsolete. It is
based on a redefinition of the role of the state and management of the economy.

The New Deal was based on Keynes view and put in motion a number of initiatives to bring a general
increase of wealth:

 The government had a regulatory role in economy, which means that it shouldn’t interfere in
economy as it is naturally balanced by market forces
 Government had to regulate the equilibrium between supply and demand
 Regulation of financial sector so financial investments were not too profitable and the
equilibrium between finance and production was kept. Shares become financial investment, and
that’s good for manufacturing capacities because it brings capital and enables the payment of
increasing salaries.
 Reinforcing the power of trade unions to regulate prices and get better salaries with the help of
the government.
Government interferences in some sectors of the economy were new in the 1930s but became regular
methods in western countries throughout the 50s and 60s. Keynes said that government should have a
deficit during crises, so when there was a deflational spiral, the government’s budget should not be
very tight or it could have consequences on the demand. He launched public work (travaux publics).
Companies and people benefited from public spending.

During the 1950s, 1960s and 1970s, the US experienced an important growth of wealth. After those
years, there was an economic crisis and inflation (because of the oil crises).

The 1950s were a period of prosperity and not a period of reconstruction. It is also a period of
demographic expansion: the population grew 19% during the decade thanks to the baby-boom
phenomenon, whereas the population growth was of 7% in the 30s and of 14% in the 40s. The general
feeling was of being in a dynamic society. The “corporate gigantism” participated in the feeling of
power, comfort and stability:

 The 30 largest American corporations represented 40 % of all investment in the US

 0.1 % of the total companies, 25 % of all workers, 1/3 of the money-making (added value), 1/3
of all salaries.

The standardization of consumption brought a decrease in inequalities within society. All Americans
bought the same things across the country and this brought a uniformization of consumerism and
society.

In 1947, 5% richest Americans had 17% of all revenues

In 1957, the same 5% had only 15% of all revenues

The bottom of the ladder had seen its revenue increases and this stimulated a dynamic consumer
market.

In 1956, 96% of all households had a fridge,

67% of all households had a vacuum cleaner

89% of all households had a washing machine

In 1955, the US population represented 6% of the world population but produced 50% of all goods.
Demographic growth has a really strong impact on economic. In constant economy (taking in account
inflation), between 1950 and 1959, the GMP practically multiplied itself by too and the GNP per capita
increased 30 %. In 1958, the balance of payment became low. The huge superiority the US was already
diminishing.
The civil rights movement: why after such stability during the 1950s, protest movements
took place in the 1960s?

Behind the positive figures, something was going wrong. There were many claims by ethnic
communities who thought that they also should have their shares of prosperity. During the war, the
black community got well integrated but after the war they went back to their pre-war social position.
Many black workers were fired after the WW2. The economic stability reached its peak in the 60s but
racial minorities lived in a different economic world. It triggered and intellectual revolution in the US
concerning equality and brought a new perception of reality. Before that, the question of equality in
the USA was really different than in Europe, because it was seen as a “non-issue” and definitely not as
a social issue. For Americans, inequality existed because of individual responsibility to succeed or not,
so if you were treated differently, it was because you hadn’t succeeded. In the US, poor people
weren’t considered as “really poor”, because they weren’t as poor as people in India or in Africa. In
fact, 50% of them had a washing machine and 70% owned a car. The new concept of poor people,
applied to the developed world, emerged during Johnson’s presidency.

The Civil rights movement did not only show that there was racial inequality but also brought to the
attention of the living people that minorities were excluded from the economic prosperity. There were
classes of people who were facing difficulties in the economic and even the legal system. Inequalities
became a social problem and then a public issue. The myth of the self-made man (“from rags to
riches”) didn’t apply to the black community.

In 1947, 20% of the poorest received 5% of national revenue.

In 1962, 20% of the poorest received 4.6% of national revenue. ¾ of the kids had a raincoat.

Lyndon Johnson and his Great Society:

Lyndon Johnson (1963-1969, 2 mandates), who was less charismatic than Kennedy, was much more
clever. He manipulated the congressmen and came up with the idea of a “Great Society”, which is a
commitment of the society to destroy inequalities. It is the last great participation of the whole
country to a program launched by the government. A study in Detroit on 19,000 families showed that
1 family out of 9 had a telephone. This was the basis of the establishment of a large social program run
by the federal government and the state government to fight poverty.

In 1954, there were 40 different programs implemented to fight poverty.

In 1971, 1/3 of the federal budget went to social issues and poverty fight, which represents about 8% of
the GNP.

All of the programs were successfully accepted and implanted. He created Medicare and Medicaid, the
US social security organizations. During this period the liberal view was triumphing in politics and
economy. They had a left view of state economy.

In 1959, 22% of the people were living under the poverty line.
In 1973, 11% of the people were living under the poverty line.

The Civil rights movement became more radical in political actions because the program didn’t bring a
significant change for Blacks, so their frustration increased. Johnson’s policy was contradictory because
it followed the left wing in domestic policies and the right wing overseas (with their increasing
involvement in the Vietnam War). A student movement emerged (like May 68 in France), maybe
because young people didn’t want this type of involvement in the Great Society ideas. People became
more individualistic. Everybody wanted to be special (black/white). There were “free speech
movements” on American campuses and the number of students exploded. A larger portion of
population had the will to become literate to progress towards an equalitarian ideal. This expression
became in political ideas the idea of a right of citizenship for everybody, and citizenship was linked to
wealth, literacy and education. Blacks could now get into American universities. The number of people
who reached the higher education is of 15% of the whole population of the US. A new type of
collective identity emerged. Those people had distinctive view towards the society and different
aspirations that the rest. This changed deeply the vision the society had of itself. A new brand of
individualism had appeared.

What took place in the 1960s is the questioning of the society. According to Keynes, capitalism could be
run on the interest of everyone and was linked to classes and to other people. There was a general
change of the neutrality that prevailed in society (Keynes). Those movements brought a holistic and
egalitarian approach. Neoconservatives still thought that the pursuit of profit was in the general
interest and that the enemy was also in the middle class. They had a particular type of unequalitarian
vision of the society. Those changes prepared society for the emergence of an economic change which
would bring the classical ideas of economy in the front of the ideological scene.

Johnson’s economic policies increased the federal deficit. The Vietnam War, that took everyone by
surprise in March 1973, could no longer be an excuse for the US to be the guardians of the
international order. The Brettonwoods agreement, which brought a new organization for the
international monetary order and which gave its supremacy to the dollar right after WW2, was no
longer in place and the gold standard was given up during Johnson.

The crisis of the 70s: stagflation and Keynes

In the 1970s, a neoliberal system (that would be followed by Reagan’s neoliberal administration)
gained power and Keynes’ theory couldn’t explain what happened. In Keynes’s system, when the
government interferes in correcting inequalities, it is good, but in the neoliberal system it is bad for the
economy. So the social and economic situation made it possible for this new type of economy in the
1980s. As government couldn’t interfere, people that suffered from poverty had to be let down so
they were pushed to get out of their situation.
In 1973 with the oil shock, the price of oil multiplied by 4. There was a sharp increase of basic goods in
economy that caused inflation. Inflation is usually followed by stagflation, which means low economic
growth, high inflation and high unemployment. In this case, there was stagflation because the increase
in prices of basic goods in economy by a multiplicity of factors can slow down the economy and bring
price inflation of basic goods. At that time, people started asking for higher salaries to buy goods.

Differential accumulation theory (la théorie du differentiel d’accumulation) theory sees stagflation
oscillate inversely with periods where mergers and acquisitions are dominant as a major strategy of
dominant capital groups to "beat the market" or exceed the normal, average rate of return on
investments. If too many people try to "beat the average" a market imbalance results. Stagflation,
which appears as a crisis at the societal level, contributes significantly to differential accumulation at
the disaggregate level, that is, of dominant capital groups accumulating faster than smaller businesses.
Since the 20th century, the dominant capital group which has benefited from stagflation has been the
"weapon-dollar-petrodollar coalition" during periods of Mid-east crises and rising oil prices. These
periods have oscillated between periods of relative "peace" during which mergers and acquisitions
have been the dominant strategy for beating the average.

The external factor that brought this delicate economic situation is the Kippur War between Egypt,
Syria and Israel (continuation of the 6 days war of 1968) made it complicated to solve the crisis. On
October 6th 1973, Israel attacked Egypt thinking that Egypt was going to do the same. Before the war,
there was no peace treaty or diplomatic arrangement. Egyptian president wanted to negotiate with
Israel in Kippur. He had 2 diplomatic goals: to wash the humiliation from 1968 and to force Israel into
negotiation. On October 17th there was an embargo from the Arab members of OPEC on oil production
by 5% per month and on the 19th the embargo was enforced against the US in response to their
support of Israel and it was then extended to Europe (the Netherlands), causing the 1973 energy crisis.
On October 22nd, the Israel army became successful again and Russia and the US imposed a cease-fire.
On October 26th the war ended and on November 23rd the embargo was extended to many countries
in Africa. It took end in 1974.

John Maynard Keynes was a chief negotiator at Brettonwoods (July 22nd 1944). He thought it was a
mistake for dealing countries to have only one national currency by country. An international central
bank created a new international currency called “Bancor”. This bank lends a certain amount of money
(“bancors”) to countries. Those countries dealt between them at a stable tax fixed by the Central Bank.
When those countries pay back, they have to pay interests that are calculated depending on the
economic growth. The countries that have made too much money have to pay a tax on the extra-
money they’ve made, and those who are in deficit have to pay a tax because they didn’t reach the
level of wealth required. States commerce between them but at the end of the year there are
differences between the countries (disequilibria) and Bancor has to pay for those differences. Usually,
when a government equilibrates its account, there is a flow of money that circulates and that avoids
competition with private investors. Those ideas are Keynes ideas of necessity of equity. It forced the
countries to keep the balance and not try to be the richest ones. This system naturally brought
countries to a right use of international commerce.

The result of this agreement was that the dollar became the international currency of reference. It was
the only currency pegged to the price of gold and all the other currencies were pegged to the price of
$US. In order to reach that position, gold had to be devaluated. At that time, Nixon was borrowing and
printing a lot of money to spend it in the Vietnam War: the weapon industry was highly financed a lot
by borrowed money in the Nixon administration. The Vietnam War was one of the most expensive
($100b spending in defense). The US government ran an increasing deficit throughout the 70s and the
80s. To pay for the deficit, the government printed more dollars and at the end there was more dollars
in the market that gold in the Federal Reserve. To maintain the parity between gold and dollars, the
dollar had to be devaluated in 1971. Some people asked to have their dollars changed into gold (like
De Gaulle), so the dollar was devaluated very quickly, because of the high amount of dollars that were
circulating.

The working class was organized in such a way that it was easy to influence her. The working class had
the ability to operate as a community and they thought that the community shared the same interests
(values, self-esteem…). In the 1960s, the working class had social protection and access to education.
They lived in concentrated areas with public areas (cinemas, bars). At the end of the 70s, the situation
had changed. Inflation and unemployment had risen partly due to the new technologies and as there
was no economic growth because of the crisis, there were no new jobs created, and that hugely
affected the working class. Before the 70s there was much more stability because unemployment was
compensated by the created of new jobs thanks to the growth of production. But we can’t only blame
poor economic performance for this situation, because it wasn’t that bad excepted for inflation. 1975
was a recession year but in 1977 the growth was of 5.5%.

GNP in 1971: $1,122b

GNP in 1980: $1,474b

The essential problem of the period is the combination of 2 negative phenomenons in economy: high
inflation and high unemployment. People didn’t have the bargaining power to request higher salaries.
It was a temporary increasing crisis that saw the emergence of a neoconservative revolution as an
economic factor. The government should intervene as little as possible on the market and should only
correct inequalities in order to increase the efficiency of the economy. This element goes against the
neoconservative ideology, so intervention has to be used with parsimony.

Issue of moral individuality:

In a more individualistic approach people fear that their fate is disconnected from the rest of the world.
If you approach a higher consciousness, why should they consider others? Because they have to
confront with people who claim that they want to live in values and a lifestyle totally different. The
more individualistic culture had an important impact on the working class, who tended to have a
community life style. So people rejected working and middle-class values because they were démodé
and when the same people entered the working life it was a big shock. The economic justification and
philosophical and sociological justification corresponds to a new vision of society. The moral element is
quite visible in a number of studies.
These are ideas take the phenomenon of poverty away from its social dimension and back to its
individual dimension. In the 50s, poverty was made by a departed form of Calvinism theory a social
issue that had to be treated socially and politically. These ideas were criticized because the individual
vision of poverty had been a self-inflated hardship (caused by “poor people for not doing the right thing
to avoid poverty”).

In the 1970s, the 19th century ideology of a social Darwinism dominated the economical and
philosophical sphere. Specialists thought that government programs to fight poverty in effect
maintained people in a state of poverty because “it is economically unwise not to let people suffer the
full consequences of their poverty when they don’t take their fate in their hands and find solutions to
fight it”. The original moral justification of Darwinism to the issue of poverty was abandoned and
treated again on a strictly economic term. This basic change in ideology allowed the emergence of
economic ideas later on the 1980s. Without these changes, society wouldn’t have been ready for this
shift. The economic revolution can’t be seen as a phenomenon up-down (neo-conservative revolution:
political leaders and economic leaders imposing ideas on middle-class) because the middle class
accepted those measures.

How economic structures and companies evolved after the eco revolution?

The stratification of society in the US caused a disconnection between the lower and the upper middle
class. The top class is the one that really benefited. Those changes affected the working class who saw
the emergence of an equalitarian society. The working class was now allowed to try to influence
politicians and managers and to operate as a community. This idea relates to a number of values and
took place in the concentrated areas.

In the 70s the situation became stable. There were some technical progresses, like the creation of
higher new jobs that affected the working class as well. Unemployment grew among them. It was a
more individualistic culture than the 60s’ culture of community lifestyle. Jobs were lost in large scale
industries. Urban structures gradually disappeared. There was a high social instability and a loss of
values. This brought the emergence of an underclass, composed of class people left outside the
society, and living under economic conditions in contradiction with the social mainstream. They had
practically no relation with the rest of the society.

The urban structure rapidly disappeared, people found themselves isolated because of the new
structure of production. The environment and culture disappearance brought loss of values and the
reemergence of an underclass (something that had disappeared after the WW2 in a developed
country)… Urban ghettos appeared in the 80s.
During this period, there were changes in the family structure. The single parent families emerged. It is
a tendency to the individuality of the 70s. To take the example of England:

1938 – 1 divorce up on 58 marriages

1980s – 1 divorce up on 2.2 marriages; 29% were two-parent families.

The advent of the youth culture (14-25) became an important element in society and a major
economic player. Young people from different countries recognized the same values and the same
icons. This brought an opportunity to sell products internationally (great interest in records worldwide
for example).

In 1965, the total sale of records was of $277m.

In 1976, the total sale of records was of $2b.

A radical political opinion appeared and preached for anti-capitalism to reach social and individual
liberation following a romanticized had political regime, like in China. It’s a contradiction because some
were anti-capitalists but one way of showing what they felt and what they were was to buy the latest
records of their favorite stars.

e. The takeover sharks of the eighties

The consumerism that took place in the 1920s was a consumerism of belonging which led to mass
consumption. The one in the 60s was consumption of public statement and identity: people bought
items that showed that they belonged to a particular social group. In the 1970s, the first VCRs
appeared, along with the first game consoles, the first cable TV system, the first microchips and the
first personal computers (1977). All of this represented a technological and economic revolution that
really exploded in the beginning of the 80s, bringing new economic opportunities and creating new
markets and industries.

The 80s economic policies were based on the 30s ones. At this time Reagan was in office and he
declared that “you should help an industry which is facing competition, because competition is good”
but some thought that if the industry was helped, it could ruin the competition and bring interferences
in the end price.

The US car industry was facing Japanese competition. The ability of Japanese of working better and
faster relies with the demographic structure of Japan at that time. The Japanese were operating under
a regime where they had a qualified workforce, whereas a little part of the population was retired
class, not like in the developed countries. Therefore Japanese industry could compete with prices that
didn’t take into account the retirement pays that affected American and European industry. This
system had developed through negotiations with trade unions that made that workers in the end had
better retirements. Japan was in a state of transition, being a developed country with a high birth rate
and a high death rate. When its demography caught up with the rest of the world, they weren’t as
powerful as they were before. Today they are one country among others.

Japan gained 30% of the market shares in the 80s and it deeply affected the automobile industry in the
US. The US Government had to face the fact that Japanese cars were produced at a cheaper cost than
Europeans and set a voluntary export restraint agreement in the US and Europe, to limit the number of
Japanese cars that could be imported to western countries. Japan disagreed with that so they reached
an agreement on the terms that European market would be gradually opened in exchange for a
volunteer restriction from Japan to 3.5% on the sales of new cars in Europe. The British car industry
disappeared because it disagreed with the agreement.

The US economy ended shifting to production of non-material goods, focusing on programs or

software for example. Material goods, such as TVs and VCRs, were left to the Japanese, which clearly
was an important competitor for the US in that sector too. This partly explains the dominance of
American entertainment (Hollywood, games…). It fed the consumption drive of the younger
generations. Americans had always wanted to open the cultural aspects of its economy (ring French
films to US TV, etc…), so this situation wasn’t that terrifying for them. The problem was that this
industry was highly dependent on other countries productions for a large amount for material
products, like cars.

Americans had to sacrify their oil industry as well because the future of its economy no longer was on
the production of harder goods like cars. In the 80s, the exports per capita in Germany were much
higher than in the US or in Japan and they dominated particularly the chemistry and machine tools
market. The fact that Japanese enjoyed such a visible domination in the sector of energetic profits
made them believe that American negotiators insisted on the opening of the Japanese market, when
in fact their only interest was the highly productive car production.

Ricardo’s model (see the example of the exchanges between England and Portugal) show the
advantages of exchange, but insists on the profitability of exchanges between countries specialized in
the production of different items which are cheaper to produce in their country. // Adam Smith’s
model.

The problem with the position of the United States in trying to compensate the losses in some industry
through specializing in other sectors is that this system doesn’t always work because:

- It needs to have a strict balance in import-export (the non-material goods exported have to be
compensated by the material goods imported).
 In this situation, the balance didn’t resist the test of reality.
- People you fire from an industry are not necessarily employable in other sectors because they don’t
have certain abilities and skills needed.
 In this situation, this unemployment and the no-relocation of fired employees brought a
large amount of economic disorder.
- Very quickly a risk of very sharp trade deficit can occur.
  in this situation, the US could afford the deficit because if was paid in dollars, so financed
by their own currency, but other countries couldn’t.

The American economy is seen by some as an imperial economy. The center of economy needs to
embrace the countries that were under the US economic domination. This is impossible to do in a
military way, so they had to use soft power. They offered people under domination economic
opportunities: they allowed people to supply them with goods that they produce in order to integrate
their economy into the American economy and basically in order for them to fully accept the American
economic domination. This had a cost: it outclassed all of American local producers who originally
produced the goods that were now imported from the rest of the “American empire” (just like the
Romans did). The US had to face the communist problem as well: how to supply European countries
and avoid Communism at the same time? They decided to fight against communism by turning
countries away from the communist temptation: in exchange of American economic help and the
openness to products from Japan and Europe, “dominated-to-be” countries forbid or isolated
communist parties in their political sphere, so they didn’t become too powerful.

With the end of the cold war, the Americans still remained in this imperial policy, they still had
economic interests. It was a comfortable situation for them as the deficit was being paid by others, like
the Chinese are doing today when they buy American treasury bonds to increase the demand of dollar
so it is not depreciated.

The imperial position of the US started for political positions after WW2 and increased during the 80s
because of individual advantages taken by a few at the top of the society. The larger half of the
pyramid enjoyed the lower price of imported goods without caring about the lower suffering from it.
Hyper specialization doesn’t work in this case even though the USA dominated the sector.

f. American finance in the 80s

A deregulation movement started at the end of Jimmy carter’s term in office (end of the 70s) and was
accentuated with Reagan’s election. The origin of neoliberalism is not of a political seed and takes
place in something much deeper within the sociological and cultural evolution of society. Today’s
politicians are the reflection of these changes.

Under Ronald Reagan (1981-1989, 2 mandates), a number of economic and social changes were
made. He implemented his neoliberal (or neoconservative) economic policy, called Reaganomics:
- The labor unions right to strike was reduced.
- Reagan preferred to abandon the demand and the supply to their own, idea that differed
from Keynes’ which relied on government control of the demand. The demand side of
economy needed to make sure that there were enough demands to supply. The supply side
of economy was needed to improve the competitiveness of the company. If the productive
system is improved by allowing corporations to have better profits, higher salaries won’t be
possible. But the reductions on the demand were only temporary, because companies
becoming more productive could invest in new markets, and that brought new employment,
new salaries and therefore new demand. « Les profits d’aujourd’hui sont les investissements
de demain qui sont les emplois d’après-demain ». The growing supply would increase the
demand that temporarily was missing.

Between 1971 and 1980, unemployment was between 4.1 and 7.9%.

In the 1970s, inflation was between 7 and 11%.

The American GDP reached $1,12b in 1980 and 1474 billion in 1990.

A decade of regulations (the 70s) and Keynesian economic policies had come to an end and the
situation preached for a retreat of the state into the economy: there shouldn’t be no more
redistribution, no more social programs and no more taxes, element that essentially benefited to the
wealthiest classes of citizens. It translated into an increase budget deficit and a deregulation of several
industrial sectors. Before that, economy had operated under the Glass Steagall legislation that had
started with Hoover and worked intensely under Reagan. The very end of it came under Bill Clinton in
the 90s and this new situation quickly opened the door to a number of speculative moves and prices
that were going to affect finance and banking until today.

One essential element in the cultural framework of the 80s that allowed those speculative practices is
the feeling of disconnection between financial gains, profits, and the concept of a productive
economy. The origin of added value is usually a result of productive activity but added value can be
enhanced. In the 70s, speculation was seen as a by-product (produit dérivé) of the organization of the
market that served the production and a necessary evil. In the 80s, these activities are no longer called
speculation but financial activities. The disconnection between financial gains and a productive
economy makes reference to a cultural bias in the ideological climate of the early 80s. In economic
terms, this phenomenon is called “the financialization of the eco”. This process may be defined as the
increasing dominance of the finance industry in the sum total of economic activity, of financial
controllers in the management of corporations, of financial assets among total assets, of fluctuations
in the stock market as a determinant of business cycles, etc. It is understood to mean the vastly
expanded role of financial motives, financial markets, financial actors and financial institutions in the
operation of domestic and international economies. It has to do with the role of American economy in
the global economy. We are still observing that phenomenon today.
 What was the effect of deregulation in the 80s US economy (like deregulation policies
brought by the New Deal)?

Remember!!

Keynesian // regulation and intervention (Johnson)

Neoliberal // deregulation and non-intervention (Reagan, Carter)

What should have happened according to the neoliberal theory: more productive companies in a
deregulated environment should have produced better economic conditions (less unemployment
and higher salaries)

What really happened in the 80s context: Large corporations and wealthy individuals make more
and more money. They are now in a position to increase their productivity. They could invest in the
industrial sector and that would bring higher salaries and would create more jobs, but it is no
longer interesting for them to reinvest this excess of cash into their industrial activities because
people are not buying enough (not enough demand), because their salaries are already stagnating.
Very quickly the investors start looking into financial investment and this develops the financial
industry, feeding the financial speculative bubbles. This investment in the financial sector means
that companies have less money to invest in developing new products. The result is a high profit
(from the financial sector) but a decreasing trade deficit (from the slow-down of industrial
development). As a result, foreign companies became much more attractive in the 80s to
consumers and started to feed American public with new products from Japan (ex: VCR) or Europe.
This phenomenon is the core problem in the 30s crisis and it also started to develop in the 80s for
the same reasons.

In the 1980s, American manufacturers lost about 30% of their market.

What should have happened according to the neoliberal theories: All the salaries could increase
because taxes on salaries decreased.

What really happened in the 80s context: Higher salaries can increase much more rapidly than
average salaries, because taxes on incomes are low, so lower taxes on higher salaries enable a high
increase of that salary, whereas taxes slow down the growth of any low salary. Those who earned
high salaries were a minority in the US society, so the demand kept very low.
 The situations brought by deregulation made inequalities grow between different types of large
corporations from the 80s to the 2000s. Larger corporations had revenues that by far exceeded
small and medium companies’ revenue. This means that, for instance, the CEO of a small company
was much closer, in terms of revenue and economic status, to a middle-class employee of a very
large corporation that it was to a CEO of very large corporations.

The fundamental elements taking place in the 80s in the US were:

- Deregulation that affected the transportation industry, particularly the air controller industry. This
problem was already present in the late 70s under Carter. Interferences in the market forces were
seen as the responsibility of the government. Reagan ended firing the air controllers
- Deregulation and challenge in the trade union power, like in the coal mines in the UK under
Thatcher. It created a bias in the market. At that time trade unions were seen as an inconvenience
and Thatcher and Reagan tried to change the balance of power between employers and employees.
There were times of unemployment because there was a short supply of jobs and logically low
salaries. Trade union claimed that people would have been happier with a job paid with a lower
salary as long as the government could provide full employment. Neoliberals thought that if salaries
were decided by market forced, government should stop interfering in economy so they would go
back to full employment. The result was not necessarily a reduction of unemployment. The main
problem was how much was allocated in resources to work and increased the capital.
- Deregulation in finance: the banking in financial sectors had been strongly regulated since the mid-
30s with the voting of the Glass Steagall Act, under Hoover. It limited the responsibilities if the
various types of financial companies (investment banks, brokerage firms, deposit banks, savings
and loans – caisses d’épargne…). Each specific activity was strictly divided to avoid excessive
speculation and misusage of financial resources. All these limitations brought inefficiency to finance
and had a heavy cost on economy (without them, banks would have been able to give cheaper
loans for example).
- Wave of purchase and acquisitions/takeover bids (offre de rachat) as a major effect of
deregulation. They were carried out though stock exchange, through the investment bank industry
and through specialized law firms. There was another wave of P/A in the 60s but it was different. In
the 60s, small companies bought larger companies outside their core activity in order to diversify
activities of the conglomerate that was created through those acquisitions. In the 80s big
corporations bought big corporations in the same industry in order to get a higher concentration of
power within industrial branches. Was the 60s strategy a mistake? They used that strategy because
the market was reacting well and also because of government interference (Keynes’ ideology)
companies could not do what they wanted. In the 80s, it was no longer good to be diversified, so
they chose better to specialize. That limited the number of competitors in one industry, which is
not good for industry. Also in the 80s, the government stepped back with the neoliberal ideas
brought by Reagan, and then companies could grow within their own specialty. This was sustained
by the fact that in the end the acquisitions of the 60s weren’t very efficient, because the acquired
companies work better and made less profit after entering the conglomerate. Those companies
started selling their acquisitions in the 70s. That’s why neoliberals preferred to work differently in
the 80s and step back (for inner details of the 80s wave of P/A see below)
 g. The wave of Purchase and Acquisitions of the 80s

The main vehicle for them is the junk bonds business (obligations de pacotille). This business took
place in a context where companies or financial groups tried to buy other companies that had grown
very big in the 70s to then sell these companies in pieces. These corporations and financial groups
needed fresh cash to buy them. One business bank, called Drexel Burnham Lambert, and, more
particularly, a man called Michael Milken, promoted the junk bonds system as a way to get the fresh
cash needed. Corporations that wanted cash to buy another would issue bonds that, in fact, were risky
bonds because the ability for the issuer to pay back was based on the success of the operation (solid
profit raised through the purchase of the company and its selling-off at a good price). The bonds were
delivering a high interest rate to go along with this risk that if the operation failed many of these bonds
would not be reimbursed by companies, and so that would be a total loss for the people who bought
them. Through this system, loss remained to pay huge amounts of cash to feed the take-over bubble. It
captured a good part of this money that was becoming available. The people who had this cash were
particularly interested in junk bonds because it paid high interest rates: they were highly profitable
investments anyway. Michael Milken used information to keep money for himself and the bank he
worked for.

How did Milken’s system worked?

A client came to Milken’s bank to ask for a large amount of money to launch a takeover bid over a
certain company. Milken offered to help the client to issue bonds in order to raise cash. Those bonds
actually were junk bonds because Milken was going to ruin the operation for his own interest, so, as
the operation was going to fail without the client noticing anything, the interest rate was very high. For
that service, he took a fee.

Milken knew what company was going to be the target of the takeover bid. When there is a takeover
attempt over a company, the people who want to buy the company start buying shares of this
company, and the price of the share increases because of the increasing demand. Milken bought a lot
of shares from the company, all of this anonymously, as that’s the way speculation works in the US. By
buying a high number of shares for his account, he was largely participating to the increase of the price
of the shares on the market. When the price of the shares was high enough, he sold his shares before
the price collapsed and he put the money in an off-shore account. This is illegal and it’s called insider
trading (délit d’initié). It is particularly illegal when you are a banker, because you act against your
client and you are taking money from your client through the information you have.

Milken went to jail because the SCC (Security Central Commission) discovered the financial fraud, in
which Drexel Burnham Lambert was involved and due to which it went bankrupt in the early 90s.
Milken had to pay a total amount of about $800m of penalties and after he went out of jail his net
worth was of $1bn.
The junk bonds frenzy is a classic in speculative bubbles, as many of the operations that junk bonds
issued failed. The problem is that the junk bonds had infected many different investment vehicles, for
instance some mutual funds (fonds d’investissement) that had bought them as part of their portfolio
which were meant for instance for ordinary people to retire. Large people of savers (épargnants) saw
their mutual funds lose about half of their value, because the public mutual fund that was made of junk
bonds had lost most of its value.

Why did companies favored external growth in the 80s through Purchase and Acquisitions
instead of internal growth, like in the 60s?

It becomes increasingly difficult for companies to increase internally and it is harder and harder to
provide new goods to the public. But external growth has contradictory results in different levels:
- At a microeconomic level: the company that applies to buy another company grows and the wealth
of shareholders increases.
- At a macroeconomic level: there is no significant increase in wealth. The only real growth in this
level is internal growth (companies invest in new fields) and not external (there are no
acquisitions).
The result of this is that the managers of the companies, who follow the objectives of the company in
order to survive, need to provide results to their stockholders and, essentially, the result they need to
provide is high dividends or growth.

There have been different ways to do that in the 20th century:

- In the 60s, companies could use the cash flow to acquire other companies, because delivering
excess dividends to stockholders didn’t bring any profit, but increasing the size of the company
did.
- In the 80s, the same elements took place. In a context of relatively slow growth, the companies
are in effect trying to grow through the purchase of other companies.

The main difference between the two periods is that the financial construct of these operations
delivered extraordinary gains for the financial players. Which is why there is 1 class of players in the
60s (companies buying other companies) and 2 classes of players in the 80s (companies operating their
own rates and investment companies gradually specializing in purchases, or mergers, and acquisitions
of other companies).

The American industry was turned towards specialization in the 80s, and this benefited the companies,
so managers had an interest in better managing the company. In order to do that, there was a transfer
of resources from the productive sector into the financial sector, because in economy, profits could be
disconnected from production. This is linked with the movement of financialization: in the process of
gradual financialization of the American economy from the 80s until now, the wave of purchases and
acquisitions (P/A) is the first element of financialization. The financial sector becomes the arbitrator of
the American industry or the strategy of it.
Financial industry is going to have an increasing weight on other industrial sectors and is going to
increase its demand in terms of profits. As a result, some industries are going to be hard-pressed to
deliver the kind of profit that is demanded by the financial sector. As a consequence, for these
industries, it’s going to be difficult to find financing and, in attempts to reach the kind of profitability
that Wall Street requires, there are going to reduce their size to reach the sector that can really make
profit. But that is absurd: when you look at the profit structure of major airlines, in the end it would be
better business for them to concentrate on the booking system which is highly profitable, more than
flying. If we take the example of General Motors, the only profitable branch is the financial division
that gives out loans to consumers. Again, that is absurd, because it would mean that to reach this
profitability they should stop manufacturing cars and concentrate on giving loans. To get profit
elsewhere, an increasing number of US companies delocalize to other countries. That’s because in the
1960s, the Wall Street market was lean and means (“maigre et agressif”) and in the 80s the US market
became too fat and profitable (Reagan said “America is back!”). The US industry is less and less
independent and becomes more and more dependent on external consumers.

In the “imperial regime” of the US, reliance on external sources of supplies is beneficial to one part of
society (the patricians). In the 80s, the workers and managers of the financial industry become the top
of the American patricians; they are those who benefit the most from the imperial regime. As a result it
gives them political influence and so they are in a position to influence the American policy in ways that
are good for them – an unregulated market. They have a relative disregard to the 2 macroeconomic
unbalances of the American economy: budget deficit and trade deficit.

In the 80s as well, there was a growing advocacy for free trade among the economic leaders in
contradiction with the feeling of the middle class and the trade unions which are critical with free
international trade and prefer protectionist measures. In the 90s, the American government
accentuated the efforts to advocate the merits of American system and free trade in other countries
and to request from trade partners (especially those with which America had a deficit) to change
internal rules so trade would be more balanced. In order for the trade balance between Japan and the
US to balance well, the Japanese market had to open to American goods and the American market had
to stop blocking Japanese importations. The US criticized how retail distribution was organized in
Japan, because it had grown from traditional habits and it was too different from the US retailing
system. The main obstacle to distribution of American goods in Japan is that American goods weren’t
attractive to Japanese: there was a lack of competitiveness of American industry in the Japanese
market (American trade deficit). The financialization of economy is a recurrent phenomenon in a
country that is in a dominant position (Holland, Britain).

h. The Internet bubble of the 90s

The common wisdom about the 90s is that it was a time of rapid growth for the US eco and a time of
conversion of the eco to new sectors, specially linked to the new internet technologies. The Nasdaq
frenzy linked to this industry and the explosion of the prices of internet related shares this was due to
the rapid investment of the American eco in new technology sectors. One problem with this ideal
vision: in 1990, when you look at the structure of US international trade, there was a huge deficit. But
when you look at high-tech goods, the US ran a trade surplus of $35bn. In 2001, at the end of the
internet bubble, the surplus was only $5b (divided by 6). The US position in high-tech goods had
worsened throughout the 90s, and so the vision that the US had pioneered a revolution and taken a
benefit from this revolution is wrong. Certainly much of the technology was developed in the US, not
all of it (internet was in Switzerland not in the US) but throughout the 90s much of the eco activities of
the US was not so much of the production of high-tech goods as in the trading of securities (titres
financiers) related with high-tech goods. We see the same thing taking place as with different effects,
that is the apparent newness of a phenomenon in financial markets here the emergence of companies
that are entirely in a new market whose shares became very attractive.

In the 90s, the most used was stocks; in the 80s, it was junk bonds.

Stock options: contract issued by a company that gives you a right to buy or sell a certain number of
shares at a certain price over a given period of time. For instance, you buy a contract that allows you to
buy 10,000 shares at a price of $50 and this over a period of 6 months. Suppose that at the end of this
period of 6 months, all my shares are no longer $50 but $80. What you can do is exercise the contract:
with the contract you buy 10,000 shares at $50 each, for a global cost of $500,000. The next day you
can sell them for $80 each so at a total cost $800,000, leaving you with a profit of $300,000. The
contract cost you about $50,000, you buy the contract, and you make a profit of $300,000, which
means a net gain of $250,000. If you had not used stock options and you had simply bought shares
from the company at a price of $50 piece, you would have made of profit of $300,000, however you
would have made an investment of $500,000 initially, so you have to pay 10 times more than if you
use the stock option. The stock option multiplies your ability to manipulate securities hence the fact
that it gives you a leverage effect. What this means in terms of the market itself is that there are many
more people using these contracts and in effect as a result being in a position to buy themselves huge
amounts of shares, far more shares than they had before. That has a very strong effect on the activity
of the stock exchange; it has mostly a strong effect on the volatility of the price of shares, because they
are massive buy and sell orders, resulting from these contracts, the price of the shares moves much
more rapidly, which is very good from bankers, brokers and Wall Street people. The combination of
enthusiasm for internet shares, the generalized usage of stock options, combined to create the bubble
of the 1990s. For instance, some shares were initially issued at a price of $30, and in a few weeks its
price grew to $400, $500 or sometimes $600. Some companies simply because they have a great
relation with the internet when they first issued their shares on the market they became so attractive
demand exceeded the number of shares on the market. The price of share itself was usually under-
evaluated by the banks that organized the issue of shares (when a company wants to issue shares for
the first time in the market, it doesn’t do it itself. That operation, which is quite technical, has to be
done by a business bank or a banking group. What they do in fact is buying shares from the company
and selling them on the market. If the share gives profit at the beginning of the sale, then the bank will
keep that profit. That is why it is in the interest of bankers to under-evaluate the price of shares,
because this way, shares will have an increasing potential more important). The guy that is screwed in
that game is the one who is going to buy the shares after a few weeks, when he finally manages to get
them in the market at a price of $400 for example, because in 2001 when the market collapsed the
shares went back down to $35 meaning a huge loss for those who held these shares bought at $400.

The advent of Internet and the personal computer represents a major event in American economy and
a new field in which American economy could make advantage.

In the 1990s, under Bill Clinton, the effects of the financialization started to be visible. After almost 20
years of republican domination in the White House (with Reagan’s 2 terms and Bush Senior’s term),
new communication technologies appeared, like personal computers and the internet. This allowed
the come-back of the American dominance in this new technical field and a very sharp increase in
financial activities.

A great number of companies related to the sector appeared. The development of the Internet could
only become effective with the development of a whole new system to carry the Internet growth
(hardware, cables…) that had to be entirely built. Private investors and institutional investors rushed to
buy shares and bonds from telecommunications companies. This huge in-flow of money encouraged
telecom companies to build competitive infrastructures to carry the Internet traffic. The
competitiveness between the different companies was very strong.

In the 1990s, the Redhat company starting distributing the Linux system, which is a kind of user-
friendly software that had a huge success among the public. Redhat and other starting companies (like
Microsoft, Apple, Texas Instruments, HP…)started issuing shares in the Nasdaq stock exchange, which
is a system run through computers for companies too small to be listed in Wall Street (more loosening
regulated than Wall Street). Its market shares skyrocketed to the point of challenging General Motors’.
Some thought that something was wrong with that situation.

The concept of value creation was born at that period. Some companies were experiencing huge
market growth, but they were not making any profit. This can reflect an anticipation of big profits to
come. However, there must be a relation between the increase of the market value and the profits
anticipated. In the end, the goal of a company could be not to produce profits, but to produce value
for the shareholders. Value creation was a concept by which the company could bring value to the
shareholders without generating profits.

Because several competitors were building the equipment needed very fast, the equipment soon
became redundant. At one point some of the investors decided they wanted to stay away from the
market before it collapsed and they started selling their shares, feeding the speculative bubble. In the
end most of those companies related with telecoms industry and internet would go bankrupt. In 2001,
the Nasdaq collapsed. Today, only one Internet highway is still operating and 5 are left unattended.
The economic losses are estimated in $8b.

There are many factors that altered the perception of the world and this new perception of
the world made the Internet bubble crisis less effective than the crisis of 1929:
 Compared with the 1930s, there was the same speculation fever, fed by the same eagerness for
new technologies. There were large amounts of cash looking for profitable investments. But there
was some disconnection between the market value of the companies and their real value. In the
1990s, the same economic theories emerged again, challenging the theories of cycles.

 The American legislation had changed in the 1930s to try to prevent depression mechanisms.

 The 90s cultural context was different: there was a profound change in the social fabric
(development of secondary and higher education which causes a profound change on how people
perceive their surrounding world). Culture was ready to accept that people who were not the
founders of a company (salaried people, employees) were making money, such as Michael Eisner
(CEO of Walt Disney), who managed to acquire revenues which were above $90m a year. At that
time, it was a record. The cultural change was also due to the dematerialization of the economy,
which means that there is a feeling that the large amount of work done by people does not
produce anything material. A small number of people have huge amounts of money, because they
are paid more, or because they won this money speculating on the stock-exchange. In the 1970s,
statistics showed that more than half of the working people in America were employed in a sector
related to information (creation, processing and transportation of the information). This people
were advertisers, engineers, journalists, workers in printing facilities… They worked in jobs that
didn’t produce a concrete good. Today, the proportion is much more than 50%. It becomes
difficult to make a connexion between the revenue that people gain and the concrete result of
their work. The advent of the Internet reinforces this phenomenon. Thanks to the Internet,
people reached a new level of abstraction (people acquire things with no material basis).

 It is increasingly less profitable for Americans to invest in companies that produce goods and sell
them to the public because the demand for these goods is limited by the fact that there are too
expensive and salaries too low for people to buy them (demand crisis). So American companies
profits are no longer invested in other companies and they pile up in a context where reducing
the salaries make those other companies individually more profitable. The demand crisis is
something that the Keynesian and Marxist aspects of capitalism explain as a fundamental issue in
capitalism: from either point of views, it is a structural problem in capitalism. For Marxists
analysts there is no solution to it but getting rid of capitalism. For Keynesians analysts, it may be
solved by state intervention and regulation. Both analyses consider that capitalist system is not a
self-regulated system and can’t go into a structural (or systemic) analysis; it is an in-balance that
cannot be solved by itself, the system can’t go back to a natural equilibrium. Because of various
economic conditions at one point, the ability of the public to buy the goods that are produced by
the productive industry becomes lower than the outlet. According to the Keynesian point of view,
this causes a recession because if the industry produces too much and some of the goods aren’t
bought, the producers will start reducing their production and their workforce (fire people).
People who are fired no longer buy the goods produced. The individual decision by one
entrepreneur to fire people to adjust to market conditions make overall market conditions worst.
The aggregate results of all this decisions made by all the entrepreneurs to cut their workforces
create a reduction of the aggregate demand. That makes conditions worst for employers, who, to
adjust to the market conditions again, reduce their workforce even more. This is a downwards
spiral caused by a demand crisis.
If there is such a crisis in demand why are American companies making huge profits? And
why the US trade deficit has increased consistently throughout the 90s and 2000s?

A demand crisis takes places in an unregulated economy. At the beginning of the 80s (with Reagan)
there is a major deregulation of the US economy; this is what, in this case, brought the problem of a
lack of demand.

Mass production can’t work healthily without mass consumption (=large majority of the public who
needs to be in a position to purchase what has been produced). This leads economic leaders to
conclude that there is an economic need for redistribution of profits – like after the 30s crisis in the US
(implementation of Keynesian economic policies in US markets). Redistribution means that the profits
that are generated by corporations must be split between the investors, the shareholders and the
workers.

Redistribution of profits: in general, corporations tend to increase their productivity. It is a dynamic

system, where, for one unit of labor, companies find ways to produce more and more through
technological events. This over-production has to be consumed in the end. One way to do that is to
expand the pay that you give to workers that produce that, but that reduces the productivity gain,
which is not in the interest of companies. Another way could be export: finding people outside the
community who will buy the goods of the company. But there are limits to the profits of the additional
demand because of the imports that are eating-up the domestic goods of the country.

Regulators have to find how to strike the balance between the arbitration made by the producers to
increase their productivity and the overall balance of the system that requires that productivity gains
will not produce disequilibrium between the supply and the demand. This causes frustration because
this system of redistribution limits the amount of money that some people can make (through higher
taxes on corporations, shareholder profits, higher salaries…).

As the system changed at the end of the 70s-beginning of the 80s, some people felt that for their own
interest they had to vote against all the redistribution system.

From 1990 to 1998:

Inflation increased by 22.5 %,

Worker’s pays increased by 28 %

CEO’s pays increased by 443%.

Corporate profits increased by 100% in the average of the large and small American companies’
profits, including the S&P 500 (500 biggest American companies). The profit of small and medium
companies certainly has to decrease.

S&P 500’s profits increased by 224% .

 i. The credit bubble of the 2000s
Those phenomenons are in effect the same phenomenon taking place and consisting in capturing
available savings and trying to offer the highest possible return on this money. Contagion effect
through this ill devise industrial vehicles or in effect spread throughout the eco causing much more
damaged than just damage of lost earn.

Essentially what we are seeing here is a shifting from the hot money that was in mergers and
acquisitions and junk bonds in the 80s and into the internet industry in the 90s. Much of the money of
the speculative money that had been invested in the junk bonds in the 80s and that had successfully got
out of the junk bonds market before it collapsed started to look for new investment vehicles and the
internet shares of the 90s became the prime target of that money. Where in this mechanism there is
something of a self-fulfilling prophecy (prophetie auto-realisante). Why? If you have a lot of free cash
and few investors that have a lot of money and say this internet companies are the next hot thing, they
will start buying shares, whose price will increase. And because there are more and more people who
are making money want them, the demand for this shares explode and hence the simple fact that some
people say “this is the next hot thing” makes that thing become wanted. That is what happened with
the internet sector. Once the big boss started to think: we can maximize the profit we can make here
(2001), the speculators jump out of the market, the sold all their shares. This is why in a matter of
weeks the internet related shares collapsed. (ex: apple computers august 2001 – lost half of its value
within one day).

j. Today’s situation: the 2007 crisis

In 2001, when the internet bubble collapsed: In a speculative bubbles there are winners and losers.
The winners are the people who are specializing in having the right info and getting out of the game at
a right time. They sell out the investment and make huge profits. The losers are those who are less
informed and didn’t sell their shares at the right time. There is another category of people who have
made huge amount of money and now they have that money in cash, as they sold their shares. They
don’t want to keep the money in cash; they want to invest it somewhere else. At the same time, the
Fed reserve became worried that the crash of the internet market would cause a recession. To limit a
possible recession, the Federal Reserve decreased the interest rates. So they made credit easier. This
allowed a number of small, regional banks or companies specialized in credit to try and look for new
clients. One market that was targeted was the mortgage market (marché hypothécaire). This market is
a relatively safe market because banks loan money to someone who’s going to buy a house and the
house becomes a warranty to the bank in case the client can’t pay back the loan. A number of
companies began to hand out mortgage loans more easily because interest rates were low. The result
was that there was a higher demand of houses so the price of houses started to increase. Because of
that some people thought that it was a right time to buy a house, because they could buy a house, sell
it later and make a solid profit. This increased the demand for loans hence these companies started to
give out even more loans. Some of these companies after a while found out that:

- They had extended a large number of loans, so they were exposed to a default risk
- They had reached their limit of loans they could give against their reserves. When a financial
company (bank or others) gives loans, it has to make sure that they still have money in their
reserves in case of default according to ratios set by the law. So with a certain amount of reserves,
there is a point when the bank is not able to give any more loans. This is why some banks tried to
get rid of your loans, for that they went to Wall Street banks to ask to buy from them all the loans
they had, the bank agrees. In effect, the Wall Street banker is carrying the default risk of the loans.
Incidentally the regional bank has now a lot of fresh cash to hand out new loans. Because with this
fresh cash the bank increases his reserves and borrow money from the federal bank to hand out
loan. Wall Street with this loans: secured (titrisation: transforme en titres negotiables ou
obligations) thousands of this loans. It turns the loans into tradable securities. That is possible
through the following mechanism: you take the loans and put it together into a pool. These loans
in effect are a cash flow (flux de trésorerie: all of the home-owners reimbursing their loans and
paying their interests). The bank is going to create a specialized investment vehicle (véhicule
d’investissement specilisé), which are bonds sold to the clients. 100$ dollar bond with an interest
rate of 7% over 5 years. What allows the bank to do that is that it is basing the issuing on these
bonds on the cash flow coming from the loans.
Je vais émettre des obligations, je suis obligé à des remboursements (sommes principale et
intérêts), je vais devoir payer à celui a qui j’ai vendu cette obligation 7% d’intérêt par an et de lui
rembourser la somme principal,. Si je fais ça sans aucune source de revenu je perds de l’argent-. Ce
qi me permet d’alimenter cette sorte d’argent c le flux de trésorerie qui m’arrive de mes
emprunteurs, adosse cette obligation. L’acheteur en théorie sait q le remboursement et le
paiement de l’intérêt est entièrement lié. Si c flux de trésorerie s’interrompt, le flux ici s’arrête
aussi. Il a endossé le risque lié à l’emprunt. C’est la titrisation. Ça permet de transférer le risque
d’un emprunt d’une banque a qq1 d’autre (acheter des bonds) pour que la banque soit plus sure.
(securitization).

Subprime= emprunts consentis a des gens en position financière fragile donc intérêts pus importants
parce que le risque de non remboursement était important. Pk on a fait ce système ? parce q la
banque régionale ou le courtier en prêt hypothécaire local comme il avait été débarrassé de ces
emprunts auprès de Wall Street il portait plus de risque, quand il vendait un emprunt il recevait une
commission. La banque de Wall Street à travers la titrisation elle se débarrassait du risque qu’elle
transférait à un investisseur tiers. Il y a 3 types d’emprunteurs : des très surs, de moyens surs et de peu
surs. Sur cette base là on va émettre des titres qui sont de plus ou moins bonne qualité : senior ou
prime pour les meilleurs, medium pour les moyens et speculative pour les plus délicats (like junk
bonds), ils ont des intérêts différents. Et ceux qui rapportent le plus pour l’émetteur de l’emprunt en
termes d’intérêts sont les speculatives, puisque le risque est majeur donc l’intérêt est majeur aussi. Le
problème fondamental est que quand ces titres là on été émis ils sont adossés a des flux de trésorerie.
Si le cashflow des loans produit beaucoup plus de trésorerie que ce que vous avez besoin de
rembourser, vous avez une grosse marge. Si la marge est faible dès qu’il y a un des emprunteurs qui
commence à faire défaut et ne peut pas rembourser, alors certaines obligations ne pourront plus être
payée puisque on aura moins d’argent entrant des emprunts pour financer l’argent sortant des bonds.
Les premiers titres qui seront affectés c’est les speculatives, puis les medium et finalement les seniors.

Qui mesure le risque ?

Les agences de notation mesure le risque en recevant des informations, qui sont illisibles parce que
quand on a beaucoup d’emprunteurs comment peut-on gérer les risques de chacun des emprunteurs ?
Par des statistiques, sans rigueur, informatique. Le risque est noté de AAA à D, passant par AA+, AA et
AA- et ainsi de suite pur chaque lettre. Le A correspond à un niveau de sécurité total de la part de
l’emprunteur et le D a un risque extrême, accordé pour la plupart aux junk bonds.

Ceux qui ont achetés ces titres, des banque, l’ont fait en masse parce que ils ont cru qu’ils auraient des
investissements surs et qui rapportent beaucoup, ce qui n’existe pas en finance.

La banque de Wall Street évidemment a récupéré beaucoup d’argent qui pourrait retourner dans le
marché coté nord-américain pour alimenter la bulle : proposer de la liquidité suffisante pour que l’on
puisse de nouveau prêter de l’argent à des gens sur le terrain.

Il y a 2 phénomènes complètement pervers associés à ça qui sont du pur génie financier :

 Home equity extraction (see p.16)
 CDS (Credit Default Swaps) : Le vendeur du swap joue le rôle d’assureur et l’acheteur celui
d’assuré. Le vendeur remboursera à celui-ci des pertes qu’il viendrait à subir, ou pas, du fait de la
défaillance d’un tiers. Ça consiste surtout sur les pertes immatérielles d’un pari que l’on a fait
dans le marché spéculatif sur la possible défaillance des titres achetés par quelqu’un d’autre. g
acheté $500,0000 d’obligations (titres de créance) et je me dis qu’il y a un risqué donc je vais
chercher quelqu’un qui voudra bien me vendre une assurance, un operateur. Je lui demande de
me faire un CDS contre le risque de perte de valeur de ces titres là, il accepte et va mettre en
garantie 10% de la valeur es obligations ($50,000) et moi je fais plus ou moins $100,000 par an de
prime pour garantir mon investissement. Si ce que j’ai acheté (titres) produit des pertes, 20% ne
sera pas rembourser parce que les flux de trésorerie se sont épuisés parce que les emprunteurs
ont fait défaut, dans ce cas là l’émetteur du CDS va me rembourser ma perte. ça marche comme
une assurance. Qu’est-ce qui se passe si j’ai acheté le CDS sans avoir des titres ? Il se peut que l’on
achète une garantie pour s’assurer contre le fait que tels ou tels titres chutent, même s’ils ne
m’appartiennent pas, comme ça l’argent me revient quand même. Quand la crise du crédit
immobilier américain a éclaté on s’est rendu compte que les CDS garantissaient 500 fois le total
des crédits qui circulaient parce que en fait tout le monde avait spéculé sur les CDS. Aujourd’hui
on s’est rendu compte que parmi les principaux acheteurs de ces CDS, il y avait les banques
émettrices de la dette titrisée. En gros, ce qui s’est passé c’est que une banque comme JPMorgan
Chase achète de la dette, des emprunts du marche hypothécaire américain elle les repackage et
en fait des obligations qu’elle va vendre a ses clients, elle a donc gagné de l’argent et le risque est
passé aux clients, qui lui ont fait confiance. La banque va ensuite voir par exemple la corporation
AIG (American Insurance Group) et elle achète des CDS pour se garantir de la perte de valeur des
titres qu’elle a vendu à ses clients. Donc si ses clients perdent de l’argent avec les titres qu’elle a
vendu, la banque elle gagnera de l’argent. Certains de ces titres ont perdu de la valeur même 6
mois après avoir été émis, on pense aujourd’hui q certaines banque ont délibérément émis des
 titres qui étaient condamnés à faire perdre de l’argent parce qu’elles gagnaient de l’argent d’une
part par leur vente aux clients et de l’autre par la récupération de l’argent du CDS.

But where does all that money allowing the exchange of the assets (titres) come from?

It comes from a situation where a large number of investors are better off investing in the US financial
market than in productive economy. From that point of view, there is a link between the demand crisis
and financial speculation.

L’endettement massif du public américain a permis en réalité d’alimenter la consommation des

ménages américains (notamment après la home equity extraction) sans faire augmenter les salaires. E
d’autres mots, si les US au cours des années 2000 on put absorber les excédents commerciaux générés
a travers le monde du fait du manque de demande qui existe vraiment, c’est-à-dire, au niveau
macroéconomique, l’économie us joue le rôle de consommateur de dernier recours, donc si les US ont
un déficit commercial par rapport au reste du monde (et donc le reste du monde a un surplus
commercial par rapport aux US) le conso américain est devenu le conso de dernier recours pour les
industries qui ne trouvent plus des conso suffisants chez eux, en raison de la compression de salaries
(Europe, japon, chine). La crise de la demande générée par une économie mal réglementée abouti aux
US et est alimentée les dernières années par l’endettement excessif des américains. La titrisation a
servi naturellement a faire revenir aux US l’argent des surplus engrangée par la banque de produits
aux us. On peut donc dire qu’un pays comme la chine qui vend des produits aux US, en retire un
surplus commercial. Avec cet argent, la chine va acheter des titres de la dette américaine et entre
autres de la dette hypothécaire titrisée en alimentant ainsi la capacité des américains a emprunter de
l’argent pour acheter des produits qui sont fabriqués en chine. Les grands gagnant de cette histoire
sont d’abord les financiers de Wall Street, parce qu’ils gagnent de l’argent dans a la titrisation, en
empruntant de l’argent aux américains (bonds), etc. Mais le système ne peut pas fonctionner comme
ça, c’est pour cette raison que la bulle a explosé. Le système est particulièrement clair dans le cas de la
dette titrisée puisque après le home equity extraction on a bien utilisé des emprunts pour alimenter la
consommation et quand on fait les calculs sur la croissance américaine depuis 2001, si on extrait de ce
chiffre la part qui est générée par la home equity extraction la croissance américaine est seulement de
5% en tout. S’il n’y avait pas eu ce mécanisme spéculatif la croissance américaine aurait été presque
nulle pendant les 10 dernières années.