Thursday, December 13, 2018

Series on recession and financial crisis

Over the last few weeks we have had a series of discussions at Hoover on the 10th anniversary of the financial crisis and recession. This all happened mostly due to the energy of John Taylor.

The final event on Friday Dec 7 was a Panel Discussion Summary, including Taylor, Shultz, Ferguson, Hoxby, Duffie, and myself, with question and answer. Click the above video.

This was preceded by four smaller discussions. We did not video them, but there are transcripts and presentation materials.

October 19, The causes.  (Follow links to a transcript and to the presentation slides.)  John Taylor and Monika Piazzesi present and learn discussion on the causes of the financial crisis, emphasizing monetary policy, regulation, and housing.

November 9 The Panic What happened on in the panic of August through November (or so) 2018? Did the actions of government officials help or hurt? Or both? George Shultz and Niall Ferguson present their views and lead the discussion.

December 7 The Recession. Why was the recession so deep? Why wasn't it deeper, repeating the Great Recession? Why did it last so long? Did fiscal stimulus help or hurt? Caroline Hoxby and John Taylor led, focusing on labor markets and stimulus. I added some comments on QE and the lessons of the long zero bound for monetary economics; Bob Hall comments on labor markets and unemployment, Mike Boskin comments on stimulus, and much more

December 7 also, Lessons for Financial Regulation. Darrell Duffie and me. Darrell summarizes his excellent "Prone to Fail." I expound on the need for more capital.

What's distinctive about this series, given all the other conferences and retrospectives?

First, we decided not to have retrospectives from people in power at the time. Many other such meetings are descending into memoirs of how we saved the world. Maybe they did, maybe they didn't. And maybe that's not so interesting, except of course to the parties involved who would like to go down nicely in history.

Second, you will find an effort to trace the intellectual lessons of the last 10 years of thought, not just whether certain actions were right or wrong in context of some eternal truth. We all have learned a great deal in the last 10 years, and opinions are shifting. For example, I discuss how capital, once thought immensely costly and regulation much prefereable, has slowly emerged as not at all costly and the best salve for financial crises. Similar lessons have emerged throughout.

Third, and perhaps most importantly, you will find here many disagreements with the standard narrative and what is becoming the first draft of history, as Ferguson nicely described. No, maybe it wasn't just "greed" and "deregulation." No, maybe our officials contributed to panic as much as they helped to stop it. No, maybe fiscal stimulus and QE did not save the world. No, maybe our super-confident regulators armed with an immensely larger rule book are not ready to save the world again next time. And in each case you will hear contrary views buttressed with facts and thoughtful analysis. Perhaps when the second draft of history is ready to be written this will be a starting place.


  1. I would love for you to do another post, summarizing what you think the key takeaways are, beyond "No, maybe it wasn't just 'greed' and 'deregulation.'" Okay, I agree with that. But what was it?

    As far as I can tell, it was:

    1. bad housing policy (blockade against residential construction in key closed-access areas)...

    2. leads to rent inflation (as landowners capture the productivity advantage of Silicon Valley and elsewhere)...

    3. leads to sharp increases in property values...

    4. leads to shrieks of terror about inflation (which was all shelter inflation due to #1) and housing bubbles (which were actually rational valuations based on expected future rents)...

    5. leads to the Fed pushing the economy down and restricting access to mortgages sufficiently to get house asset values to come down...

    6. leads to a panic in the MBS market, leading to a general financial crisis...

    7. leads to the Fed printing a bunch of bail-out cash...

    8. leads to the Fed fearing inflation from the monetary expansion inherent in the bail-out...

    9. leads to IOR and a general monetary tightening, which was totally the wrong policy, because it...

    10. leads to the ZLB, the first drop in NGDP since the 1930's, and a massive recession, all of which could have been totally avoided if we had NGDPLT instead of random discretionary monetary policy.

    This view is supported by some of Kevin Erdmann's great work ( Of course, it might be totally wrong. I would love to hear what your view is, especially in comparison to the forgoing.


  2. I agree with everything Kenneth Duda has said and I add:

    Has anybody pondered the results of huge international capital inflows into highly regulated property, that is property subject to zoning?

    Actually, some people have. The Federal Reserve and the IMF have produced studies that large and chronic capital inflows (axiomatic due to very large current account trade deficits) can result in unstable and and bloated asset values.

    Remember also, there was a parallel collapse in commercial property values alongside the housing price collapse. In fact, the collapse in commercial property values was deeper than the fall in house prices.

    This was a market primarily defined by very sophisticated lenders and borrowers. Yet the collapsing values in this sector was worse than with the ordinary house buyers.

    In conclusion, I think John Cochrane is correct in that our financial system has been rebuilt to original specs, and that huge capital inflows are again bloating asset values.

    And if the Fed should overtighten again….

  3. Also, Kevin Erdmann's new book is out, and I dearly hope the macroeconomics community takes a long and serious note.

    "Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy" will be ready to ship in January.

    I hope that macroeconomists start to think more about ubiquitous property zoning, and the relationship of lenders to property and the money supply, and the macroeconomics consequences thereof.

    At the risk of sermonizing, let me say this: When the very intelligent John Taylor, or, say, the very intelligent Joseph Stiglitz, puts together a conference on a large macroeconomic topic, laymen already know what the results will largely be.

    I wish macroeconomists would drop their proud escutcheons and honed weapons, and walk out onto the battlefield for a fresh, apolitical reassessment of the scene.

  4. “The run defines the event as a crisis.” Yes, zoning laws, Fannie and Freddie, games with CDS margins, the community reinvestment act, games with risk weights etc matter. But if banks didn’t hold otherwise low risk assets in such fragile structures, these problems wouldn’t breed a panic. 2008 was the story of Jimmy Stewart and Mary Poppin’s “Fidelity Fiduciary Bank” albeit in more modern short-term funding arrangements.

  5. “….capital, once thought immensely costly and regulation much prefereable, has slowly emerged as not at all costly and the best salve for financial crises.”

    Even if capital does seem expensive, it should be born in mind that if bank loans are funded via deposits, then the lending process is being subsidised by money printing, as explained by Joseph Huber at the link below, p.31, para starting “Allowing banks to create new money….”

  6. This is really a great video. Very rarely does one get to see a collection of minds on stage sharing their thoughts on matters that ultimately affect the greater whole.

    The sequence in which topics came up was very interesting, too. I don’t know if it was planned that way, but it was an interesting progression.

    To me, one of the things I took away from all of this is finding the root cause, measuring the aftershocks, and then determining which interventions or policies would be best to prevent such a mess in the future. There’s a fair amount of interaction going on here, which in my mind makes it difficult to "polish" thinking towards recognition and effectiveness clarity. Hindsight may be 20/20, but the past is no indication of the future, despite the desire to build predictive models that throw all this “stuff” together in the hope it all can be prevented.

    So, here we go, probably the one that stuck out the most for me:

    The idea that there are positive externalities to home ownership (and education) is an important one. This may have been the impetus for the Fed in the US to keep rates low, and have Freddie and Fannie provide access to loans to facilitate home ownership (Remember the push for home ownership after WWII in the US and access to education via the GI Bill).

    So, if these positive externalities are good, well -- they have to get paid for/financed somehow. But if there's underlying risk in the financing, well...

    More capital is better? ;) Well, yes.

    Thanks for sharing this.


  7. Brilliant. Where were the risk managers? Moral hazard at work? Clearing firms seldom fail because no bailout is presumed. Traders either comply with OCC risk policy or they are liquidated at the market to prevent the clearing firm's capital from being invaded.

  8. Good explanations for the Great Recession; BUT, the cause of the Crisis (Sep 2008 to Oct 2008, and the after effects) was fraud, financial fraud. When Wall Street packaged MBS, with mortgages that should never have been written, for the international money market a fraudulent product was traded as an asset and used as collateral until the fraud was uncovered. Bernanke had to rectify by swapping liquid assets (U.S. treasuries) for illiquid assets (MBS) which wound up on the Fed balance sheet.

    Fraud, financial fraud, that was the problem. The other stuff could be handled like any other recession.


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