Also known as the 2nd Great Contraction….
Jeff Miron @ Harvard From 2:03 on…
“The 3rd myth is that capitalism was responsible for the recent financial crisis and the recession. That gain is almost exactly oposite of what is true. First of all, Nobody who is being intellectually honest thinks we had unbridaled serious capitalism before the economic crisis hit, before the subprime buildup occurred, before we had all the housing problems. We had enormous government interventions that subsidized risk. Enormous government interventions that encouraged over investment in housing. If one was going to draw any conclusions it seems to suggest much more clearly that interfering with capitalism generates financial crisis generates recessions. Because what we experienced was directly related to the incentives for excessive risk taking, incentives for over investment in housing that were created by government.
The private sector responded to those incentives so of course the the private sector can not be completely be absolved of involved, but as for causing it was the bad policies that caused it not what the private sector or capitalism did on it’s own.
Most importantly whenever government bail out people who took excessive risk they encourage more of that in the future. And we unfortunately went a huge way in that direction by the tarp and the federal reserve policies which helped Wall Street and all the risk takers not have to pay the true price for all the excessive risk taking they engaged in.
Quotes from NPR’s Intelligence Squared Debate BLAME WASHINGTON MORE THAN WALL STREET FOR THE FINANCIAL CRISIS
Pre-Debate Poll Results
42% For | 30% Against | 28%
Post Debate Poll Results
60% For | 31% Against | 9%
Niall Ferguson @ Harvard
(dictating work is in progress) Ladies and gentlement … NOthing would be easier than to blame everything on the banksers. Compensation was 72 million dollars the year before his firm collapsed … never to be seen again. Not only were the bankers greedy .. we would agree… they were also incompetent. But I and my colleges …. but we blame the politicians more. Who was playing the music. It’s so easy to heap approbriam on wallstreet now. That’s exactly what the politicians do. Only yesterday he was denouncing the wrecklessness and greed. FDR in his inaugural address he scorned. Ladies and gentelemnt you have to ask yourself. Could it just possibly be that they are trying to divert our intentions. Role of 4 institutions and their locations
1st federal reserve board allow housing bubble inflate and burst. Fed cut federal funds rate 6.5% to 1%. In that time house price inflation rose from 7% to 17% and stayed above 15% right about 2006. Ben Bernacke claimed this as the great moderation. yest that
2nd institution was the securities and exchange commision. Leverage 12:1 to 20-30:1 and that was a conscous decision by the SEC. The location 100 F street north west washington D.C..
3rd suspect was Congress. They failed to supervise fannie mae and freddie mac. Those two essential institutions that underpinned. Core capital 83 billion and supported 5.2 trillion dollars. Leveraged 65:1. Location of congress is capital hill washington D.C.
Location of the white house. You know the white house played an extremely important role in creating the subprime mortgage disaster. “We want everyone in america to own their own home” declared President George W. Bush. in October of 2002 Everybody in America. He challenged lenders to create 5.5 million new minority home owners by the end of the decade. He assigned the american dream down payment act in 2003. No presidental pressure, no subprime debacal. Washington sold itself to wallstreet and I fear is very much in hock to it.
John Steele Gordon
Nouriel Roubini @ NY Stern
Raghuram Rajan @ Chicago Booth
sent a clear message to bankers: “Don’t bother storing cash or marketable assets for a rainy day; we will be there to help you.” Not only did the Fed reduce the profitability of taking precautions, but it implicitly encouraged bankers to borrow short-term while making long-term loans, confident the Fed would be there if funding dried up. Leverage built up throughout the system.
Walter Bagehot, was fond of saying, “John Bull can stand many things but he can’t stand 2 percent.” Similarly, John Doe cannot stand interest rates near zero, and when the Fed pushes short rates very low, especially when deflation is not a clear and present danger but just a possibility, savers move to holding riskier assets, pushing all manner of risk premiums down and prices up.
Finally, equity markets were not entirely unaware of the risks. From the second quarter of 2005 to the second quarter of 2007, the two-year implied volatility of S&P 500 options prices—the market’s expectations of the volatility of share prices two years ahead—was 30 to 40 percent higher than the short-term onemonth volatility.23 This figure suggests that the market expected the seeming calm would end, even though the high level of the market indicated it did not place a high probability on events turning out badly for shareholders. But this is precisely how we would expect the market to behave if it believed the banks were taking on subsidized tail risk.
bet this offered employees was known variously as the Acapulco Play, IBG (I’ll be gone if it doesn’t work), and, in Chicago, the O’Hare Option (buy a ticket departing from O’Hare International Airport: if the strategy fails, use it; if the strategy succeeds, tear up the ticket and return to the office).
Rajan, Raghuram G. (2011-08-28). Fault Lines: How Hidden Fractures Still Threaten the World Economy (New in Paper) (Kindle Locations 3410-3412). Princeton University Press. Kindle Edition.