The 2008 Financial Crisis as Seen From the Top

Look to those politicians and industry leaders who failed to regulate the so-called "shadow banks" and the profits that enriched them (not addressed in this book review). These are the culprits that set the stage for what is presented as a crisis. How much more unregulated greed are we to allow before we create policy to address these predictable consequences?

The other issue that contributed to the crisis in 2008 is that almost no one at the Fed (and very few people at Treasury and the SEC) has substantive, relevant private sector experience. The Fed's unwritten anti-revolving door hiring policies result in people making and enforcing rules, and supervising and examining financial institutions who really don't understand the consequences of the rules and results of the exams and supervisory actions. What this means is that the banks and financial services companies are able to hoodwink the regulators over and over again. With impunity. A few years ago, after leaving the employ of a uniquely regulated entity that fills a singular and important function in the financial system, I was talking to a senior NY Fed employee who was in charge of supervising and examining a portion of that entity's operations. He said that he really didn't understand what the entity did, that it was a black box as far as he was concerned. I was aghast and offered to explain as much as I could to him. He was not interested.

"..we seem to have learned the wrong lessons"? You're being too nice: Trumpist incompetence is a bull in the economic china shop that will take years to undo. THAT's not news, but the high bar of Constitutional urgency needed to find Trump chronically disabled (re: 25th Amendment) or clearly guilty of abusing power allows Trumpism free reign until the next election. In other words, authoritarianism works "thanks" to due process. That’s a lesson of Trumpism. I hope that WE, the people, have not learned the wrong lessons about the need for equal power among branches of government, such that Congress, during the next administration, will pass legislation that makes protection of the people from authoritarianism more practicable. For example, that “Advice and Consent” means something; that “nuclear options” aren’t made into cynical instruments; gerrymandering is made more difficult; and politicizing the judiciary isn’t as easy.

I think that this book is a great reflection on the Great Depression. The authors showed us that in their article " But one element was that key public officials didn't stand aside while the world burned." I think that from that quote the authors want to tell us that we need to be careful with our economics.

Our economy is awash in debt, the savings rate is in negative numbers, and incomes have been stagnant for decades. Money is becoming useless in determining wealth, because money can disappear so easily. Money based on speculation is money that does not exist yet. So much of our economy is made possible by debt that we have little idea of what is actually happening. These concepts can lead to panic, and realizing that there were no people planning on moving into all the homes that were being built panicked a lot of people. Suddenly, banks didn't know how much liquidity they had, so they stopped lending. Without debt, Toys 'R' Us would still be in business, but they got loaded down with billions of dollars in obligations that were used almost entirely to line the pockets of a small number of people. Without debt, billions of dollars of assets listed by banks would not exist, instead being considered liabilities. Without debt, consumption of goods and services would have stalled in the mid 1960's. The credit card allowed the public to spend more than they were making, and consumption continued. The Federal Reserve is holding interest rates at levels far below the historic norm, while at the same time sitting on several trillion dollars worth of Treasury bonds. Both of these are not symptoms of a strong economy. Trump is demanding more stimulus when the economy is already very hot. More debt will not solve the problem, especially if it gets Trump re-elected.

The biggest takeaway from BGP is that in the Great Recession, politicians and economists came together in a non-partisan way to pass funding policies necessary to stop a full collapse of the economy. If another recession were to start sometime in the near future, it’s highly doubtful that our deeply divided political structure would work together in the same way, and pass the same level of capital support.

You forgot the part where all the big banks managed to be fully exonerated. I mean how could they ever know they were propping up a house of cards? For the next round, I think the algorithms and AI will bear the blame. Can’t blame a feckless Fed.

Thank you Paul and I note: Alan Greenspan believed “spreading risk is good” which in itself of course is true. However, what was being sucked up and spread within the derivatives ? He never went to street level to find out. Not mentioned in the article and I hope is covered in the book, was Bernanke’s critical realization that deflation was an existential risk. With falling prices, buyers would wait for still lower prices, creating a potential downward vortex. That is why he correctly kept expanding the money supply for a very long time to prop up demand. And yes, looking forward, the tools the Fed used have been little retracted to be ready to swing again when needed. Not a happy thought indeed.

Obama, Paulson, Bernanke and Geithner all never servicing in the military but all during the financial crisis that cause the $30 trillion worldwide loss of wealth needed the America military to protect this Nation from retaliation. Congress voted to purchase the bad assets as FDR did with the HOLC in 1933 that purchased 800,000 properties then refinanced the borrowers with a 80% success rate. Congress passing TARP and Paulson hijacking these funds, but there was a requirement in exchange for receiving bailout funds must underwrite and grant modification if qualified under the HAMP, FHA & VA HAMP! So as Wells Fargo received $25 billion from TARP and $159 billion from the Fed in a zero percent interest rate loan, the HAMP was not working to modify the Dept of VA loans so Obama and team created the VA HAMP (Jan 8, 2010, Circular 26-10-02) with the provision that all Dept of VA loan must first be underwritten for HAMP and if not qualified, then the VA HAMP would be underwritten and a foreclosure could not be "considered" until this occurred! Wells refused to underwrite the loan and instead foreclosed on all the thousands of military families in 2010! The firefighter got the call but ignore the arsonist who was enriching itself with illegal foreclosures and fraudulent Fed Gov insurance claims. Wells admitted to 545 illegal foreclosure that all only were protected because the modification provision was added with TARP as mortgage loans don't have a mod option at conception!

" Leave it to the experts " as President Obama said. And he did. But 20/20 showed how imperfect the experts were working in an exigency mode. But they prevented the economy of the US and thereby the world from completely getting sucked by quicksand. And now here we have President Trump who promised to find the best possible men for the same jobs as BGP - as a candidate. But what we see are a bunch of cronies who seem determined to push us into the vortex of quicksand - by deregulation! Can't blame the cronies who know nothing about the economy except their loyalty to Trump. This time around we will disappear into a Black Hole instead taking the world with us.

Dr. Krugman clearly is trying to avoid polemic here, so his review is more restrained than it might legitimately be if his goals for the review were different. The biggest single reason for the near-collapse of the world's economy is that large numbers of people were trying to game the system. In the process, they engaged in lots of magical thinking ("I can take any risk as long as I hedge myself against it" and so forth), and lots of group-think. The people who approved guaranteed-to-fail loans and then sold them in little bits to other people, who were supposedly safe because they only owed a little bit of each loan, except that they owned lots of little bits, those people were system-gamers. It certainly appears that those of them who weren't ruined (and many people who deserved to be ruined were rescued as part of rescuing the system) were convinced that they were so smart that even if the system failed, they'd come out ahead. And it looks as though many of them still think that way. They don't seem to have worried about what they did to anyone else, and they still don't seem worried about what damage they may do. And, as Dr. Krugman says, we don't have the same quality of economic overseers and available tools as we did last time.

The point about the Trump clown bus of appointees had to be taken seriously. It's not just a cheap shot. Our system is structurally very flawed even if you agree with it in principle. We face near existential risk if a serious crisis is triggered. The clowns at the helm will throw gasoline on the fire as they nearly literally are doing at the EPA.

Saved by socialism, yet the bankers try to take credit.

Economist Wynne Godley was credited with predicting the crisis and aftermath; he published warnings during the Bush Administration. In his words, from 2005: "Recall first that, as all students of the national income know, the deficit of the general government (federal, state, and local) is everywhere and always equal (by definition) to the current account deficit plus the private sector balance (the excess of private saving over investment)." "The private sector balance was negative 2.2 percent in the first quarter of 2005—some 4 percent below its long-term average—mainly because there has been a furious housing boom financed by exceptionally high borrowing. It is noteworthy that between 1952 and 1997, there was not a single whole year during which the private sector balance was negative." "If the private sector balance were to return to its long-term average (plus 1.8 percent), as might easily happen if the housing boom were to collapse, the government deficit would have to rise to nearly 8 percent of GDP." "Yet without such renewed fiscal stimulus, the United States will, at best, encounter a prolonged growth recession under the (conservative) stated assumptions about international trade and the private sector balance." The CBO is now using Godley's sectoral balance framework as of the August 2018 update. Let's hope the Fed follows their lead. The good news is the balances are more normal now. Sources: "Some Unpleasant American Arithmetic" (2005)

Prof. Krugman, I have a question. If competent people were in charge, what do you think they should do in case the U.S. economy faced a new crisis? As you explained, there does not seem to be much space to use conventional monetary and fiscal policies. Suppose a new debt crisis arised. What would you do in the current circumstances?

Federal Reserve Governor Ned Gramlich urged Federal Reserve Chairman Alan Greenspan as far back as the year 2000 to crack down on sub prime mortgages. Greenspan refused because of his free market ideology.

Of course we all are waiting for Part II - The Prosecutions. Might have to wait a wile for that one...

If this book includes an explanation of why no banker or financier went to jail for causing 2008, then I'll buy it.

The policies that BGP developed to avert the financial crisis and collapse seem in first instance to be financially beneficial, but, in second instance, they also avoided a needed very basic overhaul of the global monetary/financial system which is based upon a unjust, unsustainable and, therefore, unstable international monetary system. If the collapse had taken place, humanity inside and outside the US would have been given the task to overhaul the system be making it more just, and thus making it more stable and sustainable and at the same time deal with the world’s looming climate catastrophe. It was the integration of this double challenge I set myself to address and, after five years, came up with a global governance system the conceptual, institutional, ethical and strategic dimensions are presented in Verhagen 2012 "The Tierra Solution: Resolving the climate crisis through monetary transformation". The integration is made possible by the introduction of the carbon monetary standard of a specific tonnage of CO2e per person, a global central bank and a balance of payments system that accounts for both financial and ecological (climate) debts and credits. A well-known integrative thinker and author stated: “The further into the global warming area we go, the more physics and politics narrows our possible paths of action. Here’s a very cogent and well-argued account of one of the remaining possibilities.” Bill McKibben, May 17, 2011

"In other words, we seem to have learned the wrong lessons from our brush with disaster. As a result, when the next crisis comes, it’s likely to play out even worse than the last one. Isn’t that a happy thought?" It is worse than that. There are three standards in physics, right, wrong and not even wrong. This review fits in the last one. The correct question is "How do we strip people in the finance business of any real power and also build a bullet proof business." Canada does not have crashes like the U.S. Perhaps Canada is a guide to doing a root canal on the business.

What's not asked or answered here is, who did the bail-out actually serve? Were BGP trying to save the financial system as it then existed, along with the political power of the banks and the wealth of individual bankers, or the "economy" -- meaning protect ordinary people? Anyone who was there knows the answer: socialism for the banks and banking executives, even when guilty of massive control fraud, and capitalism for the defenseless.

This was a heist. In my view these guys were the architects of the triple heist - stealing from the working and middle classes and giving to the rich. This was reverse socialism. First they stole from the taxpayer and bailed out the banks responsible for the crisis. Second, they imposed austerity on the middle and working classes without any tax imposition on the rich. Third the offered massive quantitative easing which just inflated asset prices (benefiting primarily the wealthy) and then crushing returns for savers (pensioners) and the ability of the next generation to afford housing (in many places around the world). They did all this selling fear and conjecture that without their actions we'd be in depression. There were many other alternatives.... - Fiscal spending on infrastructure - Increasing government guarantees for savings or investment grade debt - Tax relief and helicopter money to lower income earners - Temporary government backstop (semi-nationalisation) of faltering banks. Iceland didn't bailout the banks - and put the bankers in jail, and they've recovered. I know they're small. But they point is there were alternatives. This was a massive experiment in reverse socialism, and we're still paying the price.

Was waiting for a discussion of why no-one went to jail. As usual..

Like they say, Capitalism will always survive because Socialism will always be there to save it.

Krugman does a decent job here but he can't resist the opportunity to take another shot at the Trump administration. While I'm *far* from a fan of Trump and his cronies, pointing out the shortcomings of Malpass and Kudlow is irrelevant, unless he believes the next crisis will happen inside of the next 2 years. Otherwise, it's just a cheap shot. And a transparent one at that...

Paul does nice work when he is not so politically biased.

Bush was incompetent Obama was inexperienced Congress was (and is) ill-equipped to make decisions. These guys saved the world.

Is all about fear and greed, one comes after the other,sometimes from same mouth.

Mr. Krugman and the authors are correct - there will be another crisis. Who knows when it will come, but with stock valuations as high as they are and soaring corporate and consumer debt levels, it could be right around the corner. But we do know one thing, the talent in the Trump Administration (and maybe even in today's Fed) to deal with a panic is not as compelling as the names on the masthead of this book. I think we are sleepwalking into another abyss with no one in charge.

Financial crises are as old as banking itself and the tools developed for fighting them seem less based on first principles and more on empirical rules of thumb. I recall the first TARP vote in Congress that went down to defeat, largely as a principled protest against the use of such rules of thumb. The financial markets, as we all remember, immediately vomited, and a chagrined Congress then voted to approve TARP the second time around. I look forward to reading this book. Ben Bernanke, as we know, is also well regarded for his research into the causes of the Great Depression. His thoughts on the more recent Great Recession should be most informative, as will those of his two co-authors who had ringside seats to the Financial Crisis well in advance of the dark days following the Lehman bankruptcy.

A major element leading up to this particular crisis was the idea that the Fed could be relied on prevent serious downturns, by "printing money" using its main tool of interest rate adjustment. Bernanke effectively promised this in his "Apology to Milton and Anna" speech on Greenspan's retirement. After the crisis had actually happened, he changed his tune and called on Congress to take fiscal action. The "Maestro" Greenspan had always advocated deregulation and played a direct role in the failure to regulate credit default swaps, which were a major part of the of panic in 2008. Getting Trump out of office is necessary, but will not remove the danger of more collapses. It must be recognized that strict regulation is required, and that turning management of the economy over to the Fed has been a major mistake. In particular the evidence is that interest rates do not have the effects that Krugman and other monetary policy advocates still assume.

The irony of the financial crisis is that the US government deficit (thanks to the GOP tax cut) is now running rampant and rates are still low, so any policy tools a la QE may be off the menu. The crisis was 10 years ago, and instead of fiscal and monetary discipline the US has shifted to flagrant recklessness. I hope the book makes some comment on this. The US does not have the policy tools to survive another crisis.

This is the world George W. and his cronies in the GOP gave us, and the "great America" that Trump is actively returning us to. My guess is that BGP wrote this book now, not to try to write away their own mistakes and limitations in 2008, or even to crow about their own successes, but because they fear we may be headed down the same path again. The problem now is we have a real group of bubbleheads in charge.

Paul - you wrote an article before the crisis addressing the variable rate mortgage and the fact so many were adjusting in a very short time. Paraphrasing you said "it is going to be bad, I just don't know how bad". I realigned my portfolio after that. Thank you. I've looked for the article since and couldn't find it.

The United States suffered banking panic/depressions in 1891, 1837, 1957, 1873, 1884, 1893 and 1907 before the Mother-of-All banking panic/depression which began on October 29, 1929 in the administration of Herbert Hoover. President Franlin D. Roosevelt implemented "strict supervision" of finance primarily with the Glass-Steagal Act which iniated the longest period of financial stability. Then came Ronald Reagan who had turned to extremism and radicalism. He deregulated the Savings & Loan banks. 1,043 Savings banks out of 3,234 failed costing taxpayers $132 Billion Dollars. The first thing that Glass-Steagal did was to implement Deposit Insurance to stop the kind of panic we saw in "It's a Wonderful Life". It worked. But the framers were highly intelligent people who saw deposit insurance as a "moral hazard" for Bankers who were handling what Louis D. Brandeis called "Other people's money". They implemented "strict supervision" methods to curb this "moral hazard" including separating commercial and investment banks, and, limiting what Bankers could invest in with "other people's money" It worked. Then the Graham-Leach-Blyly retained the deposit insurance leaving the taxpayer on the hook but repealed all of the "strict supervision" measures. On September 15, 2008 Lehman Bros. filed for bankruptcy the entire deregulated financial system collapsed for the first time since October 1929 "Strict supervision"=financial stability. Laisez Faire=financial instability.

Dear God. These three get to write a book about how they saved the world in 2008? Someone should remind them of the Billy Joel song - "We Didn't Start the Fire". The one they claim to have put out. The 2008 fire was started by Bernanke, Geithner, and Paulson and their fellow Wall Street, banking, and corporate crooks. None of which went to jail. Starting a fire, then running to put it out, is not a heroic thing. The heroic thing to do is to make the country as fireproof as possible and not walk around with a blowtorch, which is exactly what these three and their pals (Summers, Rubin, Greenspan, etc.) didn't do.

Each of these authors published their own memoir on the crisis, so it will be interesting to see what they've learned in comparing notes. I think we should have learned the following, mainly about making sure leverage limits are put into the system: 1. The jobless recovery after the 2001 recession caused the Bush Administration to get desperate for a means of boosting the economy. Investment banks were encouraged to lever-up in a fateful meeting with the SEC in April 2004. Their debt to equity ratios jumped from around 15-1 in 2004 to 25-1 by 2007. The years when subprime lending jumped from 10% of mortgage origination to nearly 20% were 2004-2006, making the timing of this meeting essential to understanding the crisis. The top 5 investment banks had $4 trillion in liabilities when the crisis hit, and nobody knew if they would get paid on those obligations, so the system locked up. 2. We did not enforce leverage limits on homeowners by requiring a minimum down payment of say 20%, with higher down payments for investment homes. China does so and avoided the crisis. Recent research indicates it was middle-class rather than subprime families who were the first to abandon their investment homes, making the decline in housing prices and related securities more severe. You don't get a financial crisis without economic actors in serious debt. Regulation is essential to making sure they stay solvent.