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.
The Islamic State is no mere collection of psychopaths. It is a religious group with carefully considered beliefs, among them that it is a key agent of the coming apocalypse. Here’s what that means for its strategy—and for how to stop it.
What is the Islamic State?
Where did it come from, and what are its intentions? The simplicity of these questions can be deceiving, and few Western leaders seem to know the answers. In December, The New York Times published confidential comments by Major General Michael K. Nagata, the Special Operations commander for the United States in the Middle East, admitting that he had hardly begun figuring out the Islamic State’s appeal. “We have not defeated the idea,” he said. “We do not even understand the idea.” In the past year, President Obama has referred to the Islamic State, variously, as “not Islamic” and as al-Qaeda’s “jayvee team,” statements that reflected confusion about the group, and may have contributed to significant strategic errors.
As the public’s fear and loathing surge, the frontrunner’s durable candidacy has taken a dark turn.
MYRTLE BEACH, South Carolina—All politicians, if they are any good at their craft, know the truth about human nature.
Donald Trump is very good, and he knows it better than most.
Trump stands alone on a long platform, surrounded by a rapturous throng. Below and behind him—sitting on bleachers and standing on the floor—they fill this city’s cavernous, yellow-beige convention center by the thousands. As Trump will shortly point out, there are a lot of other Republican presidential candidates, but none of them get crowds anything like this.
Trump raises an orange-pink hand like a waiter holding a tray. “They are not coming in from Syria,” he says. “We’re sending them back!” The crowd surges, whistles, cheers. “So many bad things are happening—they have sections of Paris where the police are afraid to go,” he continues. “Look at Belgium, the whole place is closed down! We can’t let it happen here, folks.”
Can we predict romantic prospects just from looking at a face?
By the time you swear you're his, / Shivering and sighing. / And he vows his passion is/ Infinite, undying. / Lady, make a note of this — /One of you is lying. ― Dorothy Parker
Edward Royzman, a psychology professor at the University of Pennsylvania, asks me to list four qualities on a piece of paper: physical attractiveness, income, kindness, and fidelity. Then he gives me 200 virtual “date points” that I’m to distribute among the four traits. The more I allocate to each attribute, the more highly I supposedly value that quality in a mate.
This experiment, which Royzman sometimes runs with his college classes, is meant to inject scarcity into hypothetical dating decisions in order to force people to prioritize.
In the name of emotional well-being, college students are increasingly demanding protection from words and ideas they don’t like. Here’s why that’s disastrous for education—and mental health.
Something strange is happening at America’s colleges and universities. A movement is arising, undirected and driven largely by students, to scrub campuses clean of words, ideas, and subjects that might cause discomfort or give offense. Last December, Jeannie Suk wrote in an online article for The New Yorker about law students asking her fellow professors at Harvard not to teach rape law—or, in one case, even use the word violate (as in “that violates the law”) lest it cause students distress. In February, Laura Kipnis, a professor at Northwestern University, wrote an essay in The Chronicle of Higher Education describing a new campus politics of sexual paranoia—and was then subjected to a long investigation after students who were offended by the article and by a tweet she’d sent filed Title IX complaints against her. In June, a professor protecting himself with a pseudonym wrote an essay for Vox describing how gingerly he now has to teach. “I’m a Liberal Professor, and My Liberal Students Terrify Me,” the headline said. A number of popular comedians, including Chris Rock, have stopped performing on college campuses (see Caitlin Flanagan’s article in this month’s issue). Jerry Seinfeld and Bill Maher have publicly condemned the oversensitivity of college students, saying too many of them can’t take a joke.
Retailers are experimenting with a bold new strategy for the commercial high holiday: boycotting themselves.
It starts with a scene of touch football in the yard. Next, a woman and a girl, cooking together in the kitchen. “Imagine a world,” a soothing voice intones, “where the only thing you have to wrestle for on Thanksgiving is the last piece of pumpkin pie, and the only place we camped out was in front of a fire, and not the parking lot of a store.” And, then, more scenes: a man, cuddling with kids on a couch. An older woman, rolling pie dough on the counter. A fire, crackling in the fireplace. Warmth. Wine. Togetherness. Laughter.
It’s an ad, unsurprisingly, but it’s an ad with a strange objective: to tell you not to buy stuff. Or, at least, to spend a day not buying stuff. “At T.J. Maxx, Marshall’s, and HomeGoods, we’re closed on Thanksgiving,” the spot’s velvet-voiced narrator informs us, “because family time comes first.” And then: more music. More scenes of familiar/familial delights. More laughter. More pie. The whole thing concludes: “Let’s put more value on what really matters. This season, bring back the holidays—with T.J. Maxx, Marshall’s, and HomeGoods.”
And other stories behind the origin and meaning of a distinctly modern holiday
Why is it called Black Friday? The most common answer is that on the day after Thanksgiving, it’s said that retailers go from being in the red to being in the black, with their profits for the year riding on just how much they can sell before Christmas.
But in fact, the earliest references to that day as Black Friday had little to do with business success—they were about the unusually high rates of work absenteeism the day after Thanksgiving. The shift of the day’s connotation from negative to positive points to the commercialization of holidays, and is an example of how the meaning of a holiday can shift over time, often as a result of contentious debates.
The first common uses of the term “Black Friday” referred to two devastating stock-market crashes that occurred on Fridays—one on September 24, 1869, when the price of gold collapsed, and another on September 19, 1873, leading to a decade-long depression. In the following century, the crash of 1929 started another depression, but it happened on a Tuesday, so naturally it became known as “Black Tuesday.” Calling a dramatically bad day “black” became a familiar turn of phrase, especially when it came to Fridays, and the label was applied even to some cases internationally, such as a November 1910 incident in England when police used force against about 300 demonstrating suffragettes, and to Australian brushfires in 1939. Before it took on its modern meaning, the phrase “Black Friday” had a negative ring to it, and wasn’t even related to Thanksgiving.
An entire industry has been built on the premise that creating gourmet meals at home is simple and effortless. But it isn’t true.
I write about food for a living. Because of this, I spend more time than the average American surrounded by cooking advice and recipes. I’m also a mother, which means more often than not, when I return from work 15 minutes before bedtime, I end up feeding my 1-year-old son squares of peanut-butter toast because there was nothing in the fridge capable of being transformed into a wholesome, homemade toddler meal in a matter of minutes. Every day, when I head to my office after a nourishing breakfast of smashed blueberries or oatmeal I found stuck to the pan, and open a glossy new cookbook, check my RSS feed, or page through a stack of magazines, I’m confronted by an impenetrable wall of unimaginable cooking projects, just sitting there pretending to be totally reasonable meals. Homemade beef barbacoa tacos. Short-rib potpie. “Weekday” French toast. Make-ahead coconut cake. They might as well be skyscraper blueprints, so improbable is the possibility that I will begin making my own nut butters, baking my own sandwich bread, or turning that fall farmer’s market bounty into jars of homemade applesauce.
Why are so many kids with bright prospects killing themselves in Palo Alto?
The air shrieks, and life stops. First, from far away, comes a high whine like angry insects swarming, and then a trampling, like a herd moving through. The kids on their bikes who pass by the Caltrain crossing are eager to get home from school, but they know the drill. Brake. Wait for the train to pass. Five cars, double-decker, tearing past at 50 miles an hour. Too fast to see the faces of the Silicon Valley commuters on board, only a long silver thing with black teeth. A Caltrain coming into a station slows, invites you in. But a Caltrain at a crossing registers more like an ambulance, warning you fiercely out of its way.
The kids wait until the passing train forces a gust you can feel on your skin. The alarms ring and the red lights flash for a few seconds more, just in case. Then the gate lifts up, signaling that it’s safe to cross. All at once life revives: a rush of bikes, skateboards, helmets, backpacks, basketball shorts, boisterous conversation. “Ew, how old is that gum?” “The quiz is next week, dipshit.” On the road, a minivan makes a left a little too fast—nothing ominous, just a mom late for pickup. The air is again still, like it usually is in spring in Palo Alto. A woodpecker does its work nearby. A bee goes in search of jasmine, stinging no one.
Nobody’s focused on winning the peace. That’s a big problem.
In August 1941, Winston Churchill and Franklin Roosevelt met off the coast of Newfoundland to outline a shared vision for the post-World War II era. The British prime minister was so thrilled to see the American president that, in the words of one official, “You’d have thought he was being carried up into the heavens to meet God.” The two countries issued the Atlantic Charter, which sought “a better future for the world” through the principles of self-determination, collective security, and free trade. The United States hadn’t even entered the war yet, but it was already focused on winning the peace. The endgame was not just the defeat of the Axis powers, but also the creation of a stable global order, in which World War II would be the last world war.
The 2016 Sony World Photography Awards are now taking entries, and the organizers have been kind enough to share some of their early entries with us.
The 2016 Sony World Photography Awards are now taking entries, and the organizers have been kind enough to share some of their early entries with us, gathered below. Last year’s competition attracted over 173,000 entries from 171 countries. Entries will be accepted until January 5, 2016. All captions below come from the photographers.