On the Creation and Destruction of National Wealth: Are Financial Collapses Endogenous?

Stanislav E Shmelev,Robert U Ayres

doi:10.3390/su13137352

Abstract

This paper traces US national wealth from 1914 through 2015 and constructs a multivariate econometric model that combines elements of short-term and long-term dynamics. We find that US wealth depends on a range of macroeconomic variables, including the wealth itself observed in the previous period, change in market capitalization, change in US house price index and inflation. Less impactful, statistically significant factors included unemployment, changes in oil price, and change in debt-to-GDP ratio. Another significant result is that the Glass–Steagall Act, which prohibited commercial banks from speculative activity in the stock market after 1933, had a statistically significant positive impact on wealth in the US. We test the model by asking whether it could have anticipated the actual collapse in 2008, given prior data up to 2000, 2005 and 2010. All three tests forecasted a sharp wealth decline starting in 2008, followed by a recovery. These results suggest the possibility of forecasting future financial collapses. We have found our model to be slightly more accurate in the short run than in the long run.

Highlights

Collapses Endogenous? SustainabilityThe hottest topic in economics in recent years has been growing inequality and its causes, e.g., [1,2]
The data we have used for the econometric modelling was obtained from the Federal Reserve Bank of St Louis
The results do suggest that the model may be usable for forecasting future financial instabilities with some confidence, based on extrapolations of the variables in the model

Summary

Introduction

Collapses Endogenous? SustainabilityThe hottest topic in economics in recent years has been growing inequality and its causes, e.g., [1,2]. The US Presidential election of 2016 focused heavily on this topic, albeit somewhat differently from the liberal-left perspective (Bernie Sanders) vis-à-vis the conservative-populist perspective (Donald Trump). We argue that the primary cause of the election results was a financial externality [3]: a continuing third-party consequence of economic transactions prior to 2008 in which most of the people adversely affected had no part. The externality was a drastic decrease in middle-class wealth (savings) resulting from a drastic decline in house prices and consequent unemployment in the housing industry. It was triggered by an unexpected rise in mortgage defaults, caused by the issuance of too many poor quality (sub-prime) mortgages to unqualified buyers

Methods

Results

Conclusion