This is a story of pride, prescience, and mild panic among the economy's keepers at the eve of this generation's worst recession
It was the end of the world as we knew it, and the Fed was feeling fine.
Okay, that's not really fair. The transcript of the Federal Reserve's 2007 meetings, months before the economy entered its worst recession since the Great Depression, reveal an institution far from oblivious, with a few notable exceptions. They just didn't quite understand the labyrinthine web of financial interconnections until it was too late.
Back in 2007, the credit crunch that became the Great Recession started when financial institutions realized it might not have been a good idea to loan money to people who couldn't pay you back. But with the economy roaring to new heights, the Fed wasn't in crisis mode -- yet. Panic in the financial markets certainly wasn't good news, but the Fed had managed to make it through similar panics in 1987, when the stock market fell almost a quarter in one day, and in 1998, when hedge fund Long-Term Capital Management nearly brought down the financial system, without the real economy suffering any harm. This time didn't need to be different. And, to be fair, the Fed was well aware of the risks piling up in the financial system as the clock ticked down to Lehman. It didn't even really make any big mistakes in 2007; those came later. So while it's easy to mock the Fed for saying Bear Stearns and Countrywide didn't have too much trouble getting liquidity in August 2007 ... but it was true at the time! They only ran into problems, the kind that drove them into bankruptcy and/or mergers, later.
Below are the six most revealing passages from the Fed's pre-crisis meetings, with a key sentence of each quote underlined. Beyond the inflation hawks who managed to see price increases under every rock, they were mostly right in their analyses. They just weren't right enough. Or quickly enough.
Ben Bernanke, August 10, 2007:
Our goal is to provide liquidity not to support asset prices per se in any way. My understanding of the market's problem is that price discovery has been inhibited by the illiquidity of the subprime-related assets that are not trading, and nobody knows what they're worth, and so there's a general freeze-up. The market is not operating in a normal way. The idea of providing liquidity is essentially to give the market some ability to do the appropriate repricing it needs to do and to begin to operate more normally. So it's a question of market functioning, not a question of bailing anybody out.
This is what a central banker says when things start to hit the fan. The day prior, French bank BNP Paribas had sent the financial world into a frenzy when it announced it wouldn't let investors cash out of two of its subprime funds, because the bank had no idea what they were worth. Nobody would buy, and when that happens, the "price" is pretty much zero. But as Bob Peston of the BBC pointed out at the time, the scariest bit was that BNP Paribas itself didn't want to buy these bonds on the cheap. The bank wasn't sure they weren't totally worthless, too. And if banks (and shadow banks like hedge funds or special investment vehicles) were sitting on top of piles of genuinely worthless bonds, who would want to lend them? Answer: nobody, at least not without top-notch collateral. Hello, credit crunch.
Ben Bernanke, August 16, 2007:
So I wouldn't say that a rate cut is completely off the table, but my own feeling is that we should try to resist a rate cut until it is really very clear from economic data and other information that it is needed. I'd really prefer to avoid giving any impression of a bailout or a put, if we can. Therefore, what I'm going to suggest today is to offer a statement updating our views of the economy that will give some signal about where we think things are going but to stop short today of changing rates.
A week later, things weren't any better. Financial institutions still didn't want to lend to each other except against the best collateral, and markets still didn't exist for subprime securities. Bernanke's dilemma was whether to 1) just expand emergency lending to the banks, or 2) cut interest rates too. But with the real economy humming despite the financial turmoil, Bernanke worried the latter would look too much like a bailout (or a "put" option) for Wall Street.
Bill Dudley, September 18, 2007:
At the same time, this balance sheet pressure and worries about counterparty risk have led to a significant rise in term borrowing rates. Banks that are sellers of funds have shifted to the overnight market to preserve their liquidity, and this shift has starved the term market of funds, pushing those rates higher .... Moreover, the increased reliance by banks on overnight funding increases rollover risk and may limit the willingness of banks to expand their balance sheets to accommodate the deleveraging of the nonbank financial sector.
This is one of the driest descriptions of financial armageddon you'll ever read. Let's translate it into English. Banks knew they were all sitting on top of toxic waste, but nobody knew who was sitting on the most of it -- so they wouldn't lend to each other, except at punitively high rates, for anything longer than a day. But relying on such overnight funding made the banks vulnerable to de facto bank runs, and that made vulnerability made them less likely to keep lending even as shadow banks cut back on lending. In other words, a credit crunch. And less credit just when borrowers most needed it meant more people would eventually go bust ... hurting mortgage bonds even more, and making banks pull back further. Loops don't get much more vicious.
Janet Yellen, December 11, 2007:
The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real .... I am particularly concerned that we may now be seeing the first signs of spillovers from the housing and financial sectors to the broader economy .... Although I don't foresee conditions in the banking sector getting as bleak as during the credit crunch of the early 1990s, the parallels to those events are striking. Back then, we saw a large number of bank failures in the contraction of the savings and loan sector. In the current situation, most banks are still in pretty good shape. Instead, it is the shadow banking sector-- that is, the set of markets in which a variety of securitized assets are financed by the issuance of commercial paper--that is where the failures have occurred. This sector is all but shut for new business. But bank capital is also an issue. Until the securitization of nonconforming mortgage lending reemerges, financing will depend on the willingness and ability of banks, thrifts, and the GSEs to step in to fill the breach.
The Great Recession was just about to officially begin (although NBER wouldn't announce that until much later), and more members of the Fed were contemplating the Rube Goldberg machine of doom subprime had set off. As Yellen pointed out here, the shadow banking system was already in hibernation at this point, although it wasn't clear whether regular banks would be able to step in the breach and keep things moving. (Spoiler alert: They weren't).
Frederic Mishkin, December 11, 2007:
In particular, there are two scenarios that they go into separately--the housing correction scenario and the credit crunch scenario. I think that there's a very strong possibility those would come together because, if housing prices go down more, that creates a much more serious problem in terms of valuation risk, and a serious problem in valuation risk will mean a further credit market disruption, which then can lead to more macroeconomic risk because it leads to this downward spiral. The real economy gets worse.
These are about the three most prescient sentences you'll find in the Fed transcripts. Miskin was concerned that subprime wasn't, as Bernanke had previously put it, contained, and that a further fall in housing would mean further damage to bank and shadow bank balance sheets, which would make them even less likely to lend. The ultimate danger, as Mishkin pointed out, was that this credit crunch would migrate from the financial to the real economy; that not just banks, but households too, wouldn't be able to borrow. The pyramid of debt that existed in 2007 was like a shark -- it had to keep moving to live. If households spent less because they couldn't borrow more, the economy would slow down, and more people would default on their debts. In other words, exactly what did happen would happen. Of course, it still wasn't clear how precarious the financial sector was beyond the shadow banks. Again, from Mishkin.
You don't like to use the R word, but the probability of recession is, I think, nearing 50 percent, and that really worries me very much. I also think that there's even a possibility that a recession could be reasonably severe, though not a disaster. Luckily all of this has happened with an economy that was pretty strong and with banks having good balance sheets; otherwise it could really be a potential disaster.
Richard Fisher, December 11, 2007:
I'd like to address the inflation situation more thoroughly, Mr. Chairman. The CEO of Wal-Mart USA said that, for the first time in his career at that firm, they have approved a plan in which purchase costs will increase 3 percent in '08. He hadn't seen that before in his experience and said, "I'm totally used to deflation. Deflation is finished." In terms of the suppliers to Wal-Mart, this was verified. I think on food prices we have to be extremely careful. Frito-Lay is seeking a 51⁄2 percent price increase for next year. Wal-Mart has acquiesced.
No, I didn't make this one up. And yes, just as the biggest deflationary spiral in 80 years was about to hit the economy, Fisher was worried about inflation. And he was worried about inflation, because ... Frito-Lay was thinking about increasing prices 5.5 percent the following year. This is not a joke. Well, it is a joke, but, again, not one that I made up.
Science says lasting relationships come down to—you guessed it—kindness and generosity.
Every day in June, the most popular wedding month of the year, about 13,000 American couples will say “I do,” committing to a lifelong relationship that will be full of friendship, joy, and love that will carry them forward to their final days on this earth.
Except, of course, it doesn’t work out that way for most people. The majority of marriages fail, either ending in divorce and separation or devolving into bitterness and dysfunction. Of all the people who get married, only three in ten remain in healthy, happy marriages, as psychologist Ty Tashiro points out in his book The Science of Happily Ever After, which was published earlier this year.
Social scientists first started studying marriages by observing them in action in the 1970s in response to a crisis: Married couples were divorcing at unprecedented rates. Worried about the impact these divorces would have on the children of the broken marriages, psychologists decided to cast their scientific net on couples, bringing them into the lab to observe them and determine what the ingredients of a healthy, lasting relationship were. Was each unhappy family unhappy in its own way, as Tolstoy claimed, or did the miserable marriages all share something toxic in common?
The current system for gaining entry to elite colleges discourages unique passions and deems many talented students ineligible.
March madness is almost here. No, I’m not referring to the college-basketball playoffs; I’m alluding to the anxious waiting of young people and their families of word about their fate from the highly selective colleges of America. And I’m talking as well about those who are about to venture forth on the ritualistic campus tours to determine where they will apply next fall. What few of these families realize is how broken the admission system is at these selective colleges.
At these institutions of higher learning, the goal is to “shape a class,” which involves trying to admit qualified and diverse students who will learn from each other as well as from their experiences in the classroom. These are the students who have the greatest potential to use their education in productive ways and to contribute to their own well-being and to the needs of the larger society. Diversity is not defined here as solely pertaining to race, ethnicity, or gender, although that weighs on decisions, but also on a range of interests and talents that students can develop and share with others during their college years. These are high-minded goals.
On Saturday, the GOP dispensed with concern about keeping up appearances—and put long-simmering anger on display.
Perhaps the most haunting memory of the night will be the audience. Previous presidential debates have banned cheering and booing. Saturday night’s Republican debate in Greenville was marked by both. Permitted or not, the rowdy crowd ventilated its feelings without concern for how it looked or sounded to the viewers at home.
This unconcern for appearances was a Republican theme of the weekend. Hours before the debate opened, news broke that Supreme Court Justice Antonin Scalia had died. Candidates Ted Cruz and Marco Rubio promptly issued statements opining that any appointing any replacement should be left to the next president. It’s not unheard of for candidates to express emotive positions adopted for political advantage. But that same evening, Senate Majority Leader Mitch McConnell joined in, with a statement ruling out any Senate action on any Supreme Court nominee, no matter who it might be.
The staunchly Catholic U.S. Supreme Court justice was known for his acidly conservative opinions, but ultimately, he prioritized the Constitution over the Church.
“How can the Court possibly assert that ‘the First Amendment mandates governmental neutrality between … religion and nonreligion’?” the U.S. Supreme Court Justice Antonin Scalia wrote in 2005, arguing that two Kentucky counties should be able to display the Ten Commandments in their courthouses. “Who says so? Surely not the words of the Constitution.”
This moment, with Scalia’s trademark snark, nicely sums up the paradox of how his religious views influenced his Supreme Court career. The justice, who died Saturday, consistently argued that the United States is fundamentally religious, meaning that the government shouldn’t have to avoid religious displays—nativity scenes on public property, prayers at townhall meetings, and the like. His Roman Catholic faith often seemed to lurk in the background of his opinions, especially in cases involving abortion and homosexuality. But above all, he was committed to a literal, originalist interpretation of the Constitution, along with strict attention to the texts of federal and state laws. His views didn’t always align with those of the Church, and he didn’t always side with people making religious-freedom claims.
A profanity-filled new self-help book argues that life is kind of terrible, so you should value your actions over your emotions.
Put down the talking stick. Stop fruitlessly seeking "closure" with your peevish co-worker. And please, don't bother telling your spouse how annoying you find their tongue-clicking habit—sometimes honesty is less like a breath of fresh air and more like a fart. That’s the argument of Michael Bennett and Sarah Bennett, the father-daughter duo behind the new self-help book F*ck Feelings.
The elder Bennett is a psychiatrist and American Psychiatric Association distinguished fellow. His daughter is a comedy writer. Together, they provide a tough-love, irreverent take on “life's impossible problems.” The crux of their approach is that life is hard and negative emotions are part of it. The key is to see your “bullshit wishes” for just what they are (bullshit), and instead to pursue real, achievable goals.
Fredrickson, a leading researcher of positive emotions at the University of North Carolina at Chapel Hill, presents scientific evidence to argue that love is not what we think it is. It is not a long-lasting, continually present emotion that sustains a marriage; it is not the yearning and passion that characterizes young love; and it is not the blood-tie of kinship.
Rather, it is what she calls a "micro-moment of positivity resonance." She means that love is a connection, characterized by a flood of positive emotions, which you share with another person—any other person—whom you happen to connect with in the course of your day. You can experience these micro-moments with your romantic partner, child, or close friend. But you can also fall in love, however momentarily, with less likely candidates, like a stranger on the street, a colleague at work, or an attendant at a grocery store. Louis Armstrong put it best in "It's a Wonderful World" when he sang, "I see friends shaking hands, sayin 'how do you do?' / They're really sayin', 'I love you.'"
Trump’s prescient opposition to the invasion is an important part of his claim to sound judgment. And he is making it up. I would know.
I respect and admire Donald Trump (yes, I wrote those words to begin a sentence) for flat-out arguing to GOP crowds that the Iraq war was a catastrophic mistake.
It was additionally amazing and heartening to see him, in last night’s WWE-style brawl-debate, finally call B.S. on a persistent and amazing claim by the otherwise-generally-reality-based Jeb Bush. When pressed about the Bush-Cheney record on office, Jeb’s final line of defense throughout the campaign has been, “whatever else you can say my brother, he kept us safe!”
Yes, perfectly safe! Except for, ummm, that one time. Trump finally had the lack of politesse to say so directly to Jeb Bush, only to receive boos from the crowd.
"It was rich, a perfect match for my body and myself."
For a long while, and I really don't wish to say when it was or how many years it lasted, I chose to live in what was perhaps the worst insubordination of our times: I had no sex life. It is true that those years were in large part filled with sensuality, when dreams alone gratified my longings, but what dreams! And if I felt drawn to anything, it was only in my thoughts, but what thoughts. . .
I realize now what that life was made of: a life in no way insignificant; on the contrary, it was rich, a perfect match for my body and myself. Yet nothing was simple, and these words I write would once have seemed leaden to me, so ashamed was I at times of my singularity, a strangeness worse than difference. Everyone knows that even people who are different have a certain sexuality worthy of the name, things to show for it, defeats they can lay claim to. Whereas we, the loners, an army that does violence only to itself, a small tribe, unavowable and hence unknowable in number, we understand instinctively that speaking out will allow the world to send us deeper into exile--and foster the kind of stupid nonsense people say about whatever they cannot comprehend. They turn us into scapegoats who reassure all others on this point: however problematic their carnal pleasures might be, we offer proof, through our most definite exclusion, that their circumstances are still better than nothing.
The Republican frontrunner repudiated a long litany of party orthodoxies in a contentious debate—but will that hurt his candidacy, or help it?
Donald Trump blamed the Bush administration for failing to heed CIA warnings before 9/11; denounced the Iraq War for destabilizing the Middle East; defended the use of eminent domain; promised to save Social Security without trimming benefits; and credited Planned Parenthood for “wonderful things having to do with women's health.”
He’s fresh off a crushing victory in New Hampshire, and the prohibitive favorite in the polls in South Carolina. Will his flouting of Republican orthodoxy sink his chances—or is it his very willingness to embrace these heterodox stances that has fueled his rise?
Even his rivals no longer seem certain of the answer. Jeb Bush, at one point, called Trump “a man who insults his way to the nomination.” He sounded like a man ruing a race that has run away from him.
The iconic conservative justice, who died Saturday at age 79, left an indelible stamp on the nation’s courts, its laws, and its understanding of itself.
Antonin Scalia, the judicial firebrand who stood as the intellectual leader of the U.S. Supreme Court’s conservative wing during his three-decade tenure as a justice, died Saturday at a ranch in western Texas. He was 79 years old.
“He was an extraordinary individual and jurist, admired and treasured by his colleagues. His passing is a great loss to the Court and the country he so loyally served,” Chief Justice John Roberts said in a statement on behalf of the Court.
President Obama, who will have the opportunity to nominate Scalia’s successor, offered his sympathies to the justice’s family on Saturday night. “He will no doubt be remembered as one of the most consequential judges to serve on the Supreme Court,” he said.