One POV I've seen and am sympathetic to is that the banks should have taken severe haircuts on their debts by forgiving some % of mortgages/troubled assets in return for bailouts. They made bad business decisions and should have suffered for it as most other businesses do (frankly, the Park Chung-Hee method of tossing executives into nasty jail cells has merits to encourage some clarity). I think Iceland did a better job of liquidating their banks.
No. Obama stopped that dead in its tracks. All 50 State AG's were going after the banks for the robo signing scandal. Obama pressured them into a sweetheart settlement, involving the creation of HAMP, instead of Cram down) because as usual, he was more concerned about the banks than the people who voted for him.
As he should have. I had a terse conversation with a neighboring diner around 2010 who was pissed off by the bailouts. I asked him when he went to the ATM, did he expect to get his money. He looked incredulous when I said if he did he believed in bank bailouts. That more people signing 'liar loans' and Angelo Mozilo didn't get jail time was a missed opportunity for a lesson in strengthening the banking system and American society in general. That the banking system should be subject to the same bankruptcy rules as other industries is insane, unless you want to bring on another Great Depression. The whole purpose of a banking system is to borrow short and lend long with a small margin of profit based on high leverage. That's not true in any other industry. Federal deposit insurance (which btw covered the S&L's too) with intense regulation has been enormously beneficial to the country.
Urgh. NO! You are basically saying Wall Street should just go ahead and blow it all up again because there won't be consequences. Bailing out the banks WAS more likely to create depression. At least according to this IMF study of 124 banking crises that came out just in time for everyone to pretend it didn't exist.
What Noah said. BofA paid another substantial settlement for its (forced)ownership of Countrywide a few days ago. I can not begin to count the billions that the large banks have paid. But they certainly have paid. Little of that would have been possible if they went out of business.
And, of course, bank profits are now limited by the new capital reserve requirements.... because we can not trust CEOs who are compensated based on quarterly results to care about a small possibility of catastrophic failure.
There was a lot of concern about chain of title problems due to the difficulty of making MERS jibe with manual county clerk processes, robosigning foreclosure documents, etc. I have not seen recent discussion of significant actual problems with titles, e.g. refusal of title insurance companies to insure titles, but it was definitely a concern a decade ago: https://www.govinfo.gov/content/pkg/CHRG-111hhrg63124/html/CHRG-111hhrg63124.htm
I think the current environment is going to be a good test of Dodd-Frank and bank reserve requirements (the infamous "stress tests") to see if the repaired system after the debacle of the Glass-Stegal repeal will hold up under stress. The British pensions clearly started to buckle, but so far nothing significant seems to have in the US. Speculative assets in tech etc. have sustained serious losses, but don't seem to be causing systemicdamage which is similar to what happened in 2000-2003. I see the grumbling about Treasury liquidity, but it is difficult right now to differentiate between unhappy financial people suddenly having a difficult market environment or something that could cause a house of cards implosion.
As somebody who started to work when Paul Volcker was doing his first massive jacking of rates, it is hard to see getting interest rates back to the low end of normal as an existential crisis. The challenge is that people have become addicted to central bank suppressed interest rates for a decade now instead of viewing it as a spriong being compressed and liable to bounce back up at any time. The Fed has barely even started QT on its balance sheet - that process continued over a couple of years or more is likely to keep mortage rates at 6% or more (which would have been historically a very low mortgage rate until a decade ago). https://www.freddiemac.com/pmms/pmms30
Yeah, thank god we had some bankers pay the US Government, some US Dollars, that it can print itself. Totally makes the millions of lives destroyed worth it.
The point of fining banks isn’t to justify the suffering that occured, or even to pay back the victims, but to inflict punitive damages on said banks.
And by the way, your suggestion to merely print money is simply another form of taxation, whereas deliberately taking it from banks which engaged in malfeasance is not.
It doesn't take a rocket surgeon to piece this together. QE is the fed buying bonds from the treasury. The treasury "prints" money to fund government spending. So, it usually doesn't just print it out of thin air (so to speak), but has a loan to back it (either from the Fed or from a 3rd party buyer). So, if QE 'feels like' money printing is really a question of how the government spends the created money (or really borrowed money in the form of bonds). In 2008-2009, QE didn't feel like money printing as much as the pandemic QE because that QE went to bank balance sheets and trickled out into asset prices slowly. In pandemic QE, the government more or less handed out money for ordinary people to spend how ever they want. And that felt like money printing. We can see this with M2.....
So yes, it is money printing, but how much it feels like the banana republic style money printing we associate with the phrase depends on what the money is used for.
Q. "So you've been printing money ?" A. "Yes, effectively, and we needed to do that as our economy is weak and inflation is very low (....)" Sorry, I can only repeat what was said. (Interview with Mr. Bernanke in 2009 on 60 Minutes "The Chairman". Link already given by CleverBeast.)
Quantititave easing is creating money out of thin air and putting it in the bank's reserve accounts at the Fed. It won't necessarily find its way into M2 stats though. For all intents and purposes it IS printing money.
“frankly, the Park Chung-Hee method of tossing executives into nasty jails cells has merits to encourage some clarity”
Ah yes, I too would like the government to arbitrarily detain people I don’t like without trial in order to force them into making economic decisions I want.
How can you seriously propose this kind of authoritarianism? That is not how we deal with accused individuals in this country, nor how any free country does.
Park Chung-Hee was a brutal dictator, and anyone who suggests bringing his methods of “justice” to the United States is little better than the MAGA-oids who idolize Orban’s Hungary. Orban, at least, has not yet massacred protesters.
Spare me your faux moral indignation over the poor wee bankers. The 2008 GFC was an event akin to wartime in the (economic) destruction it caused and the government certainly didn't have issues with tossing people in jail to enforce economic outcomes there (such as hoarding and black market activities). It's fine to make bankers very afraid to do shady shit with the fear of jail/the public flattening them if they don't get the message.
"Spare me your faux moral indignation over the poor wee bankers."
Yeah, I'm not about to let you set the precedent that will let us go full fascist. You even make the precise fascist justification of the "exception" of a "wartime economy." You then make the fascistic appeal of making our enemies fear us.
Liberal democratic countries follow the rule of law.
Spare me your petty excuses for your authoritarian impulses.
>Yeah, I'm not about to let you set the precedent that will let us go full fascist.
"Putting bankers in jail for melting down the economy is fascism, and the more jailed the more fascist it is"
Do you also think that prosecuting some of the 1/6 insurrectionists is fascism? After all, it's being used to discourage people from engaging in an activity, right?
>You then make the fascistic appeal of making our enemies fear us.
"People fearing consequences of their actions is fascism"
Was the USA a fascist state during WWII? Were the covid lockdowns/other NPIs fascism?
"Do you also think that prosecuting some of the 1/6 insurrectionists is fascism?"
Prosecution alone is not an issue. If you can prove in a court of law that they broke the law, then putting them in jail is just. Denying them their Constitutional right to a trial, with due process, before a jury of the peers, is fascist.
It really is that simple.
"People fearing consequences of their actions is fascism"
It sure as hell is when you decide what consequences go with what actions after the fact.
I don't see why banks are ever given bailouts without agreeing to a large share dilution that gives the federal government at least 50 percent ownership. Is there some theoretical reason that would cause problems or is it just protecting vested interests?
Something that puzzles me even more is that when "too big to fail" banks are hit with very large fines for misconduct, the fines are sometimes abated to avoid creating systemic risk. Why can't the Fed or the Justice Department impose fines in the form of diluted shares instead of cash?
(I pointed out many years ago on Facebook that I should *also* get a Nobel Prize for suggesting this. But I'm still waiting to hear from the committee)
"I don't see why banks are ever given bailouts without agreeing to a large share dilution that gives the federal government at least 50 percent ownership."
The practical reason, as I understand it, is that it's unconstitutional. Banks generally do not own themselves. They are owned, instead, by their shareholders (who are typically people about to retire and other ordinary Americans). Share dilution is a form of theft not from the bank, but from the bank's shareholders.
But practically, this isn't too different from what actually occurred. Banks were forced to engage in fire sales of assets are TARP, assets which the US government bought at the best time to buy possible, and then later sold for a rather tidy profit.
The idea that the "bailouts" were in exchange for nothing is therefore somewhat misleading.
Companies can choose to issue shares. There's nothing wrong with the government saying "if you want the money, issue enough shares that we take a majority. If not then have fun going bankrupt." That doesn't entail any seizure.
I don't disagree, but the more painful you make the offer, the fewer companies will accept, and arguably the more painful the nation's recovery will be.
It's pretty hard to believe that a bank would choose to go out of business versus accepting new management especially when replacement jobs are hard to find. Short of the government doing a Roman Decimation of the staff, I'm not sure what would make them think that it's better to go kaput than issue some more shares and keep their jobs.
When people ask me why I am so confident that my long term stock investments will do okay and that we are not in for a long bout of stagflation I say “we understand economics better these days”. This is one outstanding example.
But for fun let me turn the screw a bit. Would it fair to say that Diamond-Dybvig (1983) gave theoretical support to a view of banks that had been widely held for a long time but that economists (and bankers!) had been slow to accept? Similarly, was the heavy lifting of Bernanke's paper to give a convincing historical example of the need for a type of central bank policy response that had been known anecdotally since Bagehot, but that economists - you mention Feldstein and Hubbard - (and bankers!) had been slow to accept? (Of course, I meant "certain economists" or "some economists" - but we are talking about a very influential group.) I learned about the importance of deposit insurance in high school in the 60s, but the moral hazard gang never stopped carping about it. but at least they carped less after Diamond-Dybvig!
Seriously, are you being paid by Wall Street, Bernanke, and the Obama admin? Because it's either that or you are willfully obtuse. First you construct this false Binary, 1. point and laugh as banks go under or 2. just hand the banks an unlimited supply of free money and poor black people's houses.
If Bernanke was an amazing scholar, as opposed to Wall Street's bag man, you think he might have come across this widely publicized IMF Paper Studying 124 banking crises. They found, rather definitively, that the least costly way to handle a banking crisis was to fire the entire C-Suite, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them.
A process the FDIC knows well, though admittedly on a much smaller scale. As opposed to what the worthless, money-grubbing, miss-leadership class of this country went with; regulatory forbearance. Of which that IMF study said:
“The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…”
Enough with the 'repaying TARP' charade. That was little more than Uncle Sam switching his bank bailouts from the very public Treasury Department to the very private FED purely so that the Wall Street executives who blew everything up could wiggle out of the restrictions TARP put on them paying insane bonuses to themselves.
Can you do an explainer some day on 100% reserve banking? It's one of those things I keep trying to understand and can't, like not being able to reach something on a high shelf.
While I’m sympathetic to this point, as there is some evidence that more aggressive prosecution might have been able to secure a few more convictions, for the most part, bankers did not break the law.
You cannot simply declare, ex post facto, that certain behavior is illegal. The 2007 crisis was brought about largely by fully legal behavior, and the proper answer to that is not individual punishment--since again, laws were not broken--but systemic reform.
The Constitution specifically bars ex post facto laws and Bills of Attainder precisely to prevent the mob braying for blood when their are society-wide failings. These are good rules, and we should not break them merely to satisfy our own desire for bloodlust.
Bonds and other financial instruments were being graded high above their level they actually were and this was known. Rating agencies were going against their basic practices to keep the party going. Banks were knowingly selling bonds to the Germans based on false and misleading ratings. That has always been called FRAUD. That is not ex post facto. It was simply not executed legally by the Obama Administration. Having lived through it, my S&L was taken over, where I banked, not what I owned, and the government went deep into debt, for that time period.
They had a chance to start breaking up the bank, but the former head of the New York Fed, then the Treasury Secretary, declined any interest to go there.
Yes things can always be done to a higher level of accountability, but removing those from any accountability almost guarantees a resurgent of the same event in a different form.
Except, no, it hasn't, because fraud requires active intent. If everyone, from the lowest clerk on up, is just sort of signing off on things they probably shouldn't, then no fraud has occurred. Incompetence is not fraud. That's the trouble with '08, if everybody's cheating (and we're talking hundreds of thousands of people here), then there's not really requisite mens rea for a conviction. More annoyingly, most of those most directly involved in what you term fraud were relatively low-level workers. The executives created incentives impossible to meet without following the inflated numbers, but kept their own hands largely clean, and in some cases did not even realize exactly how fucked they were.
"They had a chance to start breaking up the bank"
Breaking up the banks would have worsened the financial crisis, as Bernanke's paper shows. It's the epitome of the phrase, "cutting off your nose to spite your face."
"In short, all of this was a scam — and that’s why so many of these mortgages lack a true paper trail. Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold. But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments). Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping “proper” documentation of all these dubious transactions."
"First, there was no serious criminal prosecution, meaning that no one will be charged with a felony and no one will go to jail. In terms of affecting executives’ incentives, this is the only thing that matters.
Even the terminology used to frame the discussion is wrong. Kelleher, an attorney with extensive experience in private practice and the public sector, tells it like it is: “ ‘Robo-signing’ is massive, systematic, fraudulent, criminal conduct.” Alternatively, as he points out, we could just call it “lying, cheating, and stealing.”"
"Buried in the sweeping mortgage settlement with banks, for which final documents were filed this week, are five whistleblower cases that shed light on the litany of foreclosure abuses by the banks."
" The FHA insures one-third of the mortgages loans in the country, taking on the risk of homeowners' default from lenders like Citi. The government requires lenders to certify that insured loans meet FHA standards.
Citi appears to have flouted those standards. According to the lawsuit, the bank passed along subpar loans to the FHA until very recently, making "substantial profits through the sale and/or securitization of FHA-backed insured mortgages" while "it wrongfully endorsed mortgages that were not eligible.""
"Nevada's attorney general charges that Bank of America and the now-defunct mortgage giant Countrywide acquired by the bank in 2008, deceived borrowers and investors at almost every stage of the process.
According to the suit, borrowers were duped into unaffordable loans and then victimized again through a misleading mortgage modification program that homeowners tried to use to avoid foreclosure. Finally, the suit alleges, the bank filed fraudulent documents to move forward with the foreclosures."
Except 2008 and 2010 did in fact provide empirical evidence for Bernanke's hypothesis.
That's the best you're going to get, and for all the sarcastic comments people make about economics, I find it amusing that they would rather rely on gut instinct than models with even some data behind them.
"Except 2008 and 2010 did in fact provide empirical evidence for Bernanke's hypothesis."
No, because you don't have a counter factual. More than that, it was something that is only observable once, in contrast to say observational sciences like astronomy.
At best, all you can say is that giving banks a bunch of money helped them from not collapsing, which is a really trivial accomplishment. It says nothing about if policy A would have worked better than policy B or C...etc.
And what do you think economic models are other than a numerical representation of gut instinct in a such a pseudoscience? Mind you, I don't say pseudoscience to be derogative, rather that is what it is. In real sciences models can be truly explicitly tested.
Your view on breaking up the banks may well be correct, my own thoughts are that they need to be lessened in power and influence, breaking them up will allow for a reformulation in a new form, that may better serve the present day system.
In your example of the "impossible expectations" on the staff, while racketeering may not be the best resort, if one sets up a system, that is doomed to fail, that should be criminal, at least in my view.
The ones who practically forced their underlings to commit the fraud, and will still contend it is fraud, even if everyone is doing it, should have been exposed for the failing they brought about.
If it could happen with the S&L's, why not the banks, though since they do own the Fed, that does make it harder.
"if one sets up a system, that is doomed to fail, that should be criminal, at least in my view."
And indeed, many of the actions which were taken are now criminal, but at the time they were legal, and you cannot--for both constitutional and moral reasons--change the law to apply retroactively.
"If it could happen with the S&L's, why not the banks, though since they do own the Fed, that does make it harder."
There are two problems in this statement. The first is that the part about the banks owning the Fed is nonsensical. They do not, and I'm even really sure if you're trying to imply some grand conspiracy--or how that would work, as prosecution is the job of the Justice Department, not the Federal Reserve.
The second problem is that the S&Ls of the 90s did simply commit outright fraud, and it was illegal at the time. There were no laws against what happened in 2008. It really is that simple.
The phrases "for the most part" and "largely" in your comment are not necessarily wrong, but they are certainly load-bearing; the natural follow-up question is why there were few prosecutions for the crisis-contributing actions that WERE law-breaking and/or illegal. Who went to prison for the fraudulent foreclosures?
Quite a few people have been sent to prison regarding fraudulent foreclosures, but these are mostly small-time employees. It’s not really headline-generating stuff.
Also, although fraudulent foreclosures certainly made the crisis worse, they’re a positive feedback effect, not it’s origin.
You don't actually name names, or even try to count, how many went to prison for the foreclosure frauds, and you grant that they were mostly small fry. Which is how Big Finance gets away with it; the senior management in the driving seat is perpetually insulated from the consequences of de facto policies, and indeed most of the foot-soldiers actually carrying out the policies don't go to prison. And your second paragraph is not actually a rebuttal of what I wrote.
They were also quite similar in that in both the values of the assets were misrepresented, by the financial institutions and the rating agencies. I am not convinced, but hopeful, that the changes the Great Recession brought about, may finally seal off those avenues for deceit, but would not guaranty it.
Nice article as always from Noah but this is is a very generous assessment of Bernanke's work in the federal Reserve.
I've seen some people claiming that Bernanke had nothing to do with the crisis and did the best he could.
We can debate the second premise but the first is utterly untrue.
Although it's not mentioned here, Bernanke joined the federal reserve
from Princeton six years before 2008, so he was around a full six years before the crisis and played his role in creating it.
And he was no different, despite being a scholar of the great depression, in tirelessly claiming before the recession that the problem of stabilizing the economy and avoiding major economic crises were now solved.
In fact, in 2006, as Alan Greenspan himself began to express doubts over the state of the housing market, Bernanke was supremely confident and gave a speech to Congress confidently stating that the housing market ' largely reflects strong fundamentals'.
We all know how that turned out a mere two years later.
I think the default story of the great recession of 2008 as the actions of greedy bankers converting subprime mortgages into risky gambles has obscured how much of a role the federal reserve played as well.
It was the federal reserve that supported the gambling activities of these banks in the name of market efficiency.
It was the federal reserve that kept policy interest rates lower than the growth rates of the economy for a decade, depressing yields on safer investments and forcing investors to seek for higher returns in riskier investments.
It was the federal reserve that adopted the rather fatuous idea that bubbles cannot be stopped as they are developing. This was even more damaging as the housing bubble was completely unproductive unlike the dotcom bubble.
Allowing it to play out to its full consequences caused the great recession.
And Bernanke was responsible throughout all of this.
In no small way, it was Bernanke and the Fed's pursuit of price stabilization that led to the crisis. Bernanke had adopted a monetarist view of the great depression of 1929, stating repeatedly that it was caused by a severe contraction in the money supply.
This conveniently ignores that throughout the 1920s, there had been a decade of low and easy interest rates fuelling a stock bubble while the attention of the Fed was directed elsewhere at stabilizing customer prices.
How different was this from the Fed's actions prior to 2008
It's not a new insight. In 1937, Chester Arthur et al in his wonderful book, Business and the banking Cycle, had already fully demonstrated the dangerous implications of price stabilization.
And as Mervyn King pointed out, who is going to clean up the mess of quantitative easing. I would agree that Bernanke solved the crisis to a degree in the short term. But there is a convincing case to be made that his actions have had damaging consequences, especially for pension funds and retirees, in the long term.
I'm not going to debate on whether he merits the Nobel economic prize. In my opinion, it is not a Nobel at all. It is a memorial prize created by bankers to reward other bankers and theoreticians.
And that's fine. Nobody should lose sleep over it. But claiming that Bernanke solved the crisis without mentioning his substantial role in creating it and the substantial mess he left afterwards does a disservice to history, to the people whose lives were fundamentally changed for the worse, and to the truth.
Although, with regard to the last, that's usually the first casualty of these things
“In my opinion, it is not a Nobel at all. It is a memorial prize created by bankers to reward other bankers and theoreticians.”
It is awarded by the same institute that awards all the other Nobels, none of which have any particular special meaning besides the fact that they were created by Nobel himself.
If you trust the Institute’s judgement on those prizes, you should be consistent and trust it on the Nobel Memorial Prize in Economics. If you do not trust its judgement on the Economic Nobel, then it is rather foolish to trust it on matters of chemistry, physics, or literature.
The Norwegian Nobel Committee is responsible for the selection of eligible candidates and the choice of the Nobel Peace Prize laureates. Originally, in 1901, in Physics, Chemistry, Physiology/Medicine, Literature. The Nobel Peace Prize was added in 1969. The Nobel Committee is composed of five members appointed by the Storting (Norwegian parliament).
The prize for economics is awarded by the Sveriges Riksbank in Memory of Alfred Nobel (first time in 1968).
"The prize for economics is awarded by the Sveriges Riksbank in Memory of Alfred Nobel (first time in 1968)."
This is correct only if by awarded, you mean "financially awarded". The Nobel Memorial Prize in Economics is funded by the Swedish Central Bank, but the laureates are chosen by The Royal Swedish Academy of Sciences, as are the Nobel Prizes in Chemistry and Physics.
The Norwegian Nobel Committee is responsible for the selection of various other Nobel Awards.
There should have been a comment in this post about the lack of punishment for the bad financial actors vis a vis whether Bernanke had feelings about it.
Only problem with saving the bad actors is they're still with us. Business cycle flushes would normally 'clean' the system and reset values. Greenspan/Bernanke have created a scenario for housing bubbles, stock bubbles, massive deficits and have and expanded the divide between rich and poor all in the name of saving us.
Inequality definitely a big concern, but you can put in policies to fix that (if there is the political will to do so).
I’m not a fan of the “cleansing” route because what’s more likely is a lot of pain for a lot of people leading to fascist dictatorship. You can’t separate the economic from the political.
I think that we shouldn't have let he banks collapse, but made them eat more losses in form of a cramdown. Obama, being excessively enamored of Wall Street, blocked that.
If there wasn't the political will to do that immediately after they blow up the world's economy what on earth makes you think anything short of apocalypses will?
We saw inequality decrease after the first Gilded Age, and that started before the Great Depression, so if there was political will then, why can't there be now?
Unbelievable. Three guys, economists, who stood by and let the 2007 mess happen, causing much poverty and misery in the US and elsewhere in the world, get a Nobel-prize ???
Well, many others involved got rewarded too, so why not.
Wow. Talk about hate and whatever. And yes I read the post. But as said, I also lived in part of the US hard hit during the crisis of 2007/2008 and saw in the years before things developing, some almost criminal, some outright criminal, that led to said crisis. Am I really to believe that these learned experts did not see what I saw ? I was mainly surprised it took so long for the proverbial shite to hit the proverbial fan. I described my observations and you call that masturbation. Hahahaha. But, maybe you are right and all journalism, writing, moviemaking, creating art, is a form of masturbation. Why do you not write an in-depth article about this ?
Back to the topic: The experts could have looked into what was happening. They could have talked to Brooksley Born (and Selma Blair) who advocated regulation of derivative banking products and were rebuffed. They could have studied the "beautiful new banking products" on offer making more/higher mortgages possible. They could have and they did not - that's my grievance. I will now stop writing because as you indicated I can do other, more pleasurable things, with my fingers.
I actually quite like Brooksley Born, but the point I am trying to make is much narrower than you seem to think.
The economics profession as a whole failed to predict the greatest economic disaster in nearly a century. That is indeed a serious failing, and one which it is still trying to learn from.
However, Born failed. The Fed did not have the power to regulate derivatives. Furthermore, she did not predict the crisis, hardly anyone did, she merely realized one of its many causes.
Blaming Bernanke for the failings that afflicted every economist is simply picking a scapegoat, and it is both a deeply unjust scapegoat and one which has always reeked of more than a little antisemitism.
You are now accusing me of being an anti-semite ? I know the Jewish people invented the "scape-goat", literally, but what has that to do with anything ?
"You are now accusing me of being an anti-semite ?"
Not you specifically, I've just always found the hatred of Bernanke to be deeply unfair and tinged with antisemitism. The Jew who saved the financial--and by proxy, America--system gets only hatred for his action. It's kind of ironic, no?
I did not even know he was Jewish. Why/how would I ? I only know one great economic thinker who was Jewish (although converted): Karl Marx.
Being upset (I lost a lot, more than just money) that someone (no THREE someones) are awarded a prestigious prize does not mean I "hate" him. That would be ridiculous. I have great respect for Mr. Bernanke and for the difficult job(s) he took upon him.
Had you studied my masturbacious entries more closely, you would have read that I did not put the blame of the crisis on him (or the other two) but on many other people. Who all made money from the mortgages/CDO's or expected to. I asked a number of them: what were you thinking ? Well, they were not thinking, they just did what they thought they had to do to feed their families. But the experts should have recognized the warning signs and acted upon them. I will never understand how something so obvious was missed by so many experts - or was their expertise causing the blind spot ?
> Bernanke *saved* you from the worst of the Great Recession, and had nothing to do with its causes. [...] By the time Bernanke took over, there was literally nothing that could have been done to avert the crisis.
Bullshit. Bernanke was on the Federal Reserve Board from 2002, even before he became its chair in 2006. There was a window of years when he could've been raising hell about the mortgage bubble, and he didn't. I turn the mic to Dean Baker (https://www.npr.org/templates/story/story.php?storyId=122992857):
"In the years from the beginning of the bubble in 1996 to 2002, the rise in house prices already exceeded the overall rate of inflation by more than 30 percentage points. Since there was no remotely plausible explanation for this run-up in the fundamentals of the housing market, it should have been apparent to Bernanke and others at the Fed that the housing market was experiencing a bubble. [...] Instead, Bernanke and Greenspan insisted that there was no bubble and that everything was fine in the housing market. As a result, the bubble continued to grow"
> Point your hate somewhere else, you’ve picked a scapegoat in your own self-righteous masturbation.
That is certainly what you’re peddling, not least because I am not scapegoating anyone, and thus the sentence you end with is nonsensical.
You attribute the the Fed a job it does not have, and to Bernanke powers he did not have.
Even more egregious, you blame Bernanke for not being a god. It is easy to criticize, ex post facto, the steps not taken. However, the fact remains that only a few dozen people saw the oncoming crisis, and it was Greenspan, not Bernanke, who actually held any power to affect it.
Even then, “raising hell” as you put it would have done little. It is Congress, after all, which holds the legislative power. The Fed merely enforces existing regulations.
Perhaps Bernanke’s only genuine mistake was not increasing interest rates in 2006, but this is at best a minor criticism.
Additionally, housing prices exceeding inflation is not evidence of a bubble. That is not how economics works. Many goods (college degrees, medical services, housing, pre-K education) have exceeded the rate of inflation by far more than 30%. This cannot consistently be used to indicate bubbles, and indeed, bubbles may occur even in goods that rise by rates less than inflation, provided the fundamentals are lower than expected.
In short, your criticism of Bernanke amounts to the fact that he was not omnipotent, which is the specious criticism of a meagre intellect.
There is nothing in my comment about Bernanke being a god. Dean Baker and I object to Bernanke engaging in active bubble denialism when he could've been briefing the public about the bubble. And even you grant that he could've raised interest rates when he did become chair (though, yes, by that point most of the bubble was inflated).
You point out that "housing prices exceeding inflation is not evidence of a bubble", which is surely wrong; it is EVIDENCE of a bubble even though it is not in itself PROOF. And you say nothing against Baker's observation that "there was no remotely plausible explanation for this run-up in the fundamentals of the housing market".
Your criticism of my criticism is a blatant straw man: nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent". I can only hope that your patently defective summary of my criticism is due to a hurried misreading rather than outright mendacity (or perhaps "a meagre intellect").
“there was no remotely plausible explanation for this run-up in the fundamentals of the housing market”
And you say nothing for it. You simply appeal to his authority. However, if you want a good answer, consider that homeownership rates increased as population size increased, and that the net number of new homeowners was greater than the net number of new houses. This is a rather reasonable explanation of the rise in housing prices, which alone did not cause the Great Recession.
It is the fact that many of these loans given to allow people to own homes were not possible to pay back that ultimately brought the bubble crashing back down to reality.
“There is nothing in my comment about Bernanke being a god.”
Precisely, and yet you demand that he react to things which occurred in the future. How can you demand omniscience of a mere man?
“it is EVIDENCE of a bubble even though it is not in itself PROOF”
Not really, and certainly not stripped of context. Costs rising higher than inflation is merely evidence that demand is outstripping supply. Updating your priors on the probability of a particular commodity being overinflated merely because it rises higher than inflation would lead you to being wrong far more than you would be right, and again, many things below inflation are also overvalued.
For example, prior to 2020, used cars had their own minor subprime crisis, despite rising exactly at inflation since 2000.
“nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent"”
But you do. You insist that he be held to particular blame for not forseeing a crisis nobody else forsaw, and one which depended, to a large extent, on hundreds of thousands of bank employees misreporting statistics.
The only reasonable explanation for you demand to hold Bernanke to a higher standard than every other elected official (including those in Congress, whose deregulation of the banking industry left the Fed with few tools to actually dig into the the aforemention misreporting) is that somehow you think he must have had the power to see into the future, and done nothing.
You cannot reasonably criticize people for failing to meet a standard which no others met. Doing so is tantamount to insisting they are omniscient, and must have intended the future be brought about.
> “there was no remotely plausible explanation for this run-up in the fundamentals of the housing market”
> And you say nothing for it. You simply appeal to his authority.
Since Dean Baker called the housing bubble as it was inflating, and even sold his apartment in 2004 in expectation of it popping, I reckon he's earned some authority on this topic. But it's true that the NPR piece I linked doesn't lay out Baker's explicit reasoning for calling a bubble. For that, consult his 2002 — yes, 2002 — paper "The Run-up in Home Prices: A Bubble" (https://cooperative-individualism.org/baker-dean_the-run-up-in-home-prices-a-bubble-2002-nov-dec.pdf).
> However, if you want a good answer, consider that homeownership rates increased as population size increased, and that the net number of new homeowners was greater than the net number of new houses. This is a rather reasonable explanation of the rise in housing prices,
A "good answer" should be not just directionally correct but plausible in its magnitudes. Let's try some basic arithmetic. In 1995 the US had 109.5M housing units, of which 63.5M were owner occupied, and in 2005 it had 124.4M units, of which 74.9M were owner occupied (https://www.huduser.gov/datasets/ahs/ahs_taskc.pdf, table A-1). So during the approximate (I can't match the years exactly because HUD's statistics are for odd-numbered years) bubble period, the number of owner-occupied units went up 18%, while the total number of units went up by a mere...14%. The relative shortfall of housing units was therefore about 4%. Meanwhile prices went up by about 90% (Q4 1995 to Q4 2005 from https://fred.stlouisfed.org/series/USSTHPI). So your explanation hinges on an elasticity of price of about 23. I don't think your answer is good or reasonable.
> “There is nothing in my comment about Bernanke being a god.”
> Precisely, and yet you demand that he react to things which occurred in the future. How can you demand omniscience of a mere man?
That's false, as I'll expand on below.
> “it is EVIDENCE of a bubble even though it is not in itself PROOF”
> Not really, and certainly not stripped of context. Costs rising higher than inflation is merely evidence that demand is outstripping supply. Updating your priors on the probability of a particular commodity being overinflated merely because it rises higher than inflation would lead you to being wrong far more than you would be right, and again, many things below inflation are also overvalued.
Yes really, regardless of (non-)context. If you want to get Bayesian about it ("Updating your priors"), E is evidence for a hypothesis H if P(E | H) > P(not-E | H). When H is the hypothesis of a bubble, and E is seeing prices rising faster than inflation, not-E is seeing prices that are level or shrinking in real terms, and E is surely more likely under H than not-E. Thus E IS evidence of H in this case. Pointing to would-be counterexamples where specific H turned out to be false, or to the fact that the evidence does not rise to the level of proof, is irrelevant.
> “nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent"”
> But you do. You insist that he be held to particular blame for not forseeing a crisis nobody else forsaw, and one which depended, to a large extent, on hundreds of thousands of bank employees misreporting statistics.
False. It is literally, demonstrably false that "nobody else forsaw" the crisis. Dean Baker forsaw it. Others did too. For examples of such, like Wynne Godley and Nouriel Roubini, consult Dirk Bezemer's paper "“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models" (https://pure.rug.nl/ws/portalfiles/portal/2646456/09002_Bezemer.pdf). The housing bubble could be diagnosed, and WAS diagnosed, from the aggregate statistics then available, despite banks systemically falsifying some of their own statistics.
> The only reasonable explanation for you demand to hold Bernanke to a higher standard than every other elected official (including those in Congress, whose deregulation of the banking industry left the Fed with few tools to actually dig into the the aforemention misreporting) is that somehow you think he must have had the power to see into the future, and done nothing.
False. You're fabricating a "demand" I've supposedly made that I simply didn't (and nor is it entailed by what I wrote), and you're erroneously inferring that "somehow [I] think [Bernanke] must have had the power to see into the future". Dean Baker did not need to see into the future; nor did Bernanke.
> You cannot reasonably criticize people for failing to meet a standard which no others met. Doing so is tantamount to insisting they are omniscient, and must have intended the future be brought about.
I'm not holding Bernanke to "a standard which no others met" so this critique of yours is irrelevant.
The "experts" relied on a belief that housing prices would not go down all over the US at the same time. They were wrong.
Before, when a bank loaned people money e.g. with a mortgage, it made sure they could get that money back. Then someone(s) came up with the idea to bundle them and cut them into tranches with different characteristics and sell those. The risk was now divided over many investors.
CDO's etc. were built from these sliced bundles of mortgages, making banks needing more mortgages sold. That gave an incentive to lend more and more risky. Ratings agencies put an A+ on parts of the lowest tranches (the most risky) after the re-bundling.
Bankers were warned against the dangers these derivatives posed to the economy, the warnings were disregarded.
The CDO's etc. were insured and the possible payments involved were impossible, no-one seemed to see this or if they saw it, they did not care. Except for few who went in shorted these. (So yes some saw it coming !)
The experts could have written articles for magazines in their field, spoken up at meetings they attended, contacted Members of Congress, given interviews, insisted on more regulation, etc. But they kept mum while the banks raced us to the abyss.
Meh ? Sorry I lived it - in the CA Central Valley in one of the epicenters - did you ? I called in 2005 and 2006 CA representatives, begging them to help, or to tell me whom to contact higher up, because housing prices, mortgages, it all did not add up, and apparently new banking-products were created from it. The politicians were not interested.
Are you telling me that these three gentlemen, having completed studies in this area, being well-paid experts, having all relevant information at their fingertips, did not see it coming ? I think they did but too many profited from it - developers, builders, politicians, local and Fed. government, mortgage co.'s, brokers, realtors, banks, even the media (advertising) - so they hoped it would pass with not too much damage. Well, it did not. And no one took any responsibility, no one paid some back from what they should not have gotten in the first place. Au contraire, the government "rescued" those who had helped to create the mess.
I saw streets where just about every house was for sale, mostly a short-sale or bank-owned. Many people lost their nest egg. But most managed to go on somehow, feed and cloth their kids, put them through school. Those people should get medals.
Yes, I lived it although my urban area didn't have the subprime lending that you experienced. My ire is directed toward the weak-kneed fiscal policy responders who couldn't even cough up $1T to help create jobs and stimulate growth in the U.S. We lost nearly a decade of potential growth. My public-employee real wages are still 12% lower than they were in 2007 because of the decreased tax base caused by slow economic growth. But without the innovative and decisive work of Bernanke, Paulsen, and Geithner in 2008, the "R" word would definitely have been the "D" word with significantly more agony.
The misery did not stop with many people losing their house. (And property taxes going down considerably.) As said, a number of people tried to hang on. Emptied bank accounts, 401-k's, etc., money intended for their kids going to college or for a trip back to the homeland. Prez Obama got elected and people expected/hoped that after the banks were saved, there would be some help for them too. They got nothing, were often humiliated for buying a house at the wrong place, the wrong time. Many were immigrants, they were sold the American dream, that buying a house was the best way to amass wealth. As the crisis deepened and businesses started to experience hard times, lay-offs followed. Many of those still-hanging-on lost their job and now they lost their house too. Still no peep from the government. So when in 2016 a brash NY real estate "tycoon" turned reality-star told people he felt their pain, they elected him Prez of the USA.
Especially in areas like the CA Central Valley, where many newcomers the developers/realtors-brokers/mortgage lenders could feast like never before. Houses went up in value so much and so fast that on builders-flyers they just crossed out the previous price and wrote the new one, often crossing that one out and adding the next higher price, and then again. I saw flyers with prices that way upped $25,000 in just under three months. The Saturday and Sunday papers with real-estate sections were so heavy it felt like lifting half-a-tree.
I applied for a mortgage and had to fight for 20% down/30 yrs fixed. The broker called me a few times explaining how stupid we were to not "take advantage of the beautiful new banking products". Like no down-payment but taking a second mortgage, and/or not paying off on principal & deciding how much interest to pay every month - not paying anything for awhile was OK too ! Variable interest meant lower interest and no worry you can reset a year from now, when the house will be worth so much more ! Furthermore my husband would no doubt make promotion earn more money next year why did I not buy a better house ? It felt like a siren singing in my ear ! (Later I discovered that on a "new product" the broker would made over $10,000 more than on the mortgage as requested.) In this way people who barely made a living were sold houses from $350,000-450,000. Some mortgage brokers put notes in the files claiming secondary sources of income - famous is the picture of an Hispanic gentleman with a big sombrero indicating a Mariachi-band.
On this and similar elsewhere in the US, bankers created so-called derivative products: CDO, CDOsquared, CDOsynthetic, by slicing and dicing mortgages till no one had any idea what was happening anymore, all they saw that these products made a lot of money. Housing prices would never go down all over the country at the same time, wouldn't they ? Ratings agencies helped by rubber-stamping A+ ratings (and making a lot of money too).
A few years earlier a woman named Brooksley Born had advocated that derivatives should be regulated. She was treated by a gaggle of men (bankers/politicians) like middle aged women usually are: with scorn and insults. A few years later they had to admit she had been right all along. She was given the ProfilesinCourage award along Sheila Blair of the FCID.
Interesting thread. As Chair of the FDIC, Sheila Bair was more interested in protecting her institution and her reputation than in helping to prevent the U.S. banking system from failing. No Nobel Prize for her. (I don't disagree that the underground financial market of derivates needs to have accountable and at least enough openness to know how much money is being bet on short sales and the like.)
I understand the snake oil sales that occurred during the subprime mortgage crisis, and there is certainly a lot of blame to go around. However, the majority of home foreclosures during the subprime crisis occurred in a minority of states: California, Nevada, Arizona, Florida, Michigan, Ohio, Indiana, and Illinois. Certainly there were national and federal agencies at fault for allowing loans to subprime borrowers; but state regulators in these specific areas deserve the most blame, IMHO.
The "minority of states" are heavily populated states, and also states with a lot of immigrants.
The CDOs were not based on short sales but on existing mortgages. Nothing "underground" there. What you call snake oil sales was then an accepted, legitimate way of selling a product (caused IMHO by lack of regulation/sanctions).
Nevertheless, while a tribute is not a good time to be critical, I'd like to point out that all the modeling of financial systems, their crises, and their impact on the real economy still left us with an institutional and regulatory framework that allowed another meltdown to happen in 2007-08. And, in spite of Bernanke's deep understanding of the problems, policy makers were not prepared to deal with the crisis effectively and fairly when evaluated through a longer-term lens.
Jeremy Bulow and Paul Klemperer described a way to avoid both the severe real economic damage of letting the financial system fail (The Great Depression), as well as the undesirable redistributive effects of bailouts (The Great Recession):
A lot of popular anger about the bailouts were that they bailed out the banks rather than the mortgage holders.
Would that have worked instead? I think our current inflation situation shows that bailing out both would have caused massive inflation (QE plus widespread consumer demand).
Would we have less homeless if government had helped lower income home owners with lower priced houses. They were the most vulnerable and especially those already somewhat older who lost their job in the aftermath, had little to no chance of bouncing back.
Good question. Hope Noah answers. I think that this + assuaging public anger through more prosecution and harsh sentences or allowing direct public retribution would have dampened the populist movement.
One POV I've seen and am sympathetic to is that the banks should have taken severe haircuts on their debts by forgiving some % of mortgages/troubled assets in return for bailouts. They made bad business decisions and should have suffered for it as most other businesses do (frankly, the Park Chung-Hee method of tossing executives into nasty jail cells has merits to encourage some clarity). I think Iceland did a better job of liquidating their banks.
The Fed could have given these haircuts after buying them (I think).
No. Obama stopped that dead in its tracks. All 50 State AG's were going after the banks for the robo signing scandal. Obama pressured them into a sweetheart settlement, involving the creation of HAMP, instead of Cram down) because as usual, he was more concerned about the banks than the people who voted for him.
https://www.nakedcapitalism.com/2019/01/kamala-harris-tells-big-lie-2012-mortgage-settlement-good-deal-homeowners.html
http://www.billmoyers.com/2015/02/14/needless-default/
As he should have. I had a terse conversation with a neighboring diner around 2010 who was pissed off by the bailouts. I asked him when he went to the ATM, did he expect to get his money. He looked incredulous when I said if he did he believed in bank bailouts. That more people signing 'liar loans' and Angelo Mozilo didn't get jail time was a missed opportunity for a lesson in strengthening the banking system and American society in general. That the banking system should be subject to the same bankruptcy rules as other industries is insane, unless you want to bring on another Great Depression. The whole purpose of a banking system is to borrow short and lend long with a small margin of profit based on high leverage. That's not true in any other industry. Federal deposit insurance (which btw covered the S&L's too) with intense regulation has been enormously beneficial to the country.
Urgh. NO! You are basically saying Wall Street should just go ahead and blow it all up again because there won't be consequences. Bailing out the banks WAS more likely to create depression. At least according to this IMF study of 124 banking crises that came out just in time for everyone to pretend it didn't exist.
https://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
If you want a better rundown of why it happened and why we did everything possible to make it last longer you really need to read this:
https://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/?single_page=true
What Noah said. BofA paid another substantial settlement for its (forced)ownership of Countrywide a few days ago. I can not begin to count the billions that the large banks have paid. But they certainly have paid. Little of that would have been possible if they went out of business.
And, of course, bank profits are now limited by the new capital reserve requirements.... because we can not trust CEOs who are compensated based on quarterly results to care about a small possibility of catastrophic failure.
There was at least $9.3 billion in fines that went back to homeowners etc. https://www.marketwatch.com/story/us-breaks-down-93-bln-robo-signing-settlement-2013-02-28
At least one person actually pled guilty to something (other than Bernie Madoff). Robo-signing fradulent documents without review is something relatively easy to show "intent to defraud": https://www.reuters.com/article/robosigning-plea/ex-mortgage-document-exec-pleads-guilty-in-robo-signing-case-idUSL1E8ML0C120121121
There was a lot of concern about chain of title problems due to the difficulty of making MERS jibe with manual county clerk processes, robosigning foreclosure documents, etc. I have not seen recent discussion of significant actual problems with titles, e.g. refusal of title insurance companies to insure titles, but it was definitely a concern a decade ago: https://www.govinfo.gov/content/pkg/CHRG-111hhrg63124/html/CHRG-111hhrg63124.htm
I think the current environment is going to be a good test of Dodd-Frank and bank reserve requirements (the infamous "stress tests") to see if the repaired system after the debacle of the Glass-Stegal repeal will hold up under stress. The British pensions clearly started to buckle, but so far nothing significant seems to have in the US. Speculative assets in tech etc. have sustained serious losses, but don't seem to be causing systemicdamage which is similar to what happened in 2000-2003. I see the grumbling about Treasury liquidity, but it is difficult right now to differentiate between unhappy financial people suddenly having a difficult market environment or something that could cause a house of cards implosion.
As somebody who started to work when Paul Volcker was doing his first massive jacking of rates, it is hard to see getting interest rates back to the low end of normal as an existential crisis. The challenge is that people have become addicted to central bank suppressed interest rates for a decade now instead of viewing it as a spriong being compressed and liable to bounce back up at any time. The Fed has barely even started QT on its balance sheet - that process continued over a couple of years or more is likely to keep mortage rates at 6% or more (which would have been historically a very low mortgage rate until a decade ago). https://www.freddiemac.com/pmms/pmms30
Yeah, thank god we had some bankers pay the US Government, some US Dollars, that it can print itself. Totally makes the millions of lives destroyed worth it.
What does that have to do with justice?
The point of fining banks isn’t to justify the suffering that occured, or even to pay back the victims, but to inflict punitive damages on said banks.
And by the way, your suggestion to merely print money is simply another form of taxation, whereas deliberately taking it from banks which engaged in malfeasance is not.
Bernanke, when asked, insisted that the bail-outs were not done with taxpayer money, but by printing addition US currency.
https://www.youtube.com/watch?v=U_bjDAZazWU
"It's much more akin THOUGH IT'S NOT EXACTLY THE SAME as printing money than it is to borrowing"
Emphasis added.
Quantitative Easing is not printing money.
It doesn't take a rocket surgeon to piece this together. QE is the fed buying bonds from the treasury. The treasury "prints" money to fund government spending. So, it usually doesn't just print it out of thin air (so to speak), but has a loan to back it (either from the Fed or from a 3rd party buyer). So, if QE 'feels like' money printing is really a question of how the government spends the created money (or really borrowed money in the form of bonds). In 2008-2009, QE didn't feel like money printing as much as the pandemic QE because that QE went to bank balance sheets and trickled out into asset prices slowly. In pandemic QE, the government more or less handed out money for ordinary people to spend how ever they want. And that felt like money printing. We can see this with M2.....
So yes, it is money printing, but how much it feels like the banana republic style money printing we associate with the phrase depends on what the money is used for.
Q. "So you've been printing money ?" A. "Yes, effectively, and we needed to do that as our economy is weak and inflation is very low (....)" Sorry, I can only repeat what was said. (Interview with Mr. Bernanke in 2009 on 60 Minutes "The Chairman". Link already given by CleverBeast.)
Quantititave easing is creating money out of thin air and putting it in the bank's reserve accounts at the Fed. It won't necessarily find its way into M2 stats though. For all intents and purposes it IS printing money.
“frankly, the Park Chung-Hee method of tossing executives into nasty jails cells has merits to encourage some clarity”
Ah yes, I too would like the government to arbitrarily detain people I don’t like without trial in order to force them into making economic decisions I want.
How can you seriously propose this kind of authoritarianism? That is not how we deal with accused individuals in this country, nor how any free country does.
Park Chung-Hee was a brutal dictator, and anyone who suggests bringing his methods of “justice” to the United States is little better than the MAGA-oids who idolize Orban’s Hungary. Orban, at least, has not yet massacred protesters.
They GFC was the exception here. We have a long history of prosecuting bankers when there fraud and greed blow up the economy.
https://www.pbs.org/wgbh/frontline/article/were-bankers-jailed-in-past-financial-crises/#:~:text=Savings %26 Loan Crisis,convicted by the Justice Department.
Spare me your faux moral indignation over the poor wee bankers. The 2008 GFC was an event akin to wartime in the (economic) destruction it caused and the government certainly didn't have issues with tossing people in jail to enforce economic outcomes there (such as hoarding and black market activities). It's fine to make bankers very afraid to do shady shit with the fear of jail/the public flattening them if they don't get the message.
https://open.substack.com/pub/theliberalpatriot/p/lawlessness-erodes-solidarityand?r=ehsiz&utm_medium=ios&utm_campaign=post
"Spare me your faux moral indignation over the poor wee bankers."
Yeah, I'm not about to let you set the precedent that will let us go full fascist. You even make the precise fascist justification of the "exception" of a "wartime economy." You then make the fascistic appeal of making our enemies fear us.
Liberal democratic countries follow the rule of law.
Spare me your petty excuses for your authoritarian impulses.
>Yeah, I'm not about to let you set the precedent that will let us go full fascist.
"Putting bankers in jail for melting down the economy is fascism, and the more jailed the more fascist it is"
Do you also think that prosecuting some of the 1/6 insurrectionists is fascism? After all, it's being used to discourage people from engaging in an activity, right?
>You then make the fascistic appeal of making our enemies fear us.
"People fearing consequences of their actions is fascism"
Was the USA a fascist state during WWII? Were the covid lockdowns/other NPIs fascism?
"Do you also think that prosecuting some of the 1/6 insurrectionists is fascism?"
Prosecution alone is not an issue. If you can prove in a court of law that they broke the law, then putting them in jail is just. Denying them their Constitutional right to a trial, with due process, before a jury of the peers, is fascist.
It really is that simple.
"People fearing consequences of their actions is fascism"
It sure as hell is when you decide what consequences go with what actions after the fact.
Could have nationalized the banks (for a period) too.
We did. Fannie Mae and Freddie Mac are still under US government control.
There is so much misinformation about what happened. The US came down hard on people.
I don't see why banks are ever given bailouts without agreeing to a large share dilution that gives the federal government at least 50 percent ownership. Is there some theoretical reason that would cause problems or is it just protecting vested interests?
Something that puzzles me even more is that when "too big to fail" banks are hit with very large fines for misconduct, the fines are sometimes abated to avoid creating systemic risk. Why can't the Fed or the Justice Department impose fines in the form of diluted shares instead of cash?
(I pointed out many years ago on Facebook that I should *also* get a Nobel Prize for suggesting this. But I'm still waiting to hear from the committee)
"I don't see why banks are ever given bailouts without agreeing to a large share dilution that gives the federal government at least 50 percent ownership."
The practical reason, as I understand it, is that it's unconstitutional. Banks generally do not own themselves. They are owned, instead, by their shareholders (who are typically people about to retire and other ordinary Americans). Share dilution is a form of theft not from the bank, but from the bank's shareholders.
But practically, this isn't too different from what actually occurred. Banks were forced to engage in fire sales of assets are TARP, assets which the US government bought at the best time to buy possible, and then later sold for a rather tidy profit.
The idea that the "bailouts" were in exchange for nothing is therefore somewhat misleading.
Companies can choose to issue shares. There's nothing wrong with the government saying "if you want the money, issue enough shares that we take a majority. If not then have fun going bankrupt." That doesn't entail any seizure.
I don't disagree, but the more painful you make the offer, the fewer companies will accept, and arguably the more painful the nation's recovery will be.
It's pretty hard to believe that a bank would choose to go out of business versus accepting new management especially when replacement jobs are hard to find. Short of the government doing a Roman Decimation of the staff, I'm not sure what would make them think that it's better to go kaput than issue some more shares and keep their jobs.
You're apparently not aware that the bailout of Citibank was accompanied by, as I recall, 98% dilution. The same was true of the rest of the industry.
This is how the French bail out companies - if you want $ give us your shares and we'll guide you.
When people ask me why I am so confident that my long term stock investments will do okay and that we are not in for a long bout of stagflation I say “we understand economics better these days”. This is one outstanding example.
Outstanding post Noah
Thank you, sir!
Nice post.
But for fun let me turn the screw a bit. Would it fair to say that Diamond-Dybvig (1983) gave theoretical support to a view of banks that had been widely held for a long time but that economists (and bankers!) had been slow to accept? Similarly, was the heavy lifting of Bernanke's paper to give a convincing historical example of the need for a type of central bank policy response that had been known anecdotally since Bagehot, but that economists - you mention Feldstein and Hubbard - (and bankers!) had been slow to accept? (Of course, I meant "certain economists" or "some economists" - but we are talking about a very influential group.) I learned about the importance of deposit insurance in high school in the 60s, but the moral hazard gang never stopped carping about it. but at least they carped less after Diamond-Dybvig!
Yep
Seriously, are you being paid by Wall Street, Bernanke, and the Obama admin? Because it's either that or you are willfully obtuse. First you construct this false Binary, 1. point and laugh as banks go under or 2. just hand the banks an unlimited supply of free money and poor black people's houses.
https://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf
If Bernanke was an amazing scholar, as opposed to Wall Street's bag man, you think he might have come across this widely publicized IMF Paper Studying 124 banking crises. They found, rather definitively, that the least costly way to handle a banking crisis was to fire the entire C-Suite, set strict guidelines, and separate out the bad loans and investments in order to restructure and sell them.
A process the FDIC knows well, though admittedly on a much smaller scale. As opposed to what the worthless, money-grubbing, miss-leadership class of this country went with; regulatory forbearance. Of which that IMF study said:
“The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred…”
Enough with the 'repaying TARP' charade. That was little more than Uncle Sam switching his bank bailouts from the very public Treasury Department to the very private FED purely so that the Wall Street executives who blew everything up could wiggle out of the restrictions TARP put on them paying insane bonuses to themselves.
https://www.nakedcapitalism.com/2010/03/the-empire-continues-to-strike-back-team-obama-propaganda-campaign-reaches-fever-pitch.html
But who can blame them? This is America. We don't allow rich people to suffer any consequences. Ever. For Anything. No matter how many millions of lives they ruin in the process. https://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/?utm_source=pocket_mylist
(Even if you hate everything I just wrote, read that Atlantic Article, It's worth it.)
Nice explanation!
We could say that these economists are really the gold standard of the profession, for lack of a better figure of speech...
It's a nice take on things, I appreciate it. Funny how fascism is rising anyway though....
This is terrific, thanks!
Can you do an explainer some day on 100% reserve banking? It's one of those things I keep trying to understand and can't, like not being able to reach something on a high shelf.
Yep, will do!
While your overall thesis is sound, there remains no excuse for not prosecuting those bankers who brought about the problems.
I’m the S & L fiasco under George H. W. Bush,
Over 60 bankers went to jail, under Obama, no one went to jail over ratings, selling, or malfeasance. That needs to be changed for the next crisis.
While I’m sympathetic to this point, as there is some evidence that more aggressive prosecution might have been able to secure a few more convictions, for the most part, bankers did not break the law.
You cannot simply declare, ex post facto, that certain behavior is illegal. The 2007 crisis was brought about largely by fully legal behavior, and the proper answer to that is not individual punishment--since again, laws were not broken--but systemic reform.
The Constitution specifically bars ex post facto laws and Bills of Attainder precisely to prevent the mob braying for blood when their are society-wide failings. These are good rules, and we should not break them merely to satisfy our own desire for bloodlust.
Bonds and other financial instruments were being graded high above their level they actually were and this was known. Rating agencies were going against their basic practices to keep the party going. Banks were knowingly selling bonds to the Germans based on false and misleading ratings. That has always been called FRAUD. That is not ex post facto. It was simply not executed legally by the Obama Administration. Having lived through it, my S&L was taken over, where I banked, not what I owned, and the government went deep into debt, for that time period.
They had a chance to start breaking up the bank, but the former head of the New York Fed, then the Treasury Secretary, declined any interest to go there.
Yes things can always be done to a higher level of accountability, but removing those from any accountability almost guarantees a resurgent of the same event in a different form.
"That has always been called FRAUD."
Except, no, it hasn't, because fraud requires active intent. If everyone, from the lowest clerk on up, is just sort of signing off on things they probably shouldn't, then no fraud has occurred. Incompetence is not fraud. That's the trouble with '08, if everybody's cheating (and we're talking hundreds of thousands of people here), then there's not really requisite mens rea for a conviction. More annoyingly, most of those most directly involved in what you term fraud were relatively low-level workers. The executives created incentives impossible to meet without following the inflated numbers, but kept their own hands largely clean, and in some cases did not even realize exactly how fucked they were.
"They had a chance to start breaking up the bank"
Breaking up the banks would have worsened the financial crisis, as Bernanke's paper shows. It's the epitome of the phrase, "cutting off your nose to spite your face."
You are just wrong.
"In short, all of this was a scam — and that’s why so many of these mortgages lack a true paper trail. Had these transfers been done legally, the actual mortgage note and detailed information about all of these transactions would have been passed from entity to entity each time the mortgage was sold. But in actual practice, the banks were often committing securities fraud (because many of the mortgages did not match the information in the prospectuses given to investors) and tax fraud (because the way the mortgages were collected and serviced often violated the strict procedures governing such investments). Having unloaded this diseased cargo onto their unsuspecting customers, the banks had no incentive to waste money keeping “proper” documentation of all these dubious transactions."
https://www.rollingstone.com/politics/politics-news/invasion-of-the-home-snatchers-185849/
"First, there was no serious criminal prosecution, meaning that no one will be charged with a felony and no one will go to jail. In terms of affecting executives’ incentives, this is the only thing that matters.
Even the terminology used to frame the discussion is wrong. Kelleher, an attorney with extensive experience in private practice and the public sector, tells it like it is: “ ‘Robo-signing’ is massive, systematic, fraudulent, criminal conduct.” Alternatively, as he points out, we could just call it “lying, cheating, and stealing.”"
https://slate.com/business/2012/02/the-robo-signing-settlement-wont-help-homeowners-and-it-doesnt-hurt-the-banks.html
"Buried in the sweeping mortgage settlement with banks, for which final documents were filed this week, are five whistleblower cases that shed light on the litany of foreclosure abuses by the banks."
https://www.propublica.org/article/four-whistleblowers-who-sounded-the-alarm-on-banks-mortgage-shenanigans
" The FHA insures one-third of the mortgages loans in the country, taking on the risk of homeowners' default from lenders like Citi. The government requires lenders to certify that insured loans meet FHA standards.
Citi appears to have flouted those standards. According to the lawsuit, the bank passed along subpar loans to the FHA until very recently, making "substantial profits through the sale and/or securitization of FHA-backed insured mortgages" while "it wrongfully endorsed mortgages that were not eligible.""
https://www.propublica.org/article/how-citibank-dumped-lousy-mortgages-on-the-government
"Exec Who Allegedly Enabled Fraud Runs Chase’s Effort to Compensate Foreclosure Victims"
https://www.propublica.org/article/exec-who-allegedly-enabled-fraud-runs-jpmorgan-chases-effort-to-compensate
"Nevada's attorney general charges that Bank of America and the now-defunct mortgage giant Countrywide acquired by the bank in 2008, deceived borrowers and investors at almost every stage of the process.
According to the suit, borrowers were duped into unaffordable loans and then victimized again through a misleading mortgage modification program that homeowners tried to use to avoid foreclosure. Finally, the suit alleges, the bank filed fraudulent documents to move forward with the foreclosures."
https://www.propublica.org/article/nevada-slams-bank-of-america-with-sweeping-suit-nation-wide-foreclosure-set
The Obama admin just swept everything under the rug with the settlement.
"....as Bernanke's paper shows....."
Oh economists, it must be nice to participate in field where you never have to carry out the experiment that invalidates your hypothesis....
Except 2008 and 2010 did in fact provide empirical evidence for Bernanke's hypothesis.
That's the best you're going to get, and for all the sarcastic comments people make about economics, I find it amusing that they would rather rely on gut instinct than models with even some data behind them.
"Except 2008 and 2010 did in fact provide empirical evidence for Bernanke's hypothesis."
No, because you don't have a counter factual. More than that, it was something that is only observable once, in contrast to say observational sciences like astronomy.
At best, all you can say is that giving banks a bunch of money helped them from not collapsing, which is a really trivial accomplishment. It says nothing about if policy A would have worked better than policy B or C...etc.
And what do you think economic models are other than a numerical representation of gut instinct in a such a pseudoscience? Mind you, I don't say pseudoscience to be derogative, rather that is what it is. In real sciences models can be truly explicitly tested.
Your view on breaking up the banks may well be correct, my own thoughts are that they need to be lessened in power and influence, breaking them up will allow for a reformulation in a new form, that may better serve the present day system.
In your example of the "impossible expectations" on the staff, while racketeering may not be the best resort, if one sets up a system, that is doomed to fail, that should be criminal, at least in my view.
The ones who practically forced their underlings to commit the fraud, and will still contend it is fraud, even if everyone is doing it, should have been exposed for the failing they brought about.
If it could happen with the S&L's, why not the banks, though since they do own the Fed, that does make it harder.
"if one sets up a system, that is doomed to fail, that should be criminal, at least in my view."
And indeed, many of the actions which were taken are now criminal, but at the time they were legal, and you cannot--for both constitutional and moral reasons--change the law to apply retroactively.
"If it could happen with the S&L's, why not the banks, though since they do own the Fed, that does make it harder."
There are two problems in this statement. The first is that the part about the banks owning the Fed is nonsensical. They do not, and I'm even really sure if you're trying to imply some grand conspiracy--or how that would work, as prosecution is the job of the Justice Department, not the Federal Reserve.
The second problem is that the S&Ls of the 90s did simply commit outright fraud, and it was illegal at the time. There were no laws against what happened in 2008. It really is that simple.
The phrases "for the most part" and "largely" in your comment are not necessarily wrong, but they are certainly load-bearing; the natural follow-up question is why there were few prosecutions for the crisis-contributing actions that WERE law-breaking and/or illegal. Who went to prison for the fraudulent foreclosures?
Quite a few people have been sent to prison regarding fraudulent foreclosures, but these are mostly small-time employees. It’s not really headline-generating stuff.
Also, although fraudulent foreclosures certainly made the crisis worse, they’re a positive feedback effect, not it’s origin.
You don't actually name names, or even try to count, how many went to prison for the foreclosure frauds, and you grant that they were mostly small fry. Which is how Big Finance gets away with it; the senior management in the driving seat is perpetually insulated from the consequences of de facto policies, and indeed most of the foot-soldiers actually carrying out the policies don't go to prison. And your second paragraph is not actually a rebuttal of what I wrote.
“and you grant that they were mostly small fry”
Yes, I grant that the people guilty of crimes are the people charged with crimes. What a shock.
My second paragraph is not an attempt to rebut you.
If you're just retreating into tautology, I think this argument is over. For everyone else reading this: go take a look at the book
☞ Chain of Title: How Three Americans Uncovered Wall Street's Great Foreclosure Fraud, by David Dayen,
then review what's been posted in this comments section in that light.
They were also quite similar in that in both the values of the assets were misrepresented, by the financial institutions and the rating agencies. I am not convinced, but hopeful, that the changes the Great Recession brought about, may finally seal off those avenues for deceit, but would not guaranty it.
Nice article as always from Noah but this is is a very generous assessment of Bernanke's work in the federal Reserve.
I've seen some people claiming that Bernanke had nothing to do with the crisis and did the best he could.
We can debate the second premise but the first is utterly untrue.
Although it's not mentioned here, Bernanke joined the federal reserve
from Princeton six years before 2008, so he was around a full six years before the crisis and played his role in creating it.
And he was no different, despite being a scholar of the great depression, in tirelessly claiming before the recession that the problem of stabilizing the economy and avoiding major economic crises were now solved.
In fact, in 2006, as Alan Greenspan himself began to express doubts over the state of the housing market, Bernanke was supremely confident and gave a speech to Congress confidently stating that the housing market ' largely reflects strong fundamentals'.
We all know how that turned out a mere two years later.
I think the default story of the great recession of 2008 as the actions of greedy bankers converting subprime mortgages into risky gambles has obscured how much of a role the federal reserve played as well.
It was the federal reserve that supported the gambling activities of these banks in the name of market efficiency.
It was the federal reserve that kept policy interest rates lower than the growth rates of the economy for a decade, depressing yields on safer investments and forcing investors to seek for higher returns in riskier investments.
It was the federal reserve that adopted the rather fatuous idea that bubbles cannot be stopped as they are developing. This was even more damaging as the housing bubble was completely unproductive unlike the dotcom bubble.
Allowing it to play out to its full consequences caused the great recession.
And Bernanke was responsible throughout all of this.
In no small way, it was Bernanke and the Fed's pursuit of price stabilization that led to the crisis. Bernanke had adopted a monetarist view of the great depression of 1929, stating repeatedly that it was caused by a severe contraction in the money supply.
This conveniently ignores that throughout the 1920s, there had been a decade of low and easy interest rates fuelling a stock bubble while the attention of the Fed was directed elsewhere at stabilizing customer prices.
How different was this from the Fed's actions prior to 2008
It's not a new insight. In 1937, Chester Arthur et al in his wonderful book, Business and the banking Cycle, had already fully demonstrated the dangerous implications of price stabilization.
And as Mervyn King pointed out, who is going to clean up the mess of quantitative easing. I would agree that Bernanke solved the crisis to a degree in the short term. But there is a convincing case to be made that his actions have had damaging consequences, especially for pension funds and retirees, in the long term.
I'm not going to debate on whether he merits the Nobel economic prize. In my opinion, it is not a Nobel at all. It is a memorial prize created by bankers to reward other bankers and theoreticians.
And that's fine. Nobody should lose sleep over it. But claiming that Bernanke solved the crisis without mentioning his substantial role in creating it and the substantial mess he left afterwards does a disservice to history, to the people whose lives were fundamentally changed for the worse, and to the truth.
Although, with regard to the last, that's usually the first casualty of these things
“In my opinion, it is not a Nobel at all. It is a memorial prize created by bankers to reward other bankers and theoreticians.”
It is awarded by the same institute that awards all the other Nobels, none of which have any particular special meaning besides the fact that they were created by Nobel himself.
If you trust the Institute’s judgement on those prizes, you should be consistent and trust it on the Nobel Memorial Prize in Economics. If you do not trust its judgement on the Economic Nobel, then it is rather foolish to trust it on matters of chemistry, physics, or literature.
The Norwegian Nobel Committee is responsible for the selection of eligible candidates and the choice of the Nobel Peace Prize laureates. Originally, in 1901, in Physics, Chemistry, Physiology/Medicine, Literature. The Nobel Peace Prize was added in 1969. The Nobel Committee is composed of five members appointed by the Storting (Norwegian parliament).
The prize for economics is awarded by the Sveriges Riksbank in Memory of Alfred Nobel (first time in 1968).
"The prize for economics is awarded by the Sveriges Riksbank in Memory of Alfred Nobel (first time in 1968)."
This is correct only if by awarded, you mean "financially awarded". The Nobel Memorial Prize in Economics is funded by the Swedish Central Bank, but the laureates are chosen by The Royal Swedish Academy of Sciences, as are the Nobel Prizes in Chemistry and Physics.
The Norwegian Nobel Committee is responsible for the selection of various other Nobel Awards.
Thank you for this correction.
The link to a review is wrong (leads to Investopedia entry on "TALF"). Link on the old blog is also broken: cfr.org/content/newsletter/files/Smith-2016-International_Finance.pdf
There should have been a comment in this post about the lack of punishment for the bad financial actors vis a vis whether Bernanke had feelings about it.
Only problem with saving the bad actors is they're still with us. Business cycle flushes would normally 'clean' the system and reset values. Greenspan/Bernanke have created a scenario for housing bubbles, stock bubbles, massive deficits and have and expanded the divide between rich and poor all in the name of saving us.
Inequality definitely a big concern, but you can put in policies to fix that (if there is the political will to do so).
I’m not a fan of the “cleansing” route because what’s more likely is a lot of pain for a lot of people leading to fascist dictatorship. You can’t separate the economic from the political.
I think that we shouldn't have let he banks collapse, but made them eat more losses in form of a cramdown. Obama, being excessively enamored of Wall Street, blocked that.
https://www.nakedcapitalism.com/2019/01/kamala-harris-tells-big-lie-2012-mortgage-settlement-good-deal-homeowners.html
If there wasn't the political will to do that immediately after they blow up the world's economy what on earth makes you think anything short of apocalypses will?
We saw inequality decrease after the first Gilded Age, and that started before the Great Depression, so if there was political will then, why can't there be now?
Unbelievable. Three guys, economists, who stood by and let the 2007 mess happen, causing much poverty and misery in the US and elsewhere in the world, get a Nobel-prize ???
Well, many others involved got rewarded too, so why not.
Did you read the post?
Bernanke *saved* you from the worst of the Great Recession, and had nothing to do with its causes.
Subprime mortgages were primarily the fault of Congress, with some additional responsibility laying on Greenspan.
By the time Bernanke took over, there was literally nothing that could have been done to avert the crisis.
Point your hate somewhere else, you’ve picked a scapegoat in your own self-righteous masturbation.
Wow. Talk about hate and whatever. And yes I read the post. But as said, I also lived in part of the US hard hit during the crisis of 2007/2008 and saw in the years before things developing, some almost criminal, some outright criminal, that led to said crisis. Am I really to believe that these learned experts did not see what I saw ? I was mainly surprised it took so long for the proverbial shite to hit the proverbial fan. I described my observations and you call that masturbation. Hahahaha. But, maybe you are right and all journalism, writing, moviemaking, creating art, is a form of masturbation. Why do you not write an in-depth article about this ?
Back to the topic: The experts could have looked into what was happening. They could have talked to Brooksley Born (and Selma Blair) who advocated regulation of derivative banking products and were rebuffed. They could have studied the "beautiful new banking products" on offer making more/higher mortgages possible. They could have and they did not - that's my grievance. I will now stop writing because as you indicated I can do other, more pleasurable things, with my fingers.
I actually quite like Brooksley Born, but the point I am trying to make is much narrower than you seem to think.
The economics profession as a whole failed to predict the greatest economic disaster in nearly a century. That is indeed a serious failing, and one which it is still trying to learn from.
However, Born failed. The Fed did not have the power to regulate derivatives. Furthermore, she did not predict the crisis, hardly anyone did, she merely realized one of its many causes.
Blaming Bernanke for the failings that afflicted every economist is simply picking a scapegoat, and it is both a deeply unjust scapegoat and one which has always reeked of more than a little antisemitism.
You are now accusing me of being an anti-semite ? I know the Jewish people invented the "scape-goat", literally, but what has that to do with anything ?
"You are now accusing me of being an anti-semite ?"
Not you specifically, I've just always found the hatred of Bernanke to be deeply unfair and tinged with antisemitism. The Jew who saved the financial--and by proxy, America--system gets only hatred for his action. It's kind of ironic, no?
I did not even know he was Jewish. Why/how would I ? I only know one great economic thinker who was Jewish (although converted): Karl Marx.
Being upset (I lost a lot, more than just money) that someone (no THREE someones) are awarded a prestigious prize does not mean I "hate" him. That would be ridiculous. I have great respect for Mr. Bernanke and for the difficult job(s) he took upon him.
Had you studied my masturbacious entries more closely, you would have read that I did not put the blame of the crisis on him (or the other two) but on many other people. Who all made money from the mortgages/CDO's or expected to. I asked a number of them: what were you thinking ? Well, they were not thinking, they just did what they thought they had to do to feed their families. But the experts should have recognized the warning signs and acted upon them. I will never understand how something so obvious was missed by so many experts - or was their expertise causing the blind spot ?
> Bernanke *saved* you from the worst of the Great Recession, and had nothing to do with its causes. [...] By the time Bernanke took over, there was literally nothing that could have been done to avert the crisis.
Bullshit. Bernanke was on the Federal Reserve Board from 2002, even before he became its chair in 2006. There was a window of years when he could've been raising hell about the mortgage bubble, and he didn't. I turn the mic to Dean Baker (https://www.npr.org/templates/story/story.php?storyId=122992857):
"In the years from the beginning of the bubble in 1996 to 2002, the rise in house prices already exceeded the overall rate of inflation by more than 30 percentage points. Since there was no remotely plausible explanation for this run-up in the fundamentals of the housing market, it should have been apparent to Bernanke and others at the Fed that the housing market was experiencing a bubble. [...] Instead, Bernanke and Greenspan insisted that there was no bubble and that everything was fine in the housing market. As a result, the bubble continued to grow"
> Point your hate somewhere else, you’ve picked a scapegoat in your own self-righteous masturbation.
Take a look in the mirror.
“Bullshit”
That is certainly what you’re peddling, not least because I am not scapegoating anyone, and thus the sentence you end with is nonsensical.
You attribute the the Fed a job it does not have, and to Bernanke powers he did not have.
Even more egregious, you blame Bernanke for not being a god. It is easy to criticize, ex post facto, the steps not taken. However, the fact remains that only a few dozen people saw the oncoming crisis, and it was Greenspan, not Bernanke, who actually held any power to affect it.
Even then, “raising hell” as you put it would have done little. It is Congress, after all, which holds the legislative power. The Fed merely enforces existing regulations.
Perhaps Bernanke’s only genuine mistake was not increasing interest rates in 2006, but this is at best a minor criticism.
Additionally, housing prices exceeding inflation is not evidence of a bubble. That is not how economics works. Many goods (college degrees, medical services, housing, pre-K education) have exceeded the rate of inflation by far more than 30%. This cannot consistently be used to indicate bubbles, and indeed, bubbles may occur even in goods that rise by rates less than inflation, provided the fundamentals are lower than expected.
In short, your criticism of Bernanke amounts to the fact that he was not omnipotent, which is the specious criticism of a meagre intellect.
Specious criticism? Again, I urge a visit to the mirror.
The Fed DOES have the job of promoting the financial system's stability and monitoring it for risks. It says so itself: https://www.federalreserve.gov/aboutthefed/files/the-fed-explained.pdf#page=50. By dragging its feet about confronting the housing bubble it signally FAILED to do that job.
There is nothing in my comment about Bernanke being a god. Dean Baker and I object to Bernanke engaging in active bubble denialism when he could've been briefing the public about the bubble. And even you grant that he could've raised interest rates when he did become chair (though, yes, by that point most of the bubble was inflated).
You point out that "housing prices exceeding inflation is not evidence of a bubble", which is surely wrong; it is EVIDENCE of a bubble even though it is not in itself PROOF. And you say nothing against Baker's observation that "there was no remotely plausible explanation for this run-up in the fundamentals of the housing market".
Your criticism of my criticism is a blatant straw man: nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent". I can only hope that your patently defective summary of my criticism is due to a hurried misreading rather than outright mendacity (or perhaps "a meagre intellect").
“there was no remotely plausible explanation for this run-up in the fundamentals of the housing market”
And you say nothing for it. You simply appeal to his authority. However, if you want a good answer, consider that homeownership rates increased as population size increased, and that the net number of new homeowners was greater than the net number of new houses. This is a rather reasonable explanation of the rise in housing prices, which alone did not cause the Great Recession.
It is the fact that many of these loans given to allow people to own homes were not possible to pay back that ultimately brought the bubble crashing back down to reality.
“There is nothing in my comment about Bernanke being a god.”
Precisely, and yet you demand that he react to things which occurred in the future. How can you demand omniscience of a mere man?
“it is EVIDENCE of a bubble even though it is not in itself PROOF”
Not really, and certainly not stripped of context. Costs rising higher than inflation is merely evidence that demand is outstripping supply. Updating your priors on the probability of a particular commodity being overinflated merely because it rises higher than inflation would lead you to being wrong far more than you would be right, and again, many things below inflation are also overvalued.
For example, prior to 2020, used cars had their own minor subprime crisis, despite rising exactly at inflation since 2000.
“nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent"”
But you do. You insist that he be held to particular blame for not forseeing a crisis nobody else forsaw, and one which depended, to a large extent, on hundreds of thousands of bank employees misreporting statistics.
The only reasonable explanation for you demand to hold Bernanke to a higher standard than every other elected official (including those in Congress, whose deregulation of the banking industry left the Fed with few tools to actually dig into the the aforemention misreporting) is that somehow you think he must have had the power to see into the future, and done nothing.
You cannot reasonably criticize people for failing to meet a standard which no others met. Doing so is tantamount to insisting they are omniscient, and must have intended the future be brought about.
More falsehoods from you.
> “there was no remotely plausible explanation for this run-up in the fundamentals of the housing market”
> And you say nothing for it. You simply appeal to his authority.
Since Dean Baker called the housing bubble as it was inflating, and even sold his apartment in 2004 in expectation of it popping, I reckon he's earned some authority on this topic. But it's true that the NPR piece I linked doesn't lay out Baker's explicit reasoning for calling a bubble. For that, consult his 2002 — yes, 2002 — paper "The Run-up in Home Prices: A Bubble" (https://cooperative-individualism.org/baker-dean_the-run-up-in-home-prices-a-bubble-2002-nov-dec.pdf).
> However, if you want a good answer, consider that homeownership rates increased as population size increased, and that the net number of new homeowners was greater than the net number of new houses. This is a rather reasonable explanation of the rise in housing prices,
A "good answer" should be not just directionally correct but plausible in its magnitudes. Let's try some basic arithmetic. In 1995 the US had 109.5M housing units, of which 63.5M were owner occupied, and in 2005 it had 124.4M units, of which 74.9M were owner occupied (https://www.huduser.gov/datasets/ahs/ahs_taskc.pdf, table A-1). So during the approximate (I can't match the years exactly because HUD's statistics are for odd-numbered years) bubble period, the number of owner-occupied units went up 18%, while the total number of units went up by a mere...14%. The relative shortfall of housing units was therefore about 4%. Meanwhile prices went up by about 90% (Q4 1995 to Q4 2005 from https://fred.stlouisfed.org/series/USSTHPI). So your explanation hinges on an elasticity of price of about 23. I don't think your answer is good or reasonable.
> “There is nothing in my comment about Bernanke being a god.”
> Precisely, and yet you demand that he react to things which occurred in the future. How can you demand omniscience of a mere man?
That's false, as I'll expand on below.
> “it is EVIDENCE of a bubble even though it is not in itself PROOF”
> Not really, and certainly not stripped of context. Costs rising higher than inflation is merely evidence that demand is outstripping supply. Updating your priors on the probability of a particular commodity being overinflated merely because it rises higher than inflation would lead you to being wrong far more than you would be right, and again, many things below inflation are also overvalued.
Yes really, regardless of (non-)context. If you want to get Bayesian about it ("Updating your priors"), E is evidence for a hypothesis H if P(E | H) > P(not-E | H). When H is the hypothesis of a bubble, and E is seeing prices rising faster than inflation, not-E is seeing prices that are level or shrinking in real terms, and E is surely more likely under H than not-E. Thus E IS evidence of H in this case. Pointing to would-be counterexamples where specific H turned out to be false, or to the fact that the evidence does not rise to the level of proof, is irrelevant.
> “nowhere do I claim or even suggest that Bernanke could or should have been "omnipotent"”
> But you do. You insist that he be held to particular blame for not forseeing a crisis nobody else forsaw, and one which depended, to a large extent, on hundreds of thousands of bank employees misreporting statistics.
False. It is literally, demonstrably false that "nobody else forsaw" the crisis. Dean Baker forsaw it. Others did too. For examples of such, like Wynne Godley and Nouriel Roubini, consult Dirk Bezemer's paper "“No One Saw This Coming”: Understanding Financial Crisis Through Accounting Models" (https://pure.rug.nl/ws/portalfiles/portal/2646456/09002_Bezemer.pdf). The housing bubble could be diagnosed, and WAS diagnosed, from the aggregate statistics then available, despite banks systemically falsifying some of their own statistics.
> The only reasonable explanation for you demand to hold Bernanke to a higher standard than every other elected official (including those in Congress, whose deregulation of the banking industry left the Fed with few tools to actually dig into the the aforemention misreporting) is that somehow you think he must have had the power to see into the future, and done nothing.
False. You're fabricating a "demand" I've supposedly made that I simply didn't (and nor is it entailed by what I wrote), and you're erroneously inferring that "somehow [I] think [Bernanke] must have had the power to see into the future". Dean Baker did not need to see into the future; nor did Bernanke.
> You cannot reasonably criticize people for failing to meet a standard which no others met. Doing so is tantamount to insisting they are omniscient, and must have intended the future be brought about.
I'm not holding Bernanke to "a standard which no others met" so this critique of yours is irrelevant.
The "experts" relied on a belief that housing prices would not go down all over the US at the same time. They were wrong.
Before, when a bank loaned people money e.g. with a mortgage, it made sure they could get that money back. Then someone(s) came up with the idea to bundle them and cut them into tranches with different characteristics and sell those. The risk was now divided over many investors.
CDO's etc. were built from these sliced bundles of mortgages, making banks needing more mortgages sold. That gave an incentive to lend more and more risky. Ratings agencies put an A+ on parts of the lowest tranches (the most risky) after the re-bundling.
Bankers were warned against the dangers these derivatives posed to the economy, the warnings were disregarded.
The CDO's etc. were insured and the possible payments involved were impossible, no-one seemed to see this or if they saw it, they did not care. Except for few who went in shorted these. (So yes some saw it coming !)
The experts could have written articles for magazines in their field, spoken up at meetings they attended, contacted Members of Congress, given interviews, insisted on more regulation, etc. But they kept mum while the banks raced us to the abyss.
Meh.
Meh ? Sorry I lived it - in the CA Central Valley in one of the epicenters - did you ? I called in 2005 and 2006 CA representatives, begging them to help, or to tell me whom to contact higher up, because housing prices, mortgages, it all did not add up, and apparently new banking-products were created from it. The politicians were not interested.
Are you telling me that these three gentlemen, having completed studies in this area, being well-paid experts, having all relevant information at their fingertips, did not see it coming ? I think they did but too many profited from it - developers, builders, politicians, local and Fed. government, mortgage co.'s, brokers, realtors, banks, even the media (advertising) - so they hoped it would pass with not too much damage. Well, it did not. And no one took any responsibility, no one paid some back from what they should not have gotten in the first place. Au contraire, the government "rescued" those who had helped to create the mess.
I saw streets where just about every house was for sale, mostly a short-sale or bank-owned. Many people lost their nest egg. But most managed to go on somehow, feed and cloth their kids, put them through school. Those people should get medals.
Yes, I lived it although my urban area didn't have the subprime lending that you experienced. My ire is directed toward the weak-kneed fiscal policy responders who couldn't even cough up $1T to help create jobs and stimulate growth in the U.S. We lost nearly a decade of potential growth. My public-employee real wages are still 12% lower than they were in 2007 because of the decreased tax base caused by slow economic growth. But without the innovative and decisive work of Bernanke, Paulsen, and Geithner in 2008, the "R" word would definitely have been the "D" word with significantly more agony.
The misery did not stop with many people losing their house. (And property taxes going down considerably.) As said, a number of people tried to hang on. Emptied bank accounts, 401-k's, etc., money intended for their kids going to college or for a trip back to the homeland. Prez Obama got elected and people expected/hoped that after the banks were saved, there would be some help for them too. They got nothing, were often humiliated for buying a house at the wrong place, the wrong time. Many were immigrants, they were sold the American dream, that buying a house was the best way to amass wealth. As the crisis deepened and businesses started to experience hard times, lay-offs followed. Many of those still-hanging-on lost their job and now they lost their house too. Still no peep from the government. So when in 2016 a brash NY real estate "tycoon" turned reality-star told people he felt their pain, they elected him Prez of the USA.
Especially in areas like the CA Central Valley, where many newcomers the developers/realtors-brokers/mortgage lenders could feast like never before. Houses went up in value so much and so fast that on builders-flyers they just crossed out the previous price and wrote the new one, often crossing that one out and adding the next higher price, and then again. I saw flyers with prices that way upped $25,000 in just under three months. The Saturday and Sunday papers with real-estate sections were so heavy it felt like lifting half-a-tree.
I applied for a mortgage and had to fight for 20% down/30 yrs fixed. The broker called me a few times explaining how stupid we were to not "take advantage of the beautiful new banking products". Like no down-payment but taking a second mortgage, and/or not paying off on principal & deciding how much interest to pay every month - not paying anything for awhile was OK too ! Variable interest meant lower interest and no worry you can reset a year from now, when the house will be worth so much more ! Furthermore my husband would no doubt make promotion earn more money next year why did I not buy a better house ? It felt like a siren singing in my ear ! (Later I discovered that on a "new product" the broker would made over $10,000 more than on the mortgage as requested.) In this way people who barely made a living were sold houses from $350,000-450,000. Some mortgage brokers put notes in the files claiming secondary sources of income - famous is the picture of an Hispanic gentleman with a big sombrero indicating a Mariachi-band.
On this and similar elsewhere in the US, bankers created so-called derivative products: CDO, CDOsquared, CDOsynthetic, by slicing and dicing mortgages till no one had any idea what was happening anymore, all they saw that these products made a lot of money. Housing prices would never go down all over the country at the same time, wouldn't they ? Ratings agencies helped by rubber-stamping A+ ratings (and making a lot of money too).
A few years earlier a woman named Brooksley Born had advocated that derivatives should be regulated. She was treated by a gaggle of men (bankers/politicians) like middle aged women usually are: with scorn and insults. A few years later they had to admit she had been right all along. She was given the ProfilesinCourage award along Sheila Blair of the FCID.
Interesting thread. As Chair of the FDIC, Sheila Bair was more interested in protecting her institution and her reputation than in helping to prevent the U.S. banking system from failing. No Nobel Prize for her. (I don't disagree that the underground financial market of derivates needs to have accountable and at least enough openness to know how much money is being bet on short sales and the like.)
I understand the snake oil sales that occurred during the subprime mortgage crisis, and there is certainly a lot of blame to go around. However, the majority of home foreclosures during the subprime crisis occurred in a minority of states: California, Nevada, Arizona, Florida, Michigan, Ohio, Indiana, and Illinois. Certainly there were national and federal agencies at fault for allowing loans to subprime borrowers; but state regulators in these specific areas deserve the most blame, IMHO.
The "minority of states" are heavily populated states, and also states with a lot of immigrants.
The CDOs were not based on short sales but on existing mortgages. Nothing "underground" there. What you call snake oil sales was then an accepted, legitimate way of selling a product (caused IMHO by lack of regulation/sanctions).
Are you taking the p on me ?! If I want to know about cars I'll watch vintage British Top Gear or The Grand Tour. Thank you.
Great overview and tribute!
Nevertheless, while a tribute is not a good time to be critical, I'd like to point out that all the modeling of financial systems, their crises, and their impact on the real economy still left us with an institutional and regulatory framework that allowed another meltdown to happen in 2007-08. And, in spite of Bernanke's deep understanding of the problems, policy makers were not prepared to deal with the crisis effectively and fairly when evaluated through a longer-term lens.
Jeremy Bulow and Paul Klemperer described a way to avoid both the severe real economic damage of letting the financial system fail (The Great Depression), as well as the undesirable redistributive effects of bailouts (The Great Recession):
https://cepr.org/voxeu/columns/reorganising-banks-focus-liabilities-not-assets
A lot of popular anger about the bailouts were that they bailed out the banks rather than the mortgage holders.
Would that have worked instead? I think our current inflation situation shows that bailing out both would have caused massive inflation (QE plus widespread consumer demand).
“Would that have worked instead?”
No. The banks were bailed out because of the function they serve in the economy, not because they deserved it.
Whether it would have worked in addition is a question I’m not qualified to answer.
But it would have been great if the (investment)banks, when profits started showing again, had helped some of the most vulnerable homeowners.
Would we have less homeless if government had helped lower income home owners with lower priced houses. They were the most vulnerable and especially those already somewhat older who lost their job in the aftermath, had little to no chance of bouncing back.
Good question. Hope Noah answers. I think that this + assuaging public anger through more prosecution and harsh sentences or allowing direct public retribution would have dampened the populist movement.
I think it would have worked with affirming the pain that was caused, proposing to give some help, and do better with stricter regulations.