"Here is an embiggened version of the infamous jobs chart prepared by Obama administration economists Jared Bernstein and Christina Romer back in January 2009 (and now updated again by me with data from the August jobs report)."
Quotes on 2007-2009 Recession: Boom, Bust, and Beyond
''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''
"Underlying the crisis was the housing bubble, and it is clear that several policy decisions shaped the home mortgage market. Excesses in that market eventually led to a significant decline in home prices and a surge of loan defaults which caused tremendous losses in the financial system, triggered a contraction of credit, and put many Americans—quite literally—out on the street. These excesses were driven in large part by housing policy. From 1994 to 2006, home ownership soared from an already spectacular 64 percent of U.S. households to a staggering 69 percent due to the combined weight of a number of government policies and programs. Fannie Mae and Freddie Mac, the government sponsored enterprises (GSEs) comprised a central part of U.S. housing policy. The GSEs operated under an inherently flawed model of private profit backed by public support, which encouraged risky revenue seeking and ultimately led to significant taxpayer losses."
"In other words, capitalism did not cause the problems as opposed to a lack of capitalism, whether with regard to having good information to make decisions, allowing companies to fail, ensuring that banks pay for external costs (even contingent ones) that they cause, and having markets more than government allocate capital, albeit with limits and effective oversight."
"Fannie and Freddie play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their role in the housing market is particularly important as we work through the current housing correction. The GSEs now touch 70 percent of new mortgages and represent the only functioning secondary mortgage market. The GSEs are central to the availability of housing finance, which will determine the pace at which we emerge from this housing correction. ...
OFHEO has reaffirmed that both GSEs remain adequately capitalized. At the same time, recent developments convinced policymakers and the GSEs that steps are needed to respond to market concerns and increase confidence by providing assurances of access to liquidity and capital on a temporary basis if necessary."
"I was shocked by the dramatic events of the week of March 10, 2008. ...[O]n Monday morning, unsubstantiated and inaccurate rumors were circulating in the market to the effect that Bear Stearns was facing a liquidity crisis. Unfortunately, the rumors persisted through Thursday, with our credit spread widening dramatically and share price declining. By Thursday evening, these rumors, which were magnified by press reports, had escalated into a panic. In this panic, an increasing number of prime brokerage clients began to request that their available cash and securities be moved to other brokers. Moreover, late on Thursday, a significant proportion of our repo counterparties informed us that they would no longer lend to us, even on the basis of secured collateral. As a result of these conditions we experienced a significant cash outflow which reduced our liquidity pool dramatically. ...
Consequently, we approached JP Morgan, our clearing bank and an institution we believed had the capacity to open a secured liquidity line of the size Bear Stearns needed. We were not looking for a bailout. Rather, we asked for a liquidity line secured by highly-rated securities. Although our negotiations with JP Morgan began as an opportunity to find a commercial solution to our liquidity issue, they ultimately resulted in a funding facility backstopped by the Federal Reserve Bank of New York. ...
Our liquidity and capital planning models failed in the face of these overwhelming market forces. Bear Stearns’ reliance on secured funding markets, which had proven durable over many other financial cycles and market shocks, proved to be insufficient in this instance. Market fears surrounding mortgage-backed securities and rumors and innuendo in the end resulted in fear-induced, irrational behavior that caused a run on the bank at Bear Stearns and then at Lehman Brothers and others during the financial crisis. In this environment, without a lender of last resort or the stability of a deposit base, neither we nor the independent investment banking model itself could survive."
"In my opinion, Bear Stearns' risk management practices were robust and effective. During my tenure on the Executive Committee I found the Risk Management team to be highly trained and very experienced. Overall, I thought Bear Stearns was well-managed, and I was saddened and disappointed when the firm collapsed."
"From such vulgar Keynesian thinking flowed the succession of 'stimulus' spending measures, beginning with the Bush administration’s, carried out in the spring of 2008. Other governments have gone down the same foolish path. Of course, as any competent economist could have testified even fifty years ago, such temporary government-spending surges give people money that, for the most part, they save or use to pay off debts, rather than spending it along the lines envisioned by Keynesian 'multiplier' analysis to set in motion an upward spiral of income, expenditure, real output, and employment. Much of the so-called stimulus spending in the United States has served only to bulk up the pay and benefits of government employees (federal, state, and local), effectively transferring income from the private sector to the government sector, and to reward other groups, such as the United Auto Workers and low-income home buyers, for their support of the Obama administration—past, present, or future."
"In terms of the unspecified line of credit, what I meant to say was not that it was counterintuitive to sophisticated people who are in markets all the time and used to thinking about it. What I said is if you are not used to thinking about these issues it seems counterintuitive. But if you are used to thinking about the issues, it is very intuitive, that if you have got a squirt gun in your pocket, you may have to take it out. If you have got a bazooka and people know you have got it, you may not have to take it out. You are not likely to take it out.
I just say that by having something that is unspecified, it will increase confidence. And by increasing confidence it will greatly reduce the likelihood it will ever be used."
"Thank you all for your testimony. I hope we have been listening to the Three Wise Men of the Economy here and that what you are telling us is going to steer us in a different direction."
"First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade: Chairman Greenspan’s easy money in the late 1990s and then followed the tech bust, inflated the housing bubble, and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil prices to a new high every day, and an almost doubling since the rate cuts started. Inflation is here and hurting us and the average American, and it was brought out very clearly by the Senator from Pennsylvania.
Second, the Fed is asking for more power, but the Fed has proven they cannot be trusted with the power they have. They get it wrong, do not use it, or stretch it farther than it was ever supposed to go in the first place. ...
Now the Fed wants to be a systemic risk regulator, but the Fed is a systemic risk. Giving the Fed more power is like giving a neighborhood kid who broke a window playing baseball in the street a bigger bat and thinking that will fix the problem.
I am not going to go along with that, and I will use every power in my arsenal as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can get it right, either by taking their monetary responsibility away or by requiring them to focus only on inflation.
Third, and finally, since I expect we will try to get it right to question the next hearing, let me say a few words about the GSE bailout plan. When I picked up my newspaper yesterday, I thought I woke up in France. But, no, it turned out it was socialism here in the United States of America, and very well, going well. The Treasury Secretary is now asking for a blank check to buy as much Fannie and Freddie debt or equity as he wants. The Fed purchase of Bear Stearns assets was amateur socialism compared to this. And for this unprecedented intervention in our free markets, what assurance do we get that it will not happen again? Absolutely none.
I close with this question, Mr. Chairman. Given what the Fed and Treasury did with Bear Stearns, and given what we are talking about here today, I have to wonder what the next Government intervention into the private enterprise will be. More importantly, where does it all stop?"
"We have proposed a program to remove troubled assets from the system. This troubled asset relief program has to be properly designed for immediate implementation and be sufficiently large to have maximum impact and restore market confidence. It must also protect the taxpayer to the maximum extent possible, and include provisions that ensure transparency and oversight while also ensuring the program can be implemented quickly and run effectively.
The market turmoil we are experiencing today poses great risk to US taxpayers. When the financial system doesn't work as it should, Americans' personal savings, and the ability of consumers and businesses to finance spending, investment and job creation are threatened.
The ultimate taxpayer protection will be the market stability provided as we remove the troubled assets from our financial system. I am convinced that this bold approach will cost American families far less than the alternative – a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion."
"The Panel still does not know what the banks are doing with taxpayer money."
"Once the crisis is safely past, we might want to reassess the role of the central bank. But in the financial crisis of 2007-2008, the Federal Reserve was the only official body that could act quickly and powerfully enough to make a difference. Given the very real and immediate dangers posed by the financial crisis that began in August 2007, it is difficult to fault the Federal Reserve for its creative and aggressive responses."
"May I make a suggestion, and this comes out of a completely separate kind of experience, but as I watched the Winter Olympics in Salt Lake City, I discovered something that I had never understood before. At the end of a luge run or a bobsled run, or whatever it might be, before the athlete gets out of the luge, he reached into a basket that is filled with colored balls, and he pulls out a ball. And it is orange or red or whatever it might be. If it is black, the athlete is instantly taken to a place where there is a drug test so that the athletes know that there is always the possibility, even if it is completely random, that he or she will be subjected to a drug test.
Might I suggest that you set up a SWAT team of some sort that can drop into a brokerage house completely unannounced, completely at random, on no particular tip, to simply say we want to pick out a couple stocks and look to see if within your brokerage house somebody has been in engaged in naked short selling. And it is completely random. You walk away with an orange-colored ball or a red ball and whatever. You are completely clean. There is no stigma attached to it. But I think the people who are engaged in naked short selling might be a little nervous if they thought there are a dozen people in the SEC that just might show up at our doorstep and start looking at this kind of thing."
"Any discussion of the housing debacle would be incomplete if it did not include mention of the systematic consumption of home equity encouraged for several years by the media and an ignorant economics profession. Consistent with the teachings of Keynesianism that consumer spending is the foundation of prosperity, they regarded the rise in home prices as a powerful means for stimulating such spending. In increasing homeowners' equity, they held, it enabled homeowners to borrow money to finance additional consumption and thus keep the economy operating at a high level. As matters have turned out, such consumption has served to saddle many homeowners with mortgages that are now greater than the value of their homes, which would not have been the case had those mortgages not been enlarged to finance additional consumption. This consumption is the cause of a further loss of capital over and above the capital lost in malinvestment."
"When I joined Moody’s in late 1997, an analyst’s worst fear was that he would contribute to the assignment of a rating that was wrong, damage Moody’s reputation for getting the answer right and lose his job as a result.
When I left Moody’s, an analyst’s worst fear was that he would do something that would allow him to be singled out for jeopardizing Moody’s market share, for impairing Moody’s revenue or for damaging Moody’s relationships with its clients and lose his job as a result."
"While other nations save, Americans spend. Consumption in this country is the norm, spurred on by low interest rates aided by capital flowing from countries, notably China and Japan, which have high savings and low shares of domestic consumption, and further encouraged by U.S. tax laws that discourage saving. We were living beyond our means, on borrowed money and borrowed time. Consumers, businesses, and financial institutions all overextended and overleveraged themselves with inevitably disastrous results while our federal and state governments continued to borrow heavily, jeopardizing their long-term fiscal flexibility."
"But the notion of an effective 'systemic regulator' as part of a regulatory reform package is ill-advised. The current sad state of economic forecasting should give governments pause on the issue. Standard models, other than those that are heavily adjusted by ad hoc judgments, could not anticipate the current crisis, let alone its depth. Indeed, models rarely anticipate recessions, unless again, the recession is artificially forced into the model structure."
"The majority’s approach to explaining the crisis suffers from the opposite problem–it is too broad. Not everything that went wrong during the financial crisis caused the crisis, and while some causes were essential, others had only a minor impact. Not every regulatory change related to housing or the financial system prior to the crisis was a cause. The majority’s almost 550-page report is more an account of bad events than a focused explanation of what happened and why. When everything is important, nothing is."
"The Commission’s statutory mission is 'to examine the causes, domestic and global, of the current financial and economic crisis in the United States.' By focusing too narrowly on U.S. regulatory policy and supervision, ignoring international parallels, emphasizing only arguments for greater regulation, failing to prioritize the causes, and failing to distinguish sufficiently between causes and effects, the majority’s report is unbalanced and leads to incorrect conclusions about what caused the crisis."
"Like Congress and the Administration, the Commission’s majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission’s majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions—that the crisis was caused by 'deregulation' or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and financial system addicted to excessive risk-taking. The Commission did not seriously investigate any other cause, and did not effectively connect the factors it investigated to the financial crisis. The majority’s report covers in detail many elements of the economy before the financial crisis that the authors did not like, but generally failed to show how practices that had gone on for many years suddenly caused a world-wide financial crisis. In the end, the majority’s report turned out to be a just so story about the financial crisis, rather than a report on what caused the financial crisis."
"One glaring example will illustrate the Commission’s lack of objectivity. In March 2010, Edward Pinto, a resident fellow at the American Enterprise Institute (AEI) who had served as chief credit officer at Fannie Mae, provided to the Commission staff a 70-page, fully sourced memorandum on the number of subprime and other high risk mortgages in the financial system immediately before the financial crisis. In that memorandum, Pinto recorded that he had found over 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto’s research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising. In August, Pinto supplemented his initial research with a paper documenting the efforts of the Department of Housing and Urban Development (HUD), over two decades and through two administrations, to increase home ownership by reducing mortgage underwriting standards.
This research raised important questions about the role of government housing policy in promoting the high risk mortgages that played such a key role in both the mortgage meltdown and the financial panic that followed. Any objective investigation of the causes of the financial crisis would have looked carefully at this research, exposed it to the members of the Commission, taken Pinto’s testimony, and tested the accuracy of Pinto’s research. But the Commission took none of these steps. Pinto’s research was never made available to the other members of the FCIC, or even to the commissioners who were members of the subcommittee charged with considering the role of housing policy in the financial crisis.
Accordingly, the Commission majority’s report ignores hypotheses about the causes of the financial crisis that any objective investigation would have considered, while focusing solely on theories that have political currency but far less plausibility. This is not the way a serious and objective inquiry should have been carried out, but that is how the Commission used its resources and its mandate." (emphasis added)
"The Commission interviewed hundreds of witnesses, and the majority’s report is full of statements such as 'Smith told the FCIC that….' However, unless the meeting was public, the commissioners were not told that an interview would occur, did not know who was being interviewed, were not encouraged to attend, and of course did not have an opportunity to question these sources or understand the contexts in which the quoted statements were made. The Commission majority’s report uses these opinions as substitutes for data, which is notably lacking in their report; opinions in general are not worth much, especially in hindsight and when given without opportunity for challenge."
"Think about World War II, right? That was actually negative social product spending, and yet it brought us out.
I mean, probably because you want to put these things together, if we say, 'Look, we could use some inflation.' Ken [Rogoff] and I are both saying that, which is, of course, anathema to a lot of people in Washington but is, in fact, what the basic logic says.
It's very hard to get inflation in a depressed economy. But if you had a program of government spending plus an expansionary policy by the Fed, you could get that. So, if you think about using all of these things together, you could accomplish, you know, a great deal.
If we discovered that, you know, space aliens were planning to attack and we needed a massive buildup to counter the space alien threat and really inflation and budget deficits took secondary place to that, this slump would be over in 18 months. And then if we discovered, oops, we made a mistake, there aren't any aliens, we'd be better –
...there was a 'Twilight Zone' episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time, we don't need it, we need it in order to get some fiscal stimulus."
"Young people between the ages of 15 and 24 saw their family’s income fall 15.3 percent between 2007 and 2010, the most precipitous decline of any group. They were followed by those aged 45 to 54, who witnessed a fall off of 9.2 percent, while those 65 and older saw incomes rise by more than 5 percent, according to the Census.
Poverty experts have good reasons why the young have absorbed much of the pain.
'This group of young people has suffered enormously because of this recession,' said Curtis Skinner, director of the Family Economic Security Department at the National Center for Children in Poverty at Columbia University. 'The big factor, of course, is the unemployment rate. Kids coming out of school, recent college graduates are having a particularly hard time breaking into the job market.'
The last few years have been rough, of course, because of the Great Recession. With a growth rate at around 1 percent and unemployment still stubbornly above 9 percent, the number of poor has steadily increased."
"How did investors react to all this hope and cheer? With a giant yawn: GM’s stock price, which has been hovering around $25 for months, barely budged. That’s $8 below GM’s IPO price. And it’s $30 below what’s needed for taxpayers to recover the $30 billion they still have stuck in the company."
More About This Topic...
- Testimony of Mark Froeba
- Federal Reserve Bank of St. Louis - Financial Crisis Timeline
- Video: 2008 Financial Crisis and Citigroup Subprime Mortgages, Day 1, Panel 1
- Selected Financial Market & Economic Data
- Testimony of Samuel Molinaro Before the Financial Crisis Inquiry Commission
- Foreclosures Started as Percent of Loans Outstanding
- Delinquency rates on nontraditional mortgages
- 2007-2009 Recession: Boom, Bust, and Beyond
- Testimony by Henry M. Paulson, Jr. Before the Financial Crisis Inquiry Commission
- The Financial Crisis: A Timeline of Events and Policy Actions