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.
Most presidents view inaugural addresses as a rare opportunity to appeal beyond “the base.” This was base-only.
For my sins, I have read every U.S. presidential inaugural address ever given, and played a small part in writing one of them—Jimmy Carter’s, delivered 40 years ago today.
The first one I remember hearing, John F. Kennedy’s in 1961, I saw on a fuzzy black-and-white TV from my 7th-grade American history classroom in California. The arctic conditions that day in Washington practically radiated through the TV screen. I remember seeing the revered 87-year-old poet Robert Frost hunch against the wind and squint in the low-sun glare as he tried to read the special inaugural ode he had composed. Then Richard Nixon, just defeated by Kennedy in a hair’s-breadth race, reached across to block the glare with his top hat. Frost waved him off and began reciting from memory one of his best-known poems, “The Gift Outright.”
Donald Trump will take the oath of office on Friday, becoming the 45th president of the United States.
Donald Trump takes the oath of office on Friday, to become the 45th president of the United States.
The day’s inaugural festivities will get underway in the morning and continue through Saturday. The swearing-in ceremony, which will take place outside of the Capitol, is expected to begin at 11:30 a.m., followed by an inaugural parade at 3 p.m. and inaugural balls in the evening.
Thousands of attendees are expected to descend on Washington, DC for the ceremonies, which will likely be met with celebration and protest. We’ll bring you the latest updates from the nation’s capital as events unfold. Also see our continuing coverage:
On January 20, 2017, the peaceful transfer of American power took place in Washington, DC, as Barack Obama, passed the office to Donald J. Trump.
On January 20, 2017, the peaceful transfer of American power took place in Washington, DC, as the 44th President of the United States, Barack Obama passed the office to President-elect Donald J. Trump. Hundreds of thousands attended the ceremony, gathering in the National Mall to hear the swearing in and Trump’s inaugural address, while groups of protesters clashed with police in some of Washington’s streets. President Trump, Vice President Mike Pence, and their wives then bid farewell to former President Obama and his wife, as the Obamas headed to Air Force One for one last flight.
Recent presidential installation ceremonies have been studiously planned and free of major disasters. It hasn’t always been so.
With malice toward none. The only thing we have to fear. Ask what you can do for your country.
Presidential inaugurations will, at their best, inspire their audiences—not just in their respective moments, but for decades and centuries to come. But presidential inaugurations are also run by people, which means that, sometimes, they will go extremely wrong. Sometimes, it will be protests that will mar the best-planned ceremonies. Sometimes, it will be human pettiness (as when President Hoover, riding with Franklin Roosevelt in the motorcade to the Capitol in 1932, seems to have ignored Roosevelt’s attempts at conversation, instead staring stone-faced into the distance). Sometimes, however, inaugural exercises will encounter disasters of a more epic strain: storms, illness, death, extremely pungent cheese.
The new president borrowed from the bleak, fiery tone of his presidential campaign, but said his election represented the ascension of the people over politicians in Washington.
President Donald Trump took office on Friday with an inaugural address that was striking for both its bleakness and its fiery, populist promises for a better future.
“Today we are not transferring power not from one administration to another, or from one party to another, but we are transferring power from Washington, D.C., and giving it back to you, the people,” the 45th president said.
Reciting a litany of horribles including gangs, drugs, crime, poverty, and unemployment, Trump told the nation, “This American carnage stops right here and stops right now.”
The inaugural address was unusually dark and political, delivered in a forum where new presidents have tended to reach for a language of unity, positivity, and non-partisanship. In many ways, the speech drew directly from the tone and approach of Trump’s often very-negative campaign rally speeches, once again showing that the “pivot” many observers have long expected Trump to make toward a more unifying and detached tone, is not coming. President Trump so far looks much the same as candidate Trump, and his speech was a strange milestone in a strange rise to power, one that was viewed as impossible just months ago.
Commentators love to praise the peaceful handover of power—but this year, it stands as a reminder of the system’s fragility and shortcomings.
Every presidency is different, but inaugural coverage is always the same. Commentators congratulate Americans on the peaceful transition of power and intone solemn sentences about democratic renewal.
There is something unnerving about these reassurances, something overstated, even hysterical. When a British prime minister loses the confidence of the House of Commons and must suddenly trundle out of 10 Downing Street (as some six dozen of them have done since the job was invented in the 1740s; a few more than once), nobody marvels on television how wonderful it is that he or she doesn’t try to retain power by force of arms. Nobody in Denmark thinks it extraordinary when one party relinquishes power to another. Ditto New Zealand or Switzerland—all of them treat peaceful transfers of power as the developed world norm, like reliable electricity or potable water.
He’s moved to establish his dominance of his party, of Congress, and of the media. Now, he turns to the nation.
Even for some Republicans, it is still a bit unbelievable. They have it all now—all the power. They won it fair and square. Donald Trump is assuming the presidency, and Republicans control the House and Senate.
They streamed into Washington this week to collect their reward, the activists and party hacks and true believers who helped make it happen. The members of the Republican National Committee, representing every state and territory, gathered in the ornate, slightly dowdy ballrooms of Washington’s Omni Shoreham hotel, where they took care of the party’s business between being feted at lunches, receptions, and inaugural balls. The mood was jubilant: Against all odds, after years of frustration, everything they worked for had come to pass.
A history of the first African American White House—and of what came next
In the waning days of President Barack Obama’s administration, he and his wife, Michelle, hosted a farewell party, the full import of which no one could then grasp. It was late October, Friday the 21st, and the president had spent many of the previous weeks, as he would spend the two subsequent weeks, campaigning for the Democratic presidential nominee, Hillary Clinton. Things were looking up. Polls in the crucial states of Virginia and Pennsylvania showed Clinton with solid advantages. The formidable GOP strongholds of Georgia and Texas were said to be under threat. The moment seemed to buoy Obama. He had been light on his feet in these last few weeks, cracking jokes at the expense of Republican opponents and laughing off hecklers. At a rally in Orlando on October 28, he greeted a student who would be introducing him by dancing toward her and then noting that the song playing over the loudspeakers—the Gap Band’s “Outstanding”—was older than she was.
From the nosebleed section of the National Mall, Donald Trump’s supporters watched his inauguration with high hopes for his presidency.
Friday’s inauguration ceremony was the calm after the storm.
The crowd on Washington, D.C.’s National Mall could have easily turned into one last Trump campaign rally, with thousands of red-topped supporters screaming for their leader and boo-hissing any Democrat spotted on the Jumbotrons.
But the mood inside the security barricades was affable, a byproduct, perhaps, of collective exhaustion from the hassle of navigating through security lines. Or perhaps Trump’s supporters simply realized they didn’t need to shout anymore. After all, they’d already won.
“I feel amazing. I feel like this is Christmas,” Josh Hammaker, a Trump voter from Calvert County, Maryland, told me in the minutes before the ceremony began. Hammaker considers himself a Democrat, but broke for Trump in November. “This is the best day of my life.” Or, at least, “one of ‘em. We’re finally getting our country back.”