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 neurologist leaves behind a body of work that reveals a lifetime of asking difficult questions with empathy.
Oliver Sacks always seemed propelled by joyful curiosity. The neurologist’s writing is infused with this quality—equal parts buoyancy and diligence, the exuberant asking of difficult questions.
More specifically, Sacks had a fascination with ways of seeing and hearing and thinking. Which is another way of exploring experiences of living. He focused on modes of perception that are delightful not only because they are subjective, but precisely because they are very often faulty.
To say Sacks had a gift for this method of exploration is an understatement. He was a master at connecting curiosity to observation, and observation to emotion. Sacks died on Sunday after receiving a terminal cancer diagnosis earlier this year. He was 82.
Thicker ink, fewer smudges, and more strained hands: an Object Lesson
Recently, Bic launched acampaign to “save handwriting.” Named “Fight for Your Write,” it includes a pledge to “encourage the act of handwriting” in the pledge-taker’s home and community, and emphasizes putting more of the company’s ballpoints into classrooms.
As a teacher, I couldn’t help but wonder how anyone could think there’s a shortage. I find ballpoint pens all over the place: on classroom floors, behind desks. Dozens of castaways collect in cups on every teacher’s desk. They’re so ubiquitous that the word “ballpoint” is rarely used; they’re just “pens.” But despite its popularity, the ballpoint pen is relatively new in the history of handwriting, and its influence on popular handwriting is more complicated than the Bic campaign would imply.
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.
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.
On the desperation behind the migrant tragedy in Austria
On Thursday, as Krishnadev Calamur has been tracking in The Atlantic’s new Notes section, Austrian authorities made a ghastly discovery: a truck abandoned in the emergency lane of a highway near the Hungarian border, packed with the decomposing bodies of 59 men, eight women, and four children. They are thoughtto be the corpses of migrants who suffocated to death, perhaps two days earlier, in the bowels of a vehicle whose back door was locked shut and refrigeration and ventilation systems weren’t functional. Stray identity documents suggest that at least some of the victims were Syrian—refugees from that country’s brutal civil war. The truck featured an image of a chicken and a slogan from the Slovakian poultry company that the lorry once belonged to: “I taste so good because they feed me so well.”
This is a low-stress way to ease back into the ancient art of blogging. Our leaders, from J.J. Gould to Chris Bodenner, have explained the logic behind this new feature on The Atlantic’s site here. My colleagues, including Ta-Nehisi Coates and Jeffrey Goldberg, have gotten into the swing of things as you will read.
What it's like to look for romance when "a big smile can be frightening"
The way to Paulette's heart is through her Outlook calendar. “Honestly, if you want to be romantic with me, send an email through Outlook and give me all the possible dates, locations, and times, so that I can prepare,” she said.
The former Miss America system contestant and University of Cincinnati College-Conservatory of Music-trained opera singer knew she had a different conception of romance than her previous boyfriends had and, for that matter, everyone else.
“People tend to think of romance as spur of the moment and exciting,” she told me. “I think of romance as things that make sense and are logical.” However, she didn't know why until this year when, at the age of 31, when she was diagnosed with autism.
Grasses—green, neatly trimmed, symbols of civic virtue—shaped the national landscape. They have now outlived their purpose.
The hashtag #droughtshaming—which primarily exists, as its name suggests, to publicly decry people who have failed to do their part to conserve water during California’s latest drought—has claimed many victims. Anonymous lawn-waterers. Anonymous sidewalk-washers. The city of Beverly Hills. The tag’s most high-profile shamee thus far, however, has been the actor Tom Selleck. Who was sued earlier this summer by Ventura County’s Calleguas Municipal Water District for the alleged theft of hydrant water, supposedly used to nourish his 60-acre ranch. Which includes, this being California, an avocado farm, and also an expansive lawn.
The case was settled out of court on terms that remain undisclosed, and everyone has since moved on with their lives. What’s remarkable about the whole thing, though—well, besides the fact that Magnum P.I. has apparently become, in his semi-retirement, a gentleman farmer—is how much of a shift all the Selleck-shaming represents, as a civic impulse. For much of American history, the healthy lawn—green, lush, neatly shorn—has been a symbol not just of prosperity, individual and communal, but of something deeper: shared ideals, collective responsibility, the assorted conveniences of conformity. Lawns, originally designed to connect homes even as they enforced the distance between them, are shared domestic spaces. They are also socially regulated spaces. “When smiling lawns and tasteful cottages begin to embellish a country,” Andrew Jackson Downing, one of the nation’s first landscaper-philosophers, put it, “we know that order and culture are established.”
Residents of Newtok, Alaska voted to relocate as erosion destroyed their land. That was the easy part.
NEWTOK, Alaska—Two decades ago, the people of this tiny village came to terms with what had become increasingly obvious: They could no longer fight back the rising waters.
Their homes perched on a low-lying, treeless tuft of land between two rivers on Alaska’s west coast, residents saw the water creeping closer every year, gobbling up fields where they used to pick berries and hunt moose. Paul and Teresa Charles watched from their blue home on stilts on Newtok’s southern side as the Ninglick River inched closer and closer, bringing with it the salt waters of the Bering Sea.
“Sometimes, we lose 100 feet a year,” Paul Charles told me, over a bowl of moose soup.
Many communities across the world are trying to stay put as the climate changes, installing expensive levees and dikes and pumps, but not Newtok, a settlement of about 350 members of the Yupik people. In 1996, the village decided that fighting Mother Nature was fruitless, and they voted to move to a new piece of land nine miles away, elevated on bedrock.
Protofeather fossils discovered entombed in amber from the Late Cretaceous era support theories of dinosaur and avian evolution
Protofeather fossils discovered entombed in amber from the Late Cretaceous era support theories of dinosaur and avian evolution -- and make for one beautiful gallery
Dinosaur and bird feathers preserved in amber from a Late Cretaceous site in Canada reveal new insights into the structure, function, and color of animals that date back to about 78 million years ago.
Researchers led by University of Alberta paleontologist Ryan McKellar say these specimens represent distinct stages of feather evolution, from early-stage, single filament protofeathers to much more complex structures associated with modern diving birds. After analyzing the preserved pigment cells, the authors add that these feathered creatures may have also had a range of transparent, mottled, and diffused colors, similar to birds today. They can't determine which feathers belonged to birds or dinosaurs yet, but they did observe filament structures that are similar to those seen in other non-avian dinosaur fossils. Their findings appear in the current issue of the journal Science.