ECON:

The Nordic Model: Pros and Cons

The high living standards and low-income disparity of Sweden, Norway, Finland,
Denmark, and Iceland, collectively known as the Nordic countries, have captured
the world’s attention. At a time when the growing gap between the rich and poor
has become a political hot button in developed nations, this region of the world has
been cited by many scholars as a role model for economic opportunity and
equality.

KEY TAKEAWAYS

 The Nordic model refers to the standards followed in Sweden, Norway,

Finland, Denmark, and Iceland.
 These nations are known for high living standards and low-income disparity.
 The Nordic model merges free-market capitalism with a generous welfare
system.
 Some view the Nordic model as an attractive alternative to the winner-take-
all brand of capitalism that has resulted in significant inequality.
 Opponents criticize the high taxes, high degree of government intervention,
and relatively low gross domestic product (GDP) and productivity.

What Is the Nordic Model?

The Nordic model is a term coined to capture the unique combination of free-
market capitalism and social benefits that have given rise to a society that enjoys a
host of top-quality services, including free education and healthcare and generous,
guaranteed pension payments for retirees.12

These benefits are funded by taxpayers and administered by the government for
the benefit of all citizens. The citizens have a high degree of trust in their
government and a history of working together to reach compromises and address
societal challenges through democratic processes.3 Their policymakers have
chosen a mixed economic system that reduces the gap between the rich and the
poor through redistributive taxation and a robust public sector while preserving the
benefits of capitalism.1

The model is underpinned by a capitalist economy that encourages creative

destruction. While the laws make it easy for companies to shed workers and
implement transformative business models, employees are supported by
generous social welfare programs.4
The result is a system that treats all citizens equally and encourages workforce
participation.5 Gender equality is a hallmark trait of the culture that results in not
only a high degree of workplace participation by women but also a high level of
parental engagement by men.6
Creative Destruction: Out With the Old, in With the New

What Is Creative Destruction?

Creative destruction is the dismantling of long-standing practices in order to make

way for innovation and is seen as a driving force of capitalism.

KEY TAKEAWAYS

 Creative destruction describes the deliberate dismantling of established

processes in order to make way for improved methods of production.
 Creative destruction is most often used to describe disruptive technologies
such as the railroads or, in our own time, the internet.
 The term was coined in the early 1940s by economist Joseph Schumpeter,
who observed real-life examples of creative destruction, such as Henry
Ford’s assembly line.
 Creative destruction can be seen across many different industries such as
technology, retail, and finance.
 Creative destruction often has unintended consequences such as temporary
losses of jobs, environmental issues, or inequity.

Limitations of Creative Destruction

Though creative destruction can lead to many long-term positive aspects of

economic growth and innovation, it does come with downsides. As old industries
and technologies are replaced, jobs may be lost. This can lead to unemployment
and hardship for those who are displaced due to the nature of their previous
employment relating to an antiquated industry. It can also take time for new jobs
and industries to emerge.

The benefits of creative destruction may also not be evenly distributed. Wealth and
power may become concentrated in the hands of a few individuals or companies
that are able to succeed in the new markets. This is often the case for those who
have the best access to power, capital, or influence. Those who have already
succeeded are also the most likely to have the best opportunity to embark on
creative destruction.

The process of creative destruction may also have negative environmental

consequences. New technologies and products may have unforeseen
environmental impacts that are not immediately apparent, and the process of
replacing old technologies with new ones may also have an environmental cost. It
may sometimes take years for enough evidence has been collected to truly see the
long-term implications of certain forms of innovation.

Creative Destruction Examples

Examples of creative destruction in history include Henry Ford's assembly line and
how it revolutionized the automobile manufacturing industry. However, it also
displaced older markets and forced many laborers out of work.

The internet is perhaps the most all-encompassing example of creative destruction,

where the losers were not only retail clerks and their employers but also bank
tellers, secretaries, and travel agents. The mobile internet added many more
losers, from taxi cab drivers to mapmakers.

The winners, beyond the obvious example of programmers, might be just as

numerous. The entertainment industry was turned upside down by the internet, but
its need for creative talent and product remains the same or greater. The internet
destroyed many small businesses but created many new ones online.

The point, as Schumpeter noted, is that an evolutionary process rewards

improvements and innovations and punishes less efficient ways of organizing
resources. The trend line is toward progress, growth, and higher standards of
living overall.

Why Is Creative Destruction a Good Thing?

While creative destruction can cause short-term pain and job losses, it is generally
seen as a positive force for long-term economic growth and progress. Creative
destruction is driven by innovation, which is a key driver of economic growth.
Creative destruction also encourages competition, which helps to keep prices low
and quality high. Last, it may help the economy become more resilient by breaking
up monopolies and reducing reliance on outdated industries or technologies.

What Emerges From Creative Destruction?

Creative destruction can give rise to entirely new industries that did not exist
before. For example, the rise of the internet has created new industries, such as e-
commerce, social media, and digital marketing. This also means that existing
products and services are replaced by new innovations which can lead to brand
new business models. Last, each of these items mentioned above can result in new
jobs or employment sectors.
STATE CAPITALISM
Statecapitalism isan economicsystem inwhichthe state undertakes business and c
ommercial (i.e. for-profit) economic activity and where the means of
production are nationalized as state-owned enterprises (including the processes
of capital accumulation, centralized management and wage labor). The definition
can also include the state dominance of corporatized government agencies
(agencies organized along business-management practices) or of public
companies such as publicly listed corporations in which the state has controlling
shares.[1]
A state capitalist country is one where the government controls the economy and
essentially acts like a single huge corporation, extracting surplus value from the
workforce in order to invest it in further production. [2] This designation applies
regardless of the political aims of the state, even if the state is nominally socialist.
[3]
Some scholars argue that the economy of the Soviet Union and of the Eastern
Bloc countries modeled after it, including Maoist China, were state capitalist
systems, and some western commentators believe that the current economies of
China and Singapore also constitute a mixture of state-capitalism with private-
capitalism.[4][5][6][7][8][9]
State capitalism is used by various authors in reference to a private capitalist
economy controlled by a state, i.e. a private economy that is subject to economic
planning and interventionism. It has also been used to describe the controlled
economies of the Great Powers during World War I.[10] Alternatively, state capitalism
may refer to an economic system where the means of production are privately
owned, but the state has considerable control over the allocation
of credit and investment.[11] This was the case of Western European countries during
the post-war consensus and of France during the period of dirigisme after World
War II.[12] Other examples include Singapore under Lee Kuan Yew[13][14][15][16] and
Turkey, as well as military dictatorships during the Cold War and fascist
regimes such as Nazi Germany.[17][18][19][20]
State capitalism has also come to be used (sometimes interchangeably with state
monopoly capitalism) to describe a system where the state intervenes in the
economy to protect and advance the interests of large-scale businesses. Noam
Chomsky, a libertarian socialist, applies the term 'state capitalism' to the economy
of the United States, where large enterprises that are deemed "too big to fail"
receive publicly funded government bailouts that mitigate the firms' assumption of
risk and undermine market laws, and where private production is largely funded by
the state at public expense, but private owners reap the profits. [21][22][23] This practice
is held in contrast with the ideals of both socialism and laissez-faire capitalism.[24]
There are various theories and critiques of state capitalism, some of which existed
before the October Revolution. The common themes among them identify that the
workers do not meaningfully control the means of production and that
capitalist social relations and production for profit still occur within state capitalism,
fundamentally retaining the capitalist mode of production. In Socialism: Utopian and
Scientific (1880), Friedrich Engels argued that state ownership does not do away
with capitalism by itself, but rather would be the final stage of capitalism, consisting
of ownership and management of large-scale production and communication by
the bourgeois state. He argued that the tools for ending capitalism are found in
state capitalism.[25] In Imperialism, the Highest Stage of Capitalism (1916), Lenin
claimed that World War I had transformed laissez-faire capitalism into
the monopolist state capitalism.[26]

"Too big to fail" (TBTF) is a theory in banking and finance that asserts that
certain corporations, particularly financial institutions, are so large and so
interconnected that their failure would be disastrous to the greater economic
system, and therefore should be supported by government when they face potential
failure.[1] The colloquial term "too big to fail" was popularized by U.S.
Congressman Stewart McKinney in a 1984 Congressional hearing, discussing
the Federal Deposit Insurance Corporation's intervention with Continental Illinois.
[2]
The term had previously been used occasionally in the press, [3] and similar
thinking had motivated earlier bank bailouts. [4]
The term emerged as prominent in public discourse following the global financial
crisis of 2007–2008.[5][6] Critics see the policy as counterproductive and that large
banks or other institutions should be left to fail if their risk management is not
effective.[7][8] Some critics, such as economist Alan Greenspan, believe that such
large organizations should be deliberately broken up: "If they're too big to fail,
they're too big."[9] Some economists such as Paul Krugman hold that financial
crises arise principally from banks being under-regulated rather than their size,
using the widespread collapse of small banks in the Great Depression to illustrate
this argument.[10][11][12][13]
In 2014, the International Monetary Fund and others said the problem still had not
been dealt with.[14][15] While the individual components of the new regulation for
systemically important banks (additional capital requirements, enhanced
supervision and resolution regimes) likely reduced the prevalence of TBTF, the fact
that there is a definite list of systemically important banks considered TBTF has a
partly offsetting impact.[16]

Definition[edit]
Federal Reserve Chair Ben Bernanke also defined the term in 2010: "A too-big-to-fail
firm is one whose size, complexity, interconnectedness, and critical functions are
such that, should the firm go unexpectedly into liquidation, the rest of the financial
system and the economy would face severe adverse consequences." He continued
that: "Governments provide support to too-big-to-fail firms in a crisis not out of
favoritism or particular concern for the management, owners, or creditors of the
firm, but because they recognize that the consequences for the broader economy of
allowing a disorderly failure greatly outweigh the costs of avoiding the failure in
some way. Common means of avoiding failure include facilitating a merger,
providing credit, or injecting government capital, all of which protect at least some
creditors who otherwise would have suffered losses. ... If the [subprime mortgage
crisis] has a single lesson, it is that the too-big-to-fail problem must be solved." [17]
Bernanke cited several risks with too-big-to-fail institutions: [17]

1. These firms generate severe moral hazard: "If creditors believe that an
institution will not be allowed to fail, they will not demand as much
compensation for risks as they otherwise would, thus weakening market
discipline; nor will they invest as many resources in monitoring the firm's
risk-taking. As a result, too-big-to-fail firms will tend to take more risk than
desirable, in the expectation that they will receive assistance if their bets go
bad."
2. It creates an uneven playing field between big and small firms. "This unfair
competition, together with the incentive to grow that too-big-to-fail provides,
increases risk and artificially raises the market share of too-big-to-fail firms,
to the detriment of economic efficiency as well as financial stability."
3. The firms themselves become major risks to overall financial stability,
particularly in the absence of adequate resolution tools. Bernanke wrote:
"The failure of Lehman Brothers and the near-failure of several other large,
complex firms significantly worsened the crisis and the recession by
disrupting financial markets, impeding credit flows, inducing sharp declines
in asset prices, and hurting confidence. The failures of smaller, less
interconnected firms, though certainly of significant concern, have not had
substantial effects on the stability of the financial system as a whole." [17]
Analysis[edit]
Bank size and concentration[edit]
The largest U.S. banks continue to grow larger while the concentration of bank
assets increases. The largest six U.S. banks had assets of $9,576 billion as of year-
end 2012, per their 2012 annual reports (SEC Form 10K). The top 5 U.S. banks had
approximately 30% of the U.S. banking assets in 1998; this rose to 45% by 2008
and to 48% by 2010, before falling to 47% in 2011. [27]
This concentration continued despite the subprime mortgage crisis and its
aftermath. During March 2008, JP Morgan Chase acquired investment bank Bear
Stearns. Bank of America acquired investment bank Merrill Lynch in September
2008. Wells Fargo acquired Wachovia in January 2009. Investment banks Goldman
Sachs and Morgan Stanley obtained depository bank holding company charters,
which gave them access to additional Federal Reserve credit lines. [22]
Bank deposits for all U.S. banks ranged between approximately 60–70% of GDP
from 1960 to 2006, then jumped during the crisis to a peak of nearly 84% in 2009
before falling to 77% by 2011.[28]
The number of U.S. commercial and savings bank institutions reached a peak of
14,495 in 1984; this fell to 6,532 by the end of 2010. The ten largest U.S. banks
held nearly 50% of U.S. deposits as of 2011. [29]
Implicit guarantee subsidy[edit]
Since the full amount of the deposits and debts of "too big to fail" banks are
effectively guaranteed by the government, large depositors and investors view
investments with these banks as a safer investment than deposits with smaller
banks. Therefore, large banks are able to pay lower interest rates to depositors and
investors than small banks are obliged to pay.
In October 2009, Sheila Bair, at that time the Chairperson of the FDIC, commented:
"'Too big to fail' has become worse. It's become explicit when it was implicit before.
It creates competitive disparities between large and small institutions, because
everybody knows small institutions can fail. So it's more expensive for them to raise
capital and secure funding." [30] Research has shown that banking organizations are
willing to pay an added premium for mergers that will put them over the asset sizes
that are commonly viewed as the thresholds for being too big to fail. [31]
A study conducted by the Center for Economic and Policy Research found that the
difference between the cost of funds for banks with more than $100 billion in assets
and the cost of funds for smaller banks widened dramatically after the formalization
of the "too big to fail" policy in the U.S. in the fourth quarter of 2008. [32] This shift in
the large banks' cost of funds was in effect equivalent to an indirect "too big to fail"
subsidy of $34 billion per year to the 18 U.S. banks with more than $100 billion in
assets.
The editors of Bloomberg View estimated there was an $83 billion annual subsidy to
the 10 largest United States banks, reflecting a funding advantage of 0.8
percentage points due to implicit government support, meaning the profits of such
banks are largely a taxpayer-backed illusion. [33][34][35]
Another study by Frederic Schweikhard and Zoe Tsesmelidakis [36] estimated the
amount saved by America's biggest banks from having a perceived safety net of a
government bailout was $120 billion from 2007 to 2010. [37] For America's biggest
banks the estimated savings was $53 billion for Citigroup, $32 billion for Bank of
America, $10 billion for JPMorgan, $8 billion for Wells Fargo, and $4 billion for AIG.
The study noted that passage of the Dodd–Frank Act—which promised an end to
bailouts—did nothing to raise the price of credit (i.e., lower the implicit subsidy) for
the "too-big-to-fail" institutions.[37]
One 2013 study (Acharya, Anginer, and Warburton) measured the funding cost
advantage provided by implicit government support to large financial institutions.
Credit spreads were lower by approximately 28 basis points (0.28%) on average
over the 1990–2010 period, with a peak of more than 120 basis points in 2009. In
2010, the implicit subsidy was worth nearly $100 billion to the largest banks. The
authors concluded: "Passage of Dodd–Frank did not eliminate expectations of
government support."[38]
Economist Randall S. Kroszner summarized several approaches to evaluating the
funding cost differential between large and small banks. The paper discusses
methodology and does not specifically answer the question of whether larger
institutions have an advantage.[39]
During November 2013, the Moody's credit rating agency reported that it would no
longer assume the eight largest U.S. banks would receive government support in
the event they faced bankruptcy. However, the GAO reported that politicians and
regulators would still face significant pressure to bail out large banks and their
creditors in the event of a financial crisis. [40]
Moral hazard[edit]
See also: Moral hazard

critics have argued that "The way things are now banks reap profits if their trades
pan out, but taxpayers can be stuck picking up the tab if their big bets sink the
company."[41] Additionally, as discussed by Senator Bernie Sanders, if taxpayers are
contributing to rescue these companies from bankruptcy, they "should be rewarded
for assuming the risk by sharing in the gains that result from this government
bailout".[42]

In this sense, Alan Greenspan affirms that, "Failure is an integral part, a necessary
part of a market system."[43] Thereby, although the financial institutions that were
bailed out were indeed important to the financial system, the fact that they took
risk beyond what they would otherwise, should be enough for the Government to let
them face the consequences of their actions. It would have been a lesson to
motivate institutions to proceed differently next time.
Inability to prosecute[edit]
The political power of large banks and risks of economic impact from major
prosecutions has led to use of the term "too big to jail" regarding the leaders of
large financial institutions.[44]
On March 6, 2013, then United States Attorney General Eric Holder testified to
the Senate Judiciary Committee that the size of large financial institutions has made
it difficult for the Justice Department to bring criminal charges when they are
suspected of crimes, because such charges can threaten the existence of a bank
and therefore their interconnectedness may endanger the national or global
economy. "Some of these institutions have become too large," Holder told the
Committee. "It has an inhibiting impact on our ability to bring resolutions that I think
would be more appropriate." In this he contradicted earlier written testimony from a
deputy assistant attorney general, who defended the Justice Department's
"vigorous enforcement against wrongdoing". [45][46] Holder has financial ties to at
least one law firm benefiting from de facto immunity to prosecution, and
prosecution rates against crimes by large financial institutions are at 20-year lows.
[47]

Four days later, Federal Reserve Bank of Dallas President Richard W. Fisher and
Vice-President Harvey Rosenblum co-authored a Wall Street Journal op-ed about the
failure of the Dodd–Frank Wall Street Reform and Consumer Protection Act to
provide for adequate regulation of large financial institutions. In advance of his
March 8 speech to the Conservative Political Action Conference, Fisher proposed
requiring breaking up large banks into smaller banks so that they are "too small to
save", advocating the withholding from mega-banks access to both Federal Deposit
Insurance and Federal Reserve discount window, and requiring disclosure of this
lack of federal insurance and financial solvency support to their customers. This was
the first time such a proposal had been made by a high-ranking U.S. banking official
or a prominent conservative.[48] Other conservatives including Thomas Hoenig, Ed
Prescott, Glenn Hubbard, and David Vitter also advocated breaking up the largest
banks,[49] but liberal commentator Matthew Yglesias questioned their motives and
the existence of a true bipartisan consensus. [50]
In a January 29, 2013, letter to Holder, Senators Sherrod Brown (D-Ohio)
and Charles Grassley (R-Iowa) had criticized this Justice Department policy citing
"important questions about the Justice Department's prosecutorial philosophy".
[51]
After receipt of a DoJ response letter, Brown and Grassley issued a statement
saying, "The Justice Department's response is aggressively evasive. It does not
answer our questions. We want to know how and why the Justice Department has
determined that certain financial institutions are 'too big to jail' and that
prosecuting those institutions would damage the financial system." [52]
Kareem Serageldin pleaded guilty on November 22, 2013, for his role in inflating the
value of mortgage bonds as the housing market collapsed, and was sentenced to
two and a half years in prison. [53][54] As of April 30, 2014, Serageldin remains the
"only Wall Street executive prosecuted as a result of the financial crisis" that
triggered the Great Recession.[55] The much smaller Abacus Federal Savings
Bank was prosecuted (but exonerated after a jury trial) for selling fraudulent
mortgages to Fannie Mae.

Solutions[edit]
The proposed solutions to the "too big to fail" issue are controversial. Some options
include breaking up the banks, introducing regulations to reduce risk, adding higher
bank taxes for larger institutions, and increasing monitoring through oversight
committees.
Breaking up the largest banks[edit]
More than fifty economists, financial experts, bankers, finance industry groups, and
banks themselves have called for breaking up large banks into smaller institutions.
[56]
This is advocated both to limit risk to the financial system posed by the largest
banks as well as to limit their political influence. [57]
For example, economist Joseph Stiglitz wrote in 2009 that: "In the United States, the
United Kingdom, and elsewhere, large banks have been responsible for the bulk of
the [bailout] cost to taxpayers. America has let 106 smaller banks go bankrupt this
year alone. It's the mega-banks that present the mega-costs ... banks that are too
big to fail are too big to exist. If they continue to exist, they must exist in what is
sometimes called a 'utility' model, meaning that they are heavily regulated." He
also wrote about several causes of the crisis related to the size, incentives, and
interconnection of the mega-banks.[58]
Reducing risk-taking through regulation[edit]
Main article: Dodd–Frank Wall Street Reform and Consumer Protection Act

The United States passed the Dodd–Frank Act in July 2010 to help strengthen
regulation of the financial system in the wake of the subprime mortgage crisis that
began in 2007. Dodd–Frank requires banks to reduce their risk taking, by requiring
greater financial cushions (i.e., lower leverage ratios or higher capital ratios),
among other steps.
Banks are required to maintain a ratio of high-quality, easily sold assets, in the
event of financial difficulty either at the bank or in the financial system. These are
liquidity requirements.
Since the 2008 crisis, regulators have worked with banks to reduce leverage ratios.
For example, the leverage ratio for investment bank Goldman Sachs declined from a
peak of 25.2 during 2007 to 11.4 in 2012, indicating a much-reduced risk profile. [59]
The Dodd–Frank Act includes a form of the Volcker Rule, a proposal to ban
proprietary trading by commercial banks. Proprietary trading refers to using
customer deposits to speculate in risky assets for the benefit of the bank rather
than customers. The Dodd–Frank Act as enacted into law includes several loopholes
to the ban, allowing proprietary trading in certain circumstances. However, the
regulations required to enforce these elements of the law were not implemented
during 2013 and were under attack by bank lobbying efforts. [60][61][62]
Another major banking regulation, the Glass–Steagall Act from 1933, was effectively
repealed in 1999. The repeal allowed depository banks to enter into additional lines
of business. Senators John McCain and Elizabeth Warren proposed bringing back
Glass–Steagall during 2013.[63]
Too big to fail tax[edit]
Economist Willem Buiter proposes a tax to internalize the massive costs inflicted by
"too big to fail" institution. "When size creates externalities, do what you would do
with any negative externality: tax it. The other way to limit size is to tax size. This
can be done through capital requirements that are progressive in the size of the
business (as measured by value added, the size of the balance sheet or some other
metric). Such measures for preventing the New Darwinism of the survival of the
fittest and the politically best connected should be distinguished from regulatory
interventions based on the narrow leverage ratio aimed at regulating risk
(regardless of size, except for a de minimis lower limit)." [64]

The 2007–2008 financial crisis, or Global Financial Crisis (GFC), was a severe
worldwide economic crisis that occurred in the early 21st century. It was the most
serious financial crisis since the Great Depression (1929). Predatory
lending targeting low-income homebuyers,[1] excessive risk-taking by
[2]
global financial institutions, and the bursting of the United States housing
bubble culminated in a "perfect storm".
Mortgage-backed securities (MBS) tied to American real estate, as well as a vast
web of derivatives linked to those MBS, collapsed in value. Financial institutions
worldwide suffered severe damage,[3] reaching a climax with the bankruptcy of
Lehman Brothers on September 15, 2008, and a subsequent international banking
crisis.[4]
The preconditioning for the financial crisis was complex and multi-causal. [5][6]
[7]
Almost two decades prior, the U.S. Congress had passed legislation encouraging
financing for affordable housing. [8] However, in 1999, parts of the Glass-Steagall
legislation, which had been adopted in 1933, were repealed, permitting financial
institutions to commingle their commercial (risk-averse) and proprietary
[9]
trading (risk-taking) operations. Arguably the largest contributor to the conditions
necessary for financial collapse was the rapid development in predatory financial
products which targeted low-income, low-information homebuyers who largely
belonged to racial minorities.[10] This market development went unattended by
regulators and thus caught the U.S. government by surprise.[11]
After the onset of the crisis, governments deployed massive bail-outs of financial
institutions and other palliative monetary and fiscal policies to prevent a collapse of
the global financial system.[12] In the U.S., the October 3, $800 billion Emergency
Economic Stabilization Act of 2008 failed to slow the economic free-fall, but the
similarly-sized American Recovery and Reinvestment Act of 2009, which included a
substantial payroll tax credit, saw economic indicators reverse and stabilize less
than a month after its February 17 enactment. [13] The crisis sparked the Great
Recession which resulted in increases in unemployment [14] and suicide,[15] and
decreases in institutional trust [16] and fertility,[17] among other metrics. The recession
was a significant precondition for the European debt crisis.
In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was
enacted in the US as a response to the crisis to "promote the financial stability of
the United States".[18] The Basel III capital and liquidity standards were also adopted
by countries around the world.[19][2

he crisis sparked the Great Recession, which, at the time, was the most severe
global recession since the Great Depression. [22][23][24][25][26][27] It was also followed by
the European debt crisis, which began with a deficit in Greece in late 2009, and
the 2008–2011 Icelandic financial crisis, which involved the bank failure of all three
of the major banks in Iceland and, relative to the size of its economy, was the
largest economic collapse suffered by any country in history. [28] It was among the
five worst financial crises the world had experienced and led to a loss of more than
$2 trillion from the global economy. [29][30] U.S. home mortgage debt relative
to GDP increased from an average of 46% during the 1990s to 73% during 2008,
reaching $10.5 trillion.[31] The increase in cash out refinancings, as home values
rose, fueled an increase in consumption that could no longer be sustained when
home prices declined.[32][33][34] Many financial institutions owned investments whose
value was based on home mortgages such as mortgage-backed securities, or credit
derivatives used to insure them against failure, which declined in value significantly.
[35][36][37]
The International Monetary Fund estimated that large U.S. and European
banks lost more than $1 trillion on toxic assets and from bad loans from January
2007 to September 2009.[38]
Lack of investor confidence in bank solvency and declines in credit availability led to
plummeting stock and commodity prices in late 2008 and early 2009. [39] The crisis
rapidly spread into a global economic shock, resulting in several bank failures.
[40]
Economies worldwide slowed during this period since credit tightened and
international trade declined.[41] Housing markets suffered and unemployment
soared, resulting in evictions and foreclosures. Several businesses failed.[42][43] From
its peak in the second quarter of 2007 at $61.4 trillion, household wealth in the
United States fell $11 trillion, to $59.4 trillion by the end of the first quarter of 2009,
resulting in a decline in consumption, then a decline in business investment. [44][45]
[46]
In the fourth quarter of 2008, the quarter-over-quarter decline in real GDP in the
U.S. was 8.4%.[47] The U.S. unemployment rate peaked at 11.0% in October 2009,
the highest rate since 1983 and roughly twice the pre-crisis rate. The average hours
per work week declined to 33, the lowest level since the government began
collecting the data in 1964.[48][49]
The economic crisis started in the U.S. but spread to the rest of the world. [42] U.S.
consumption accounted for more than a third of the growth in global consumption
between 2000 and 2007 and the rest of the world depended on the U.S. consumer
as a source of demand.[citation needed] Toxic securities were owned by corporate and
institutional investors globally. Derivatives such as credit default swaps also
increased the linkage between large financial institutions. The de-leveraging of
financial institutions, as assets were sold to pay back obligations that could not be
refinanced in frozen credit markets, further accelerated the solvency crisis and
caused a decrease in international trade. Reductions in the growth rates
of developing countries were due to falls in trade, commodity prices, investment
and remittances sent from migrant workers (example: Armenia [50]). States with
fragile political systems feared that investors from Western states would withdraw
their money because of the crisis.[51]
As part of national fiscal policy response to the Great Recession, governments and
central banks, including the Federal Reserve, the European Central Bank and
the Bank of England, provided then-unprecedented trillions of dollars
in bailouts and stimulus, including expansive fiscal policy and monetary policy to
offset the decline in consumption and lending capacity, avoid a further collapse,
encourage lending, restore faith in the integral commercial paper markets, avoid
the risk of a deflationary spiral, and provide banks with enough funds to allow
customers to make withdrawals. In effect, the central banks went from being the
"lender of last resort" to the "lender of only resort" for a significant portion of the
economy. In some cases the Fed was considered the "buyer of last resort". [52][53][54][55]
[56]
During the fourth quarter of 2008, these central banks purchased US$2.5 trillion
of government debt and troubled private assets from banks. This was the largest
liquidity injection into the credit market, and the largest monetary policy action in
world history. Following a model initiated by the 2008 United Kingdom bank rescue
package,[57][58] the governments of European nations and the United States
guaranteed the debt issued by their banks and raised the capital of their national
banking systems, ultimately purchasing $1.5 trillion newly issued preferred stock in
major banks.[46] The Federal Reserve created then-significant amounts of new
currency as a method to combat the liquidity trap.[59]
Bailouts came in the form of trillions of dollars of loans, asset purchases,
guarantees, and direct spending. [60] Significant controversy accompanied the
bailouts, such as in the case of the AIG bonus payments controversy, leading to the
development of a variety of "decision making frameworks", to help balance
competing policy interests during times of financial crisis. [61] Alistair Darling, the
U.K.'s Chancellor of the Exchequer at the time of the crisis, stated in 2018 that
Britain came within hours of "a breakdown of law and order" the day that Royal
Bank of Scotland was bailed-out.[62] Instead of financing more domestic loans, some
banks instead spent some of the stimulus money in more profitable areas such as
investing in emerging markets and foreign currencies. [63]
China increased its standing as a responsible global actor during the crisis. [64] When
Western countries were nearing financial disaster, China created credit for spending
on infrastructure.[64] This both helped stabilize the global economy and it also
provided an opportunity for China to retool its own infrastructure. [64] China's
exceptional performance during the crisis made its elites more confident that the
global balance of power was shifting in China's favor. [65]
In July 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was
enacted in the United States to "promote the financial stability of the United
States".[66] The Basel III capital and liquidity standards were adopted worldwide.
[67]
Since the 2008 financial crisis, consumer regulators in America have more
closely supervised sellers of credit cards and home mortgages in order to deter
anticompetitive practices that led to the crisis. [68]: 1311
At least two major reports on the causes of the crisis were produced by the U.S.
Congress: the Financial Crisis Inquiry Commission report, released January 2011,
and a report by the United States Senate Homeland Security Permanent
Subcommittee on Investigations entitled Wall Street and the Financial Crisis:
Anatomy of a Financial Collapse, released April 2011.
In total, 47 bankers served jail time as a result of the crisis, over half of which were
from Iceland, where the crisis was the most severe and led to the collapse of all
three major Icelandic banks.[69] In April 2012, Geir Haarde of Iceland became the
only politician to be convicted as a result of the crisis. [70][71] Only one banker in the
United States served jail time as a result of the crisis, Kareem Serageldin, a banker
at Credit Suisse who was sentenced to 30 months in jail and returned $24.6 million
in compensation for manipulating bond prices to hide $1 billion of losses. [72][69] No
individuals in the United Kingdom were convicted as a result of the crisis. [73]
[74]
Goldman Sachs paid $550 million to settle fraud charges after allegedly
anticipating the crisis and selling toxic investments to its clients. [75]
With fewer resources to risk in creative destruction, the number of patent
applications was flat, compared to exponential increases in patent application in
prior years.[76]

Typical American families did not fare well, nor did the "wealthy-but-not-wealthiest"
families just beneath the pyramid's top. However, half of the poorest families in the
United States did not have wealth declines at all during the crisis because they
generally did not own financial investments whose value can fluctuate. The Federal
Reserve surveyed 4,000 households between 2007 and 2009, and found that the
total wealth of 63% of all Americans declined in that period and 77% of the richest
families had a decrease in total wealth, while only 50% of those on the bottom of
the pyramid suffered a decrease.[77][78][79]

Subprime lending[edit]
The relaxing of credit lending standards by investment banks and commercial banks
allowed for a significant increase in subprime lending. Subprime had not become
less risky; Wall Street just accepted this higher risk. [256]
Due to competition between mortgage lenders for revenue and market share, and
when the supply of creditworthy borrowers was limited, mortgage lenders relaxed
underwriting standards and originated riskier mortgages to less creditworthy
borrowers. In the view of some analysts, the relatively conservative government-
sponsored enterprises (GSEs) policed mortgage originators and maintained
relatively high underwriting standards prior to 2003. However, as market power
shifted from securitizers to originators, and as intense competition from private
securitizers undermined GSE power, mortgage standards declined and risky loans
proliferated. The riskiest loans were originated in 2004–2007, the years of the most
intense competition between securitizers and the lowest market share for the GSEs.
The GSEs eventually relaxed their standards to try to catch up with the private
banks.[257][258]
A contrarian view is that Fannie Mae and Freddie Mac led the way to relaxed
underwriting standards, starting in 1995, by advocating the use of easy-to-qualify
automated underwriting and appraisal systems, by designing no-down-payment
products issued by lenders, by the promotion of thousands of small mortgage
brokers, and by their close relationship to subprime loan aggregators such
as Countrywide.[259][260]
Depending on how "subprime" mortgages are defined, they remained below 10% of
all mortgage originations until 2004, when they rose to nearly 20% and remained
there through the 2005–2006 peak of the United States housing bubble.[261]
Easy credit conditions[edit]
Lower interest rates encouraged borrowing. From 2000 to 2003, the Federal
Reserve lowered the federal funds rate target from 6.5% to 1.0%.[295][296] This was
done to soften the effects of the collapse of the dot-com bubble and the September
11 attacks, as well as to combat a perceived risk of deflation.[297] As early as 2002, it
was apparent that credit was fueling housing instead of business investment as
some economists went so far as to advocate that the Fed "needs to create a
housing bubble to replace the Nasdaq bubble". [298] Moreover, empirical studies using
data from advanced countries show that excessive credit growth contributed
greatly to the severity of the crisis.[299]
Additional downward pressure on interest rates was created by rising U.S. current
account deficit, which peaked along with the housing bubble in 2006. Federal
Reserve chairman Ben Bernanke explained how trade deficits required the U.S. to
borrow money from abroad, in the process bidding up bond prices and lowering
interest rates.[300]
Bernanke explained that between 1996 and 2004, the U.S. current account deficit
increased by $650 billion, from 1.5% to 5.8% of GDP. Financing these deficits
required the country to borrow large sums from abroad, much of it from countries
running trade surpluses. These were mainly the emerging economies in Asia and oil-
exporting nations. The balance of payments identity requires that a country (such
as the US) running a current account deficit also have a capital
account (investment) surplus of the same amount. Hence large and growing
amounts of foreign funds (capital) flowed into the U.S. to finance its imports.
All of this created demand for various types of financial assets, raising the prices of
those assets while lowering interest rates. Foreign investors had these funds to lend
either because they had very high personal savings rates (as high as 40% in China)
or because of high oil prices. Ben Bernanke referred to this as a "saving glut".[301]
A flood of funds (capital or liquidity) reached the U.S. financial markets. Foreign
governments supplied funds by purchasing Treasury bonds and thus avoided much
of the direct effect of the crisis. U.S. households, used funds borrowed from
foreigners to finance consumption or to bid up the prices of housing and financial
assets. Financial institutions invested foreign funds in mortgage-backed securities.
[citation needed]
The Fed then raised the Fed funds rate significantly between July 2004 and July
2006.[302] This contributed to an increase in 1-year and 5-year adjustable-rate
mortgage (ARM) rates, making ARM interest rate resets more expensive for
homeowners.[303] This may have also contributed to the deflating of the housing
bubble, as asset prices generally move inversely to interest rates, and it became
riskier to speculate in housing.[304][305] U.S. housing and financial assets dramatically
declined in value after the housing bubble burst. [306][46]
Predatory lending[edit]
Predatory lending refers to the practice of unscrupulous lenders, enticing borrowers
to enter into "unsafe" or "unsound" secured loans for inappropriate purposes. [311][312]
[313]

In June 2008, Countrywide Financial was sued by then California Attorney

General Jerry Brown for "unfair business practices" and "false advertising", alleging
that Countrywide used "deceptive tactics to push homeowners into complicated,
risky, and expensive loans so that the company could sell as many loans as possible
to third-party investors".[314] In May 2009, Bank of America modified 64,000
Countrywide loans as a result. [315] When housing prices decreased, homeowners in
ARMs then had little incentive to pay their monthly payments, since their home
equity had disappeared. This caused Countrywide's financial condition to
deteriorate, ultimately resulting in a decision by the Office of Thrift Supervision to
seize the lender. One Countrywide employee—who would later plead guilty to two
counts of wire fraud and spent 18 months in prison—stated that, "If you had a pulse,
we gave you a loan."[316]
Former employees from Ameriquest, which was United States' leading wholesale
lender, described a system in which they were pushed to falsify mortgage
documents and then sell the mortgages to Wall Street banks eager to make fast
profits. There is growing evidence that such mortgage frauds may be a cause of the
crisis.[317]
Systemic crisis of capitalism[edit]
In a 1998 book, John McMurtry suggested that a financial crisis is a systemic crisis
of capitalism itself.[370]
In his 1978 book, The Downfall of Capitalism and Communism, Ravi Batra suggests
that growing inequality of financial capitalism produces speculative bubbles that
burst and result in depression and major political changes. He also suggested that a
"demand gap" related to differing wage and productivity growth explains deficit and
debt dynamics important to stock market developments. [371]
John Bellamy Foster, a political economy analyst and editor of the Monthly Review,
believed that the decrease in GDP growth rates since the early 1970s is due to
increasing market saturation.[372]
Marxian economics followers Andrew Kliman, Michael Roberts, and Guglielmo
Carchedi, in contradistinction to the Monthly Review school represented by Foster,
pointed to capitalism's long-term tendency of the rate of profit to fall as the
underlying cause of crises generally. From this point of view, the problem was the
inability of capital to grow or accumulate at sufficient rates through productive
investment alone. Low rates of profit in productive sectors led to speculative
investment in riskier assets, where there was potential for greater return on
investment. The speculative frenzy of the late 90s and 2000s was, in this view, a
consequence of a rising organic composition of capital, expressed through the fall in
the rate of profit. According to Michael Roberts, the fall in the rate of profit
"eventually triggered the credit crunch of 2007 when credit could no longer support
profits".[373]
In 2005 book, The Battle for the Soul of Capitalism, John C. Bogle wrote that
"Corporate America went astray largely because the power of managers went
virtually unchecked by our gatekeepers for far too long". Echoing the central thesis
of James Burnham's 1941 seminal book, The Managerial Revolution, Bogle cites
issues, including:[374]
 that "Manager's capitalism" replaced "owner's capitalism", meaning
management runs the firm for its benefit rather than for the shareholders, a
variation on the principal–agent problem;
 the burgeoning executive compensation;
 the management of earnings, mainly a focus on share price rather than the
creation of genuine value; and
 the failure of gatekeepers, including auditors, boards of directors, Wall Street
analysts, and career politicians.
In his book The Big Mo, Mark Roeder, a former executive at the Swiss-
based UBS Bank, suggested that large-scale momentum, or The Big Mo "played a
pivotal role" in the financial crisis. Roeder suggested that "recent technological
advances, such as computer-driven trading programs, together with the
increasingly interconnected nature of markets, has magnified the momentum
effect. This has made the financial sector inherently unstable." [375]
Robert Reich attributed the economic downturn to the stagnation of wages in the
United States, particularly those of the hourly workers who comprise 80% of the
workforce. This stagnation forced the population to borrow to meet the cost of
living.[376]
Economists Ailsa McKay and Margunn Bjørnholt argued that the financial crisis and
the response to it revealed a crisis of ideas in mainstream economics and within the
economics profession, and call for a reshaping of both the economy, economic
theory and the economics profession.[377]
Wrong banking model: resilience of credit unions[edit]
A report by the International Labour Organization concluded that cooperative
banking institutions were less likely to fail than their competitors during the crisis.
The cooperative banking sector had 20% market share of the European banking
sector, but accounted for only 7% of all the write-downs and losses between the
third quarter of 2007 and first quarter of 2011. [378] In 2008, in the U.S., the rate of
commercial bank failures was almost triple that of credit unions, and almost five
times the credit union rate in 2010.[379] Credit unions increased their lending to
small- and medium-sized businesses while overall lending to those businesses
decreased.[380]

Economists who predicted the crisis[edit]

Economists, particularly followers of mainstream economics, mostly failed to predict
the crisis.[381] The Wharton School of the University of Pennsylvania's online business
journal examined why economists failed to predict a major global financial crisis and
concluded that economists used mathematical models that failed to account for the
critical roles that banks and other financial institutions, as opposed to producers
and consumers of goods and services, play in the economy. [382]
Several followers of heterodox economics predicted the crisis, with varying
arguments. Dirk Bezemer[383] credits 12 economists with predicting the crisis: Dean
Baker (US), Wynne Godley (UK), Fred Harrison (UK), Michael Hudson (US), Eric
Janszen (US), Steve Keen (Australia), Jakob Broechner Madsen & Jens Kjaer
Sørensen (Denmark), Med Jones (US)[384] Kurt Richebächer (US), Nouriel
Roubini (US), Peter Schiff (US), and Robert Shiller (US).
Shiller, a founder of the Case–Shiller index that measures home prices, wrote an
article a year before the collapse of Lehman Brothers in which he predicted that a
slowing U.S. housing market would cause the housing bubble to burst, leading to
financial collapse.[385] Peter Schiff regularly appeared on television in the years
before the crisis and warned of the impending real estate collapse. [386]
There were other economists that did warn of a pending crisis. [387]
The former Governor of the Reserve Bank of India, Raghuram Rajan, had predicted
the crisis in 2005 when he became chief economist at the International Monetary
Fund. In 2005, at a celebration honoring Alan Greenspan, who was about to retire as
chairman of the US Federal Reserve, Rajan delivered a controversial paper that was
critical of the financial sector. [388] In that paper, Rajan "argued that disaster might
loom".[389] Rajan argued that financial sector managers were encouraged to "take
risks that generate severe adverse consequences with small probability but, in
return, offer generous compensation the rest of the time. These risks are known as
tail risks. But perhaps the most important concern is whether banks will be able to
provide liquidity to financial markets so that if the tail risk does materialize,
financial positions can be unwound and losses allocated so that the consequences
to the real economy are minimized."
Stock trader and financial risk engineer Nassim Nicholas Taleb, author of the 2007
book The Black Swan, spent years warning against the breakdown of the banking
system in particular and the economy in general owing to their use of and reliance
on bad risk models and reliance on forecasting, and framed the problem as part of
"robustness and fragility".[390][391] He also took action against the establishment view
by making a big financial bet on banking stocks and making a fortune from the
crisis ("They didn't listen, so I took their money"). [392] According to David
Brooks from The New York Times, "Taleb not only has an explanation for what's
happening, he saw it coming."[393]
Popular articles published in the mass media have led the general public to believe
that the majority of economists have failed in their obligation to predict the financial
crisis. For example, an article in The New York Times noted that economist Nouriel
Roubini warned of such crisis as early as September 2006, and stated that the
profession of economics is bad at predicting recessions. [394] According to The
Guardian, Roubini was ridiculed for predicting a collapse of the housing market and
worldwide recession, while The New York Times labelled him "Dr. Doom".[395]
In a 2012 article in the journal Japan and the World Economy, Andrew K. Rose and
Mark M. Spiegel used a Multiple Indicator Multiple Cause (MIMIC) model on a cross-
section of 107 countries to evaluate potential causes of the 2008 crisis. The authors
examined various economic indicators, ignoring contagion effects across countries.
The authors concluded: "We include over sixty potential causes of the crisis,
covering such categories as: financial system policies and conditions; asset price
appreciation in real estate and equity markets; international imbalances and foreign
reserve adequacy; macroeconomic policies; and institutional and geographic
features. Despite the fact that we use a wide number of possible causes in a flexible
statistical framework, we are unable to link most of the commonly cited causes of
the crisis to its incidence across countries. This negative finding in the cross-section
makes us skeptical of the accuracy of 'early warning' systems of potential crises,
which must also predict their timing." [396]
The Austrian School regarded the crisis as a vindication and classic example of a
predictable credit-fueled bubble caused by laxity in monetary supply. [397]
Predatory lending refers to unethical practices conducted by lending
organizations during a loan origination process that are unfair, deceptive, or
fraudulent. While there are no internationally agreed legal definitions for predatory
lending, a 2006 audit report from the office of inspector general of the US Federal
Deposit Insurance Corporation (FDIC) broadly defines predatory lending as
"imposing unfair and abusive loan terms on borrowers", though "unfair" and
"abusive" were not specifically defined. [1] Though there are laws against some of the
specific practices commonly identified as predatory, various federal agencies use
the phrase as a catch-all term for many specific illegal activities in the loan industry.
Predatory lending should not be confused with predatory mortgage servicing which
is mortgage practices described by critics as unfair, deceptive, or fraudulent
practices during the loan or mortgage servicing process, post loan origination.
One less contentious definition of the term is proposed by an investing website as
"the practice of a lender deceptively convincing borrowers to agree to unfair and
abusive loan terms, or systematically violating those terms in ways that make it
difficult for the borrower to defend against". [2][3] Other types of lending sometimes
also referred to as predatory include payday loans, certain types of credit cards,
mainly subprime,[4] or other forms of (again, often subprime) consumer debt, and
overdraft loans, when the interest rates are considered unreasonably high.
[5]
Although predatory lenders are most likely to target the less educated, the poor,
racial minorities, and the elderly, victims of predatory lending are represented
across all demographics.[6][7] The continued occurrence of predatory lending can be
viewed as a litmus test for the effectiveness of philanthropic lending that aims to
foster entrepreneurship.[8] Where such philanthropic lending initiatives
(microfinance) are widely available, loan sharks and other predatory lenders should
not continue to thrive.[9]
Predatory lending typically occurs on loans backed by some kind of collateral, such
as a car or house, so that if the borrower defaults on the loan, the lender can
repossess or foreclose and profit by selling the repossessed or foreclosed property.
Lenders may be accused of tricking a borrower into believing that an interest rate is
lower than it actually is, or that the borrower's ability to pay is greater than it
actually is. The lender, or others as agents of the lender, may well profit from
repossession or foreclosure upon the collateral.
Predatory lending is often compared to (but not to be confused with) loan sharking,
however a key the difference between the two is that loan sharks do not seriously
attempt to operate within the law.[citation needed]

Abusive or unfair lending practices[edit]

There are many lending practices which have been called abusive and labeled with
the term "predatory lending". There is a great deal of dispute between lenders and
consumer groups as to what exactly constitutes "unfair" or "predatory" practices,
but the following are sometimes cited:

 Unjustified risk-based pricing. This is the practice of charging more (in the
form of higher interest rates and fees) for extending credit to borrowers
identified by the lender as posing a greater credit risk. The lending industry
argues that risk-based pricing is a legitimate practice; since a greater
percentage of loans made to less creditworthy borrowers can be expected to go
into default, higher prices are necessary to obtain the same yield on the
portfolio as a whole. Some consumer groups argue that higher prices paid by
more vulnerable consumers cannot always be justified by increased credit risk.
[10]

 Single-premium credit insurance. This is the purchase of insurance which

will pay off the loan in case the homebuyer dies. It is more expensive than other
forms of insurance because it does not involve any medical checkups, but
customers almost always are not shown their choices, because usually the
lender is not licensed to sell other forms of insurance. In addition, this insurance
is usually financed into the loan which causes the loan to be more expensive,
but at the same time encourages people to buy the insurance because they do
not have to pay up front.
 Failure to present the loan price as negotiable. [10] Many lenders will
negotiate the price structure of the loan with borrowers. In some situations,
borrowers can even negotiate an outright reduction in the interest rate or other
charges on the loan. Consumer advocates argue that borrowers, especially
unsophisticated borrowers, are not aware of their ability to negotiate and might
even be under the mistaken impression that the lender is placing the borrower's
interests above its own. Thus, many borrowers do not take advantage of their
ability to negotiate.[10]
 Failure to clearly and accurately disclose terms and conditions,
particularly in cases where an unsophisticated borrower is involved. Mortgage
loans are complex transactions involving multiple parties and dozens of pages of
legal documents. In the most egregious of predatory cases, lenders or brokers
have not only misled borrowers but have also altered documents after they have
been signed.
 Short-term loans with disproportionally high fees, such as payday loans,
credit card late fees, checking account overdraft fees, and Tax Refund
Anticipation Loans, where the fee paid for advancing the money for a short
period of time works out to an annual interest rate significantly in excess of the
market rate for high-risk loans. The originators of such loans dispute that the
fees are interest.
 Servicing agent and securitization abuses. The mortgage servicing agent is
the entity that receives the mortgage payment, maintains the payment records,
provides borrowers with account statements, imposes late charges when the
payment is late, and pursues delinquent borrowers. A securitization is a financial
transaction in which assets, especially debt instruments, are pooled and
securities representing interests in the pool are issued. Most loans are subject to
being bundled and sold, and the rights to act as servicing agent sold, without
the consent of the borrower. A federal statute requires notice to the borrower of
a change in servicing agent, but does not protect the borrower from being held
delinquent on the note for payments made to the servicing agent who fails to
forward the payments to the owner of the note, especially if that servicing agent
goes bankrupt, and borrowers who have made all payments on time can find
themselves being foreclosed on and becoming unsecured creditors of the
servicing agent.[11] Foreclosures can sometimes be conducted without proper
notice to the borrower. In some states (see Texas Rule of Civil Procedure 746),
there is no defense against eviction, forcing the borrower to move and incur the
expense of hiring a lawyer and finding another place to live while litigating the
claim of the "new owner" to own the house, especially after it is resold one or
more times. When the debtor demands, under the best evidence rule, that the
current claimed note owner produce the original note with the debtor's signature
on it, the note owner typically is unable or unwilling to do so, and tries to
establish his or her claim with an affidavit that it is the owner, without proving it
is the "holder in due course", the traditional standard for a debt claim, and the
courts often allow them to do that. In the meantime, the note continues to be
traded, its physical whereabouts difficult to discover. [12]
OCC Advisory Letter AL 2003-2 describes predatory lending as including the
following:

 Loan "flipping" – frequent refinancings that result in little or no economic benefit

to the borrower and are undertaken with the primary or sole objective of
 generating additional loan fees, prepayment penalties, and fees from the
financing of credit-related products;
 Refinancings of special subsidized mortgages that result in the loss of beneficial
loan terms;
 "Packing" of excessive and sometimes "hidden" fees in the amount financed;
 Using loan terms or structures – such as negative amortization – to make it more
difficult or impossible for borrowers to reduce or repay their indebtedness;
 Using balloon payments to conceal the true burden of the financing and to force
borrowers into costly refinancing transactions or foreclosures;
 Targeting inappropriate or excessively expensive credit products to older
borrowers, to persons who are not financially sophisticated or who may be
otherwise vulnerable to abusive practices, and to persons who could qualify for
mainstream credit products and terms;
 Inadequate disclosure of the true costs, risks and, where necessary,
appropriateness to the borrower of loan transactions;
 The offering of single premium credit life insurance; and
 The use of mandatory arbitration clauses.

Predatory lending towards minority groups[edit]

Because many minority communities have been excluded from loans in the past,
they are and have been more vulnerable to deception. Oftentimes, they are
targeted because of these vulnerabilities. [13] Organizations and agencies
including ACORN,[14] HUD,[15] the American Civil Liberties Union,[16] United for a Fair
Economy[17] and more prove that predatory loans are disproportionately made in
poor and minority neighborhoods. Brokers and lenders preyed on these
neighborhoods with the knowledge that these people were often denied for loans
and the demand for loans were high. Lenders called these neighborhoods never-
never land. This created the subprime predatory lending world.
Subprime lenders specialize in B, C, and D paper. [18] Predatory lending is the
practice of overcharging a borrower for rates and fees, average fee should be 1%,
these lenders were charging borrowers over 5%. [19]
Consumers without challenged credit loans should be underwritten with prime
lenders. In 2004, 69% of borrowers were from subprime lending. The 2007
mortgage drop and economy fail were from over lending. [20]
Organizations such as AARP, Inner City Press, and ACORN have worked to stop what
they describe as predatory lending. ACORN has targeted specific companies such
as HSBC Finance, successfully forcing them to change their practices. [21]
Some subprime lending practices have raised concerns about mortgage
[22]
discrimination on the basis of race. African Americans and other minorities are
being disproportionately led to sub-prime mortgages with higher interest rates than
their white counterparts.[23] Even when median income levels were comparable,
home buyers in minority neighborhoods were more likely to get a loan from a
subprime lender, though not necessarily a sub-prime loan. [22]

Other targeted groups[edit]

In addition, studies by leading consumer groups have concluded that women have
become a key component to the subprime mortgage crunch. Professor Anita F.
Hill wrote that a large percentage of first-time home buyers were women, and that
loan officers took advantage of the lack of financial knowledge of many female loan
applicants.[24][25] Consumers believe that they are protected by consumer protection
laws, when their lender is really operating wholly outside the laws. Refer to 15
U.S.C. 1601 and 12 C.F.R. 226.
Media investigations have disclosed that mortgage lenders used bait-and-switch
salesmanship and fraud to take advantage of borrowers during the home-loan
boom. In February 2005, for example, reporters Michael Hudson and Scott Reckard
broke a story in the Los Angeles Times about "boiler room" sales tactics
at Ameriquest Mortgage, the nation's largest subprime lender. Hudson and Reckard
cited interviews and court statements by 32 former Ameriquest employees who said
the company had abused its customers and broken the law, "deceiving borrowers
about the terms of their loans, forging documents, falsifying appraisals and
fabricating borrowers' income to qualify them for loans they couldn't afford".
[26]
Ameriquest later agreed to pay a $325 million predatory lending settlement with
state authorities across the nation.

Disputes over predatory lending[edit]

Some subprime lending advocates, such as the National Home Equity Mortgage
Association (NHEMA), say many practices commonly called "predatory," particularly
the practice of risk-based pricing, are not actually predatory, and that many laws
aimed at reducing "predatory lending" significantly restrict the availability of
mortgage finance to lower-income borrowers. [27] Such parties consider predatory
lending a pejorative term.[28]

Underlying issues[edit]
There are many underlying issues in the predatory lending debate:

 Judicial practices: Some[who?] argue that much of the problem arises from a
tendency of the courts to favor lenders, and to shift the burden of proof of
compliance with the terms of the debt instrument to the debtor. According to
this argument, it should not be the duty of the borrower to make sure his or her
payments are getting to the current note-owner, but to make evidence that all
payments were made to the last known agent for collection sufficient to block or
reverse repossession or foreclosure, and eviction, and to cancel the debt if the
current note owner cannot prove he or she is the "holder in due course" by
producing the actual original debt instrument in court. [citation needed]
 Risk-based pricing: The basic idea is that borrowers who are thought of as
more likely to default on their loans should pay higher interest rates and finance
charges to compensate lenders for the increased risk. In essence, high returns
motivate lenders to lend to a group they might not otherwise lend to –
"subprime" or risky borrowers. Advocates [who?] of this system believe that it would
be unfair – or a poor business strategy – to raise interest rates globally to
accommodate risky borrowers, thus penalizing low-risk borrowers who are
unlikely to default. Opponents argue that the practice tends to
disproportionately create capital gains for the affluent while oppressing working-
class borrowers with modest financial resources. [29] Some[who?] people consider
risk-based pricing to be unfair in principle. [10] Lenders[who?] contend that interest
rates are generally set fairly considering the risk that the lender assumes, and
that competition between lenders will ensure availability of appropriately-priced
loans to high-risk customers. Still others [who?] feel that while the rates themselves
may be justifiable with respect to the risks, it is irresponsible for lenders to
encourage or allow borrowers with credit problems to take out high-priced loans.
[10]
For all of its pros and cons, risk-based pricing remains a universal practice in
bond markets and the insurance industry, and it is implied in the stock market
and in many other open-market venues; it is only controversial in the case of
consumer loans.[citation needed]
 Competition: Some[who?] believe that risk-based pricing is fair but feel that many
loans charge prices far above the risk, using the risk as an excuse to
overcharge. These criticisms are not levied on all products, but only on those
specifically deemed predatory. Proponents [who?] counter that competition among
lenders should prevent or reduce overcharging. [citation needed]
 Financial education: Many observers[who?] feel that competition in the markets
served by what critics describe as "predatory lenders" is not affected by price
because the targeted consumers are completely uneducated about the time
value of money and the concept of Annual percentage rate, a different measure
of price than what many are used to. [citation needed] Recent research looked at a
legislative experiment in which the State of Illinois, which required “high-risk”
mortgage applicants acquiring or refinancing properties in 10 specific zip codes
to submit loan offers from state-licensed lenders to review by HUD-certified
financial counselors. The experiment found that the legislation pushed some
borrowers to choose less risky loan products in order to avoid counseling. [30]
 Caveat emptor: There is an underlying debate about whether a lender should
be allowed to charge whatever it wants for a service, even if there is no
evidence that it attempted to deceive the consumer about the price. At issue
here is the belief that lending is a commodity and that the lending community
has an almost fiduciary duty to advise the borrower that funds can be obtained
more cheaply. Also at issue are certain financial products which appear to be
profitable only due to adverse selection or a lack of knowledge on the part of the
customers relative to the lenders. For example, some [who?] people allege
 that credit insurance would not be profitable to lending companies if only those
customers who had the right "fit" for the product actually bought it (i.e., only
those customers who were not able to get the generally cheaper term life
insurance).[10] Regardless, the majority of U.S. courts have refused to treat the
lender-borrower relationship as a fiduciary one and declined to impose a duty of
care upon lenders in the making of loans. [31][32] Thus, once the lender has
complied with all relevant statutory disclosure obligations, it remains solely the
borrower's problem to ascertain whether the loan they are getting is the right fit
for them.

Predatory borrowing[edit]
In an article in the January 17, 2008, New York Times, George Mason
University economics professor Tyler Cowen described "predatory borrowing" as
potentially a larger problem than predatory lending: [33]
"As much as 70 percent of recent early payment defaults had fraudulent
misrepresentations on their original loan applications, according to one
recent study. The research was done by BasePoint Analytics, which helps
banks and lenders identify fraudulent transactions; the study looked at more
than three million loans from 1997 to 2006, with a majority from 2005 to
2006. Applications with misrepresentations were also five times as likely to
go into default. Many of the frauds were simple rather than ingenious. In
some cases, borrowers who were asked to state their incomes just lied,
sometimes reporting five times actual income; other borrowers falsified
income documents by using computers."
Mortgage applications are usually completed by mortgage brokers or lenders' in-
house loan officers, rather than by borrowers themselves, making it difficult for
borrowers to control the information that was submitted with their applications.
A stated income loan application is done by the borrower, and no proof of
income is needed.[34] When the broker files the loan, they have to go by
whatever income is stated. This opened the doors for borrowers to be approved
for loans that they otherwise would not qualify for, or afford. However, lawsuits
and testimony from former industry insiders indicated that mortgage company
employees frequently were behind overstatements of borrower income on
mortgage applications.
Borrowers had little or no ability to manipulate other key data points that were
frequently falsified during the mortgage process. These included credit scores,
home appraisals and loan-to-value ratios. These were all factors that were under
the control of mortgage professionals. In 2012, for example, New York Attorney
General Eric Schneiderman reached a $7.8 million settlement of allegations that
a leading appraisal management firm had helped inflate real estate appraisals
on a wide scale basis in order to help a major lender push through more loan
deals. The attorney general office's lawsuit alleged that eAppraiseIT, which did
 more than 260,000 appraisals nationally for Washington Mutual, caved to
pressure from WaMu loan officers to select pliable appraisers who were willing to
submit inflated property valuations. [35]
Several commentators have dismissed the notion of "predatory borrowing",
accusing those making this argument as being apologists for the lack of lending
standards and other excesses during the credit bubble. [36]
Predatory servicing is also a component of predatory lending, characterized by
unfair, deceptive, or fraudulent practices by a lender or another company that
services a loan on behalf of the lender, after the loan is granted. Those practices
include also charging excessive and unsubstantiated fees and expenses for
servicing the loan, wrongfully disclosing credit defaults by a borrower, harassing
a borrower for repayment and refusing to act in good faith in working with a
borrower to effectuate a mortgage modification as required by federal law. [3

EUROPEAN DEBT CRISIS

Long-term interest rates (secondary market yields of government bonds with

maturities of close to ten years) of all eurozone countries
[1]
except Estonia, Latvia and Lithuania. A yield being more than 4% points higher
compared to the lowest comparable yield among the eurozone states, i.e. yields
above 6% in September 2011, indicates that financial institutions have serious
doubts about credit-worthiness of the state. [2]

The European debt crisis, often also referred to as the eurozone crisis or
the European sovereign debt crisis, is a multi-year debt crisis that took place in
the European Union (EU) from 2009 until the mid to late 2010s.
Several eurozone member states (Greece, Portugal, Ireland, Spain, and Cyprus)
were unable to repay or refinance their government debt or to bail out over-
indebted banks under their national supervision without the assistance of third
parties like other eurozone countries, the European Central Bank (ECB), or
the International Monetary Fund (IMF).
The eurozone crisis was caused by a balance-of-payments crisis, which is a sudden
stop of the flow of foreign capital into countries that had substantial deficits and
were dependent on foreign lending. The crisis was worsened by the inability of
states to resort to devaluation (reductions in the value of the national currency) due
to having the Euro as a shared currency. [3][4] Debt accumulation in some eurozone
members was in part due to macroeconomic differences among eurozone member
states prior to the adoption of the euro. The European Central Bank adopted an
interest rate that incentivized investors in Northern eurozone members to lend to
the South, whereas the South was incentivized to borrow because interest rates
were very low. Over time, this led to the accumulation of deficits in the South,
primarily by private economic actors. [3][4] A lack of fiscal policy coordination among
eurozone member states contributed to imbalanced capital flows in the eurozone, [3]
[4]
while a lack of financial regulatory centralization or harmonization among
eurozone states, coupled with a lack of credible commitments to provide bailouts to
banks, incentivized risky financial transactions by banks. [3][4] The detailed causes of
the crisis varied from country to country. In several countries, private debts arising
from a property bubble were transferred to sovereign debt as a result of banking
system bailouts and government responses to slowing economies post-bubble.
European banks own a significant amount of sovereign debt, such that concerns
regarding the solvency of banking systems or sovereigns are negatively reinforcing.
[5]

The onset of crisis was in late 2009 when the Greek government disclosed that its
budget deficits were far higher than previously thought. [3] Greece called for external
help in early 2010, receiving an EU–IMF bailout package in May 2010. [3] European
nations implemented a series of financial support measures such as the European
Financial Stability Facility (EFSF) in early 2010 and the European Stability
Mechanism (ESM) in late 2010. The ECB also contributed to solve the crisis by
lowering interest rates and providing cheap loans of more than one trillion euro in
order to maintain money flows between European banks. On 6 September 2012, the
ECB calmed financial markets by announcing free unlimited support for all eurozone
countries involved in a sovereign state bailout/precautionary programme from
EFSF/ESM, through some yield lowering Outright Monetary Transactions (OMT).
[6]
Ireland and Portugal received EU-IMF bailouts In November 2010 and May 2011,
respectively.[3] In March 2012, Greece received its second bailout. Both Spain and
Cyprus received rescue packages in June 2012. [3]
Return to economic growth and improved structural deficits enabled Ireland and
Portugal to exit their bailout programmes in July 2014. Greece and Cyprus both
managed to partly regain market access in 2014. Spain never officially received a
bailout programme. Its rescue package from the ESM was earmarked for a bank
recapitalisation fund and did not include financial support for the government itself.
The crisis has had significant adverse economic effects and labour market effects,
with unemployment rates in Greece, Italy and Spain reaching 27%, [7] and was
blamed for subdued economic growth, not only for the entire eurozone but for the
entire European Union. It had a major political impact on the ruling governments in
10 out of 19 eurozone countries, contributing to power shifts in Greece, Ireland,
France, Italy, Portugal, Spain, Slovenia, Slovakia, Belgium, and the Netherlands as
well as outside of the eurozone in the United Kingdom. [8]
The eurozone crisis resulted from the structural problem of the eurozone and a
combination of complex factors. There is a consensus that the root of the eurozone
crisis lay in a balance-of-payments crisis (a sudden stop of foreign capital into
countries that were dependent on foreign lending), and that this crisis was
worsened by the fact that states could not resort to devaluation (reductions in the
value of the national currency to make exports more competitive in foreign
markets).[3][4] Other important factors include the globalisation of finance; easy
credit conditions during the 2002–2008 period that encouraged high-risk lending
and borrowing practices;[10] the financial crisis of 2007–08; international trade
imbalances; real estate bubbles that have since burst; the Great Recession of 2008–
2012; fiscal policy choices related to government revenues and expenses; and
approaches used by states to bail out troubled banking industries and private
bondholders, assuming private debt burdens or socializing losses.
Macroeconomic divergence among eurozone member states led to imbalanced
capital flows between the member states. Despite different macroeconomic
conditions, the European Central Bank could only adopt one interest rate, choosing
one that meant that real interest rates in Germany were high (relative to inflation)
and low in Southern eurozone member states. This incentivized investors in
Germany to lend to the South, whereas the South was incentivized to borrow
(because interest rates were very low). Over time, this led to the accumulation of
deficits in the South, primarily by private economic actors. [3][4]
Comparative political economy explains the fundamental roots of the European
crisis in varieties of national institutional structures of member countries (north vs.
south), which conditioned their asymmetric development trends over time and
made the union susceptible to external shocks. Imperfections in the Eurozone's
governance construction to react effectively exacerbated macroeconomic
divergence.[11]
Eurozone member states could have alleviated the imbalances in capital flows and
debt accumulation in the South by coordinating national fiscal policies. Germany
could have adopted more expansionary fiscal policies (to boost domestic demand
and reduce the outflow of capital) and Southern eurozone member states could
have adopted more restrictive fiscal policies (to curtail domestic demand and
reduce borrowing from the North).[3][4] Per the requirements of the 1992 Maastricht
Treaty, governments pledged to limit their deficit spending and debt levels.
However, some of the signatories, including Germany and France, failed to stay
within the confines of the Maastricht criteria and turned to securitising future
government revenues to reduce their debts and/or deficits, sidestepping best
practice and ignoring international standards. [12] This allowed the sovereigns to
mask their deficit and debt levels through a combination of techniques, including
inconsistent accounting, off-balance-sheet transactions, and the use of complex
currency and credit derivatives structures. [12] From late 2009 on, after Greece's
newly elected, PASOK government stopped masking its true indebtedness and
budget deficit, fears of sovereign defaults in certain European states developed in
the public, and the government debt of several states was downgraded. The crisis
subsequently spread to Ireland and Portugal, while raising concerns about Italy,
Spain, and the European banking system, and more fundamental imbalances within
the eurozone.[13] The under-reporting was exposed through a revision of the forecast
for the 2009 budget deficit from "6–8%" of GDP (no greater than 3% of GDP was a
rule of the Maastricht Treaty) to 12.7%, almost immediately after PASOK won
the October 2009 Greek national elections. Large upwards revision of budget deficit
forecasts due to the international financial crisis were not limited to Greece: for
example, in the United States forecast for the 2009 budget deficit was raised from
$407 billion projected in the 2009 fiscal year budget, to $1.4 trillion, while in the
United Kingdom there was a final forecast more than 4 times higher than the
original.[14][15] In Greece, the low ("6–8%") forecast was reported until very late in the
year (September 2009), clearly not corresponding to the actual situation.
Fragmented financial regulation contributed to irresponsible lending in the years
prior to the crisis. In the eurozone, each country had its own financial regulations,
which allowed financial institutions to exploit gaps in monitoring and regulatory
responsibility to resort to loans that were high-yield but very risky. Harmonization or
centralization in financial regulations could have alleviated the problem of risky
loans. Another factor that incentivized risky financial transaction was that national
governments could not credibly commit not to bailout financial institutions who had
undertaken risky loans, thus causing a moral hazard problem.[3][4]

Media on debt crisis

Some in the Greek, Spanish, and French press and elsewhere spread conspiracy
theories that claimed that the U.S. and Britain were deliberately promoting rumors
about the euro in order to cause its collapse or to distract attention from their own
economic vulnerabilities. The Economist rebutted these "Anglo-Saxon conspiracy"
claims, writing that although American and British traders overestimated the
weakness of southern European public finances and the probability of the breakup
of the eurozone, these sentiments were an ordinary market panic, rather than some
deliberate plot.[465]
Greek Prime Minister Papandreou is quoted as saying that there was no question of
Greece leaving the euro and suggested that the crisis was politically as well as
financially motivated. "This is an attack on the eurozone by certain other interests,
political or financial".[466] The Spanish Prime Minister José Luis Rodríguez
Zapatero has also suggested that the recent financial market crisis in Europe is an
attempt to undermine the euro.[467][468] He ordered the Centro Nacional de
Inteligencia intelligence service (National Intelligence Centre, CNI in Spanish) to
investigate the role of the "Anglo-Saxon media" in fomenting the crisis.[469][470][471][472]
[473][474]
So far, no results have been reported from this investigation.
Other commentators believe that the euro is under attack so that countries, such as
the UK and the US, can continue to fund their large external
deficits and government deficits,[475] and to avoid the collapse of the US$. [476][477]
[478]
The US and UK do not have large domestic savings pools to draw on and
therefore are dependent on external savings e.g. from China. [479][480] This is not the
case in the eurozone, which is self-funding. [481][482][483]

Great Depression
The Great Depression (1929–1939) was an economic shock that impacted most
countries across the world. It was a period of economic depression that became
evident after a major fall in stock prices in the United States.[1] The economic
contagion began around September 1929 and led to the Wall Street stock market
crash of October 24 (Black Thursday). It was the longest, deepest, and most
widespread depression of the 20th century. [2]
Between 1929 and 1932, worldwide gross domestic product (GDP) fell by an
estimated 15%. By comparison, worldwide GDP fell by less than 1% from 2008 to
2009 during the Great Recession.[3] Some economies started to recover by the mid-
1930s. However, in many countries,[specify] the negative effects of the Great
Depression lasted until the beginning of World War II. Devastating effects were seen
in both rich and poor countries with falling personal income, prices, tax revenues,
and profits. International trade fell by more than 50%, unemployment in the U.S.
rose to 23% and in some countries rose as high as 33%. [4]
Cities around the world were hit hard, especially those dependent on heavy
industry. Construction was virtually halted in many countries. Farming communities
and rural areas suffered as crop prices fell by about 60%. [5][6][7] Faced with
plummeting demand and few job alternatives, areas dependent on primary sector
industries suffered the most.[8]
Economic historians usually consider the catalyst of the Great Depression to be the
sudden devastating collapse of U.S. stock market prices, starting on October 24,
1929. However, some dispute this conclusion, seeing the stock crash less as a
cause of the Depression and more as a symptom of the rising nervousness of
investors partly due to gradual price declines caused by falling sales of consumer
goods (as a result of overproduction because of new production techniques, falling
exports and income inequality, among other factors) that had already been
underway as part of a gradual Depression. [4][9]

The Rise Of State-Controlled Capitalism

"State-controlled capitalism" may sound like a contradiction in terms, but author Ian
Bremmer says it's a growing threat to U.S. corporations.

In his new book, The End of the Free Market, Bremmer, who runs Eurasia Group, a
political risk consulting firm, argues that corporations based in free-market
economies face growing competition from companies based in state capitalist
economies.
Bremmer defines state capitalism as economies in which the state is the principal
actor and judge, and uses the markets for political gains. China, Russia and
Venezuela are among the examples. In free-market economies, such as the U.S.,
Europe and Japan, multinational corporations are the principal actors.

One arena in which free-market multinationals face competition with state

companies is the oil industry. Seventy-five percent of the world's oil production is
controlled by government-owned corporations, such as in Saudi Arabia and Norway.

And in China, U.S. companies compete against domestic automakers that are
closely intertwined with the state. China is also developing its own aviation industry,
which Bremmer sees a future threat to Boeing and Airbus.

"There are many, many multinational corporations based in the West who have
thought they were going to be able to do great business and suddenly they are
going to find they have real competitors on the ground, in the world's second-
largest and fastest-growing economy," the author tells NPR's Renee Montagne,
referring to China. "But it's not a fair playing field, there is no rule of law, and they
are going to get 'Googled' out."

Sponsor Message

Bremmer is referring to Google's decision earlier this year to shift operations from
China to Taiwan. The search engine giant said its intellectually property had been
stolen, and it no longer wanted to comply with government censorship. Google also
faced competition from the dominant search engine in China, owned by a domestic
company called Baidu.

"We are no longer in a global, free-market economy. There are now two systems out
there. There is a free-market system, largely in the developed world. There is a
state capitalist system in China, Russia and the Persian Gulf. The systems are
mutually incompatible," Bremmer says. "When your principal actors are
multinational corporations in the private sector and they rely for their growth on
unfettered access to global markets, and state capitalist systems don't do that, you
are going to have a problem. And we are just at the beginning of that problem."
Despite the dire scenario he lays out in his book, Bremmer ultimately believes free
markets will outlast state capitalism. He says the U.S. has a bigger economy, puts
more money into research and development, and has stronger educational
institutions.

In addition, state control can create inefficiencies, such as in Venezuela, where the
state oil company in now much less productive than it was before the government
took it over.

IP THEFT
The allegations of intellectual property theft by China are contentious
in United States–China relations and between the People's Republic of China and
several other nations. China is regularly accused of state-organized economic
espionage and theft of intellectual property, in violation of international trade
agreements.[vague] The espionage and theft is not limited to business, but
also academia[1] and government.[2] China has repeatedly and vigorously denied the
allegations, stating that Western companies willingly transfer technology to get
access to China's market. China however also state they are taking steps to address
the concerns.[3] In 2019, China banned forced technology transfers. [4]

Overview[edit]
According to Derek Scissors of the American Enterprise Institute, Chinese firms have
been able to spend more on production, undercutting the prices of global
competitors, by leapfrogging the often costly research and development phase
through intellectual property theft.[5] According to James Lewis, senior vice president
and director of the Center for Strategic and International Studies’ Technology Policy
Program, "Chinese policy is to extract technologies from Western companies; use
subsidies and nontariff barriers to competition to build national champions; and
then create a protected domestic market for these champions to give them an
advantage as they compete globally". [6] After acquiring intellectual property,
Chinese government subsidies and regulations helps Chinese companies secure
market shares in the global markets at the expense of the U.S. [5]
Foreign companies in China are often induced or forced to partner with local
companies. This has led to complaints of training "future rivals". Japanese and
European rail businesses have, for example, stated that Chinese rail companies
used technology from shared ventures to become big in high-speed rail. [7] Another
example is in wind power, where Spanish wind power producer Gamesa was
required to manufacture parts using Chinese domestic producers; within years, the
same manufacturers produced parts for domestic producers who soon eclipsed
Gamesa through favorable loans and support. [3] Besides recruiting foreign
employees to share trade secrets, another method involves cyber
espionage and hacking.[6] One of the methods involves massive, broad hacks, such
as 2021 Microsoft Exchange Server data breach, before sifting through the acquired
data in search of valuable information. According to Microsoft, the large-scale hack
was probably sponsored by the Chinese government. [8]
According to William Schneider Jr., "China has institutionalized a system that
combines legal and illegal means of technology acquisition from abroad". [2] The
issue is not limited to the United States, but is also reported in Europe,[9] and
according to William Evanina, director of the National Counterintelligence and
Security Center, China directs similar efforts towards other NATO members.
[6]
According to CNN, some U.S. officials and analysts have pointed to China's Made
in China 2025 plan as "a rubric for the types of companies whose data Chinese
hackers have targeted".[10]
In 2015, Chinese President and CCP General Secretary Xi Jinping and U.S.
President Barack Obama had agreed neither government would "conduct or
knowingly support cyber-enabled theft of intellectual property". [10] This led to an 18-
month decrease in Chinese hacking, ending with the increased trade conflicts under
the Trump administration.[11]
According to Adam Meyers, working for the cyber-security firm CrowdStrike, China's
campaign of global cyber-espionage has increasingly targeted big repositories of
data, like internet or telecom service providers, making it "more difficult to really
pinpoint that they were doing economic espionage". [10] Co-founder of CrowdStrike,
Dmitri Alperovitch, stated in 2018 that China appeared to have ramped up its
intellectual property espionage, after a decrease during the end of the Obama
administration. According to Alperovitch, there has been an increase in hacks by
China's Ministry of State Security, which he considers more skilled than the People's
Liberation Army, which previously stood for most of the hacking. [12] This shift from
the PLA to the Ministry of State Security, as well as an increase in sophistication,
has also been noted by U.S. intelligence officials. [11]
A congressional estimate in the U.S. placed the cost of Chinese intellectual property
theft at 225–600 billion dollars yearly. [9] According to a CNBC survey, 1 in 5
corporations say China has stolen intellectual property within the previous year,
while 1 in 3 said it had happened some times during the previous century. [13] In
2020, FBI director Christopher Wray claimed Chinese economic espionage
amounted to one of the largest transfers of wealth in human history. [9] According
to CBS, Chinese state-actor APT 41 has conducted a cyber operation spanning
years, stealing intellectual property worth trillions of dollars from about 30
multinational companies.[14]
Economic Espionage

What Is Economic Espionage?

Economic espionage is the unlawful targeting and theft of critical economic

intelligence, such as trade secrets and intellectual property.

KEY TAKEAWAYS

 Economic espionage is the unlawful targeting and theft of critical economic

intelligence, such as trade secrets and intellectual property.
 It is likely to be state-sponsored, and have motives other than profit or gain
—such as closing a technology gap.
 The Economic Espionage Act was signed into law in October 1996,
criminalizing misappropriation of trade secrets and giving the government
the right to pursue such cases in the courts.1
 Economic espionage is estimated to cost the U.S. between $225-$600 billion
annually.2
 China has been accused of being the world’s “most active and
persistent” perpetrator of economic espionage.3

Economic Espionage Methods

According to the FBI, foreign competitors conduct economic espionage in three

main ways:9

1. By recruiting insiders working for U.S. companies and research institutions

that typically share the same national background.
2. Using methods such as bribery, cyber-attacks, “dumpster diving”, and
wiretapping.
3. Establishing seemingly innocent relationships with U.S. companies to gather
economic intelligence, including trade secrets.

To counter this threat, the FBI advises companies to stay alert. Some steps are
recommended, including implementing a proactive plan to safeguard trade secrets,
securing physical and electronic versions of intellectual property, and training
employees.

Criticism of Economic Espionage

In recent years, the number of defendants indicted under the U.S. Economic
Espionage Act has surged, and many of those charged are Chinese. From 2000 to
2020, 160 cases of Chinese economic espionage were reported. Of those cases,
42% were government or military personnel, 26% were non-Chinese (largely U.S.
citizens) recruited by Chinese nationals, and 32% were private citizens.10

According to a Cardozo Law Review study, 21% of Chinese defendants are never
proven guilty. For those convicted, their sentences are twice as long as Western
society defendants. The study also found that approximately 48% of defendants
with Western names receive probation, whereas only 22% of Chinese or Asian
defendants receive probation. These findings have fueled allegations that federal
agents and prosecutors are unfairly profiling ethnic Chinese people as spies and
issuing stiffer punishments.11
Baidu vs. Google: What's the Difference?

As Google (GOOGL) maintains its stronghold in the global internet search arena,
Baidu, Inc., (BIDU) has the upper hand in China, with 72.37% of the nation's market
share as of May 2021.1 Google China, a subsidiary of Google, ranked fourth in
China’s online search market, with a 1.95% share.

Both Google and Baidu are listed on NASDAQ and operate in similar web services
spheres, but the companies are quite different. Baidu remains focused on the local
Chinese market, while Google is global and continues to expand.

Contrary to the common perception of Baidu as an “online search specific”

company, it has a large suite of products and services somewhat similar to Google.
Both companies have multiple offerings across search products, social products,
knowledge products, location-based products, music products, PC client software,
mobile products and services, open platform for developers, games, and
translation services. Nonetheless, here are the key differences between Baidu and
Google.

KEY TAKEAWAYS

 While Baidu continues to have the lead position in the Chinese internet
search market, Google remains the undisputed leader globally.
 Baidu’s local concentration on China remains a concern from an investor's
perspective, especially due to increasing domestic competition.
 If Google can increase its share in the burgeoning Chinese market, it will add
significantly to Google’s business and potentially take away from Baidu.
 Baidu holds the bulk of the search engine market share in China, capturing
approximately 72% of the market.
 Baidu's search engine produces results in Simplified Chinese.

Baidu

Baidu remains a Chinese company, fully compliant with the local laws and
censorship, as directed by the state government.

Baidu banks on its comparatively better understanding of local Chinese language

and culture, which enables it to better optimize its search technology to the needs
of local users. The Chinese language is complex, with some words having multiple
meanings. Baidu’s search algorithms place a lot of relevance to the context in
which the words are used in the content. Google, both in business and technology,
appears to have struggled on these fronts in China.
Baidu is expected to continue its dominance and growth in China, based on its
localized offerings in the world’s most populous nation, which still has limited
internet penetration.

It consists of two segments, Baidu Core, which involves keyword-based marketing

and includes Artificial Intelligence (AI) products and services, and iQIYI, which
offers online advertising.

Baidu Core is the company's largest revenue driver, bringing in more than 70% of
the company's earnings.2 Within this segment exists the mobile platform, which
features Baidu App—China's number 1 search-plus-fee app—its AI cloud, and other
growth initiatives.

544 million
The number of monthly active users (MAU) Baidu recorded as of December 2020.2
Google has unique offerings at a global level but is not that strong in such China-
specific services. Baidu has unique offerings like a missing person search, senior
citizen search, and patent search, which are specific to Chinese legal requirements.

Google

Google has had a few rough patches with the Chinese authorities over freedom of
speech and free access to information. While Google continues its operations in
China, its capacity is limited.

Google is strong in the rest of the world. It continues to diversify its products and
offerings to expand its business in developed markets, including experimenting
with offerings like a high-speed broadband network called “Google Fiber” and
driverless cars.

Google’s timely bet on buying the mobile operating system Android has allowed it
a head start in the global mobile search market. It now contributes to increasing
proportions to Google’s revenues.

Both companies generate revenue primarily through online advertising, but

Google’s diversification is higher compared to Baidu and continues to increase.