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.
Why the rapper-slash-pop-star shut down a New York Times Magazine writer who suggested she loves to squabble
‘‘Why would a grown-ass woman thrive off drama?’’
That’s the question Nicki Minaj posed to the writer Vanessa Grigoriadis shortly before she threw her out of the hotel room where they’d been chatting for a New York Times Magazine profile. Grigoriadis had asked about public feuds between Minaj’s boyfriend Meek Mill and her labelmate Drake, and between her mentor Lil Wayne and their label boss Birdman—and proposed, tentatively, that Minaj might enjoy the squabbling between the guys around her.
“What do the four men you just named have to do with me thriving off drama?” Minaj continued. “Why would you even say that? That’s so peculiar. Four grown-ass men are having issues between themselves, and you’re asking me do I thrive off drama?”
What will happen to digital collections of books, movies, and music when the tech giants fall?
When you purchase a movie from Amazon Instant Video, you’re not buying it, exactly. It’s more like renting indefinitely.
This distinction matters if your notion of “buying” is that you pay for something once and then you get to keep that thing for as long as you want. Increasingly, in the world of digital goods, a purchasing transaction isn’t that simple.
There are two key differences between buying media in a physical format versus a digital one. First, there’s the technical aspect: Maintaining long-term access to a file requires a hard copy of it—that means, for example, downloading a film, not just streaming from a third party’s server. The second distinction is a bit more complicated, and it has to do with how the law has shaped digital rights in the past 15 years. It helps to think about the experience of a person giving up CDs and using iTunes for music purchases instead.
Forget the Common Core, Finland’s youngsters are in charge of determining what happens in the classroom.
“The changes to kindergarten make me sick,” a veteran teacher in Arkansas recently admitted to me. “Think about what you did in first grade—that’s what my 5-year-old babies are expected to do.”
The difference between first grade and kindergarten may not seem like much, but what I remember about my first-grade experience in the mid-90s doesn’t match the kindergarten she described in her email: three and a half hours of daily literacy instruction, an hour and a half of daily math instruction, 20 minutes of daily “physical activity time” (officially banned from being called “recess”) and two 56-question standardized tests in literacy and math—on the fourth week of school.
That American friend—who teaches 20 students without an aide—has fought to integrate 30 minutes of “station time” into the literacy block, which includes “blocks, science, magnetic letters, play dough with letter stamps to practice words, books, and storytelling.” But the most controversial area of her classroom isn’t the blocks nor the stamps: Rather, it’s the “house station with dolls and toy food”—items her district tried to remove last year. The implication was clear: There’s no time for play in kindergarten anymore.
American politicians are now eager to disown a failed criminal-justice system that’s left the U.S. with the largest incarcerated population in the world. But they've failed to reckon with history. Fifty years after Daniel Patrick Moynihan’s report “The Negro Family” tragically helped create this system, it's time to reclaim his original intent.
By his own lights, Daniel Patrick Moynihan, ambassador, senator, sociologist, and itinerant American intellectual, was the product of a broken home and a pathological family. He was born in 1927 in Tulsa, Oklahoma, but raised mostly in New York City. When Moynihan was 10 years old, his father, John, left the family, plunging it into poverty. Moynihan’s mother, Margaret, remarried, had another child, divorced, moved to Indiana to stay with relatives, then returned to New York, where she worked as a nurse. Moynihan’s childhood—a tangle of poverty, remarriage, relocation, and single motherhood—contrasted starkly with the idyllic American family life he would later extol.
African American employees tend to receive more scrutiny from their bosses than their white colleagues, meaning that small mistakes are more likely to be caught, which over time leads to worse performance reviews and lower wages.
For decades, black parents have told their children that in order to succeed despite racial discrimination, they need to be “twice as good”: twice as smart, twice as dependable, twice as talented. This advice can be found in everything from literature to television shows, to day-to-day conversation. Now, a new paper from the National Bureau of Economic Research shows that when it comes to getting and keeping jobs, that notion might be more than just a platitude.
There’s data that demonstrates the unfortunate reality: Black workers receive extra scrutiny from bosses, which can lead to worse performance reviews, lower wages, and even job loss. The NBER paper, authored by Costas Cavounidis and Kevin Lang, of Boston University, attempts to demonstrate how discrimination factors into company decisions, and creates a feedback loop, resulting in racial gaps in the labor force.
In an NPR interview, the Pretenders singer compared comments about her book—and its description of her sexual assault—to a “lynch mob.”
In maybe one of the most uncomfortable NPR interviews since Joaquin Phoenix went on Fresh Air, the Pretenders singer Chrissie Hynde spoke with Morning Edition’s David Greene on Tuesday about her book, Reckless. Or, more specifically, about the mass outrage sparked by the section in which she writes about being sexually assaulted at the age of 21 by a group of bikers, and of taking “full responsibility” for it.
GREENE: I’ll just read a little bit here: “The hairy horde looked at each other. It was their lucky day. ‘How bout yous come to our place for a party.’” And you ended up with them, and then you proceeded to describe what they were asking you to do. “‘Get your bleeping clothes off, shut the bleep up, hurry up, we got bleep to do, hit her in the back of the head so it don’t leave no marks.’” This certainly sounds like an awful, awful experience with these men.
HYNDE: Uh, yeah. I suppose, if that’s how you read it, then that, yeah. You know, I was having fun, because I was so stoned. I didn’t even care. That’s what I was talking about, I was talking about the drugs more than anything, and how f***** up we were. And how it impaired our judgment to the point where it just had gotten off the scale.
The Utah Republican is making no claims that he—or anyone else—can defeat Kevin McCarthy when the 247-member House Republican conference gathers behind closed doors on Thursday to elect their next leader. But Chaffetz’s theory of the case is that no matter what happens in that meeting, McCarthy can’t get the 218 votes he’ll need to formally win election by the full House as speaker. At least 30 arch-conservatives in the House Freedom Caucus will oppose McCarthy during the floor vote on October 29, and then the House will be deadlocked.
That scenario is precisely what frightens rank-and-file Republicans.
The House could become institutionally paralyzed until it found a candidate that a majority of its voting members supported as speaker. And if the Republican leader fell short on the first ballot, there’s no guarantee the party would quickly settle on someone else. “We’ve got to figure out how to get to 218 before we get to the floor. Because otherwise we could be literally doing this through the fall,” said Representative Tom Rooney, a McCarthy ally from Florida.
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.
“Gentrification, it turns out, usually stops at the schoolhouse door,” the reporter Nikole Hannah-Jones has argued.
The ups and downs of gentrification have been chronicled thoroughly, but one of its consequences hasn’t been widely addressed: the effect on neighborhood schools when a critical mass of well-educated, well-off people move in. Gentrification usually brings some benefits with it to a neighborhood, such as more attention from the city—as Spike Lee noted, suddenly the trash gets picked up! But does an influx of children from wealthier families make a positive difference to local public schools?
Nikole Hannah-Jones, now an investigative reporter for The New York Times Magazine, says no. She makes the case in Grist that “gentrification, it turns out, usually stops at the schoolhouse door.” Because newcomers tend to send their kids outside of the local system, often to private or charter schools, gentrification tends to have a neutral or even negative effect on neighborhood schools, at least in the short term.
A spike in violent attacks on Wednesday make renewed conflict between Israelis and Palestinians impossible to ignore.
For more than a year, there’s been sustained debate about whether the ongoing tensions and fits of violence in Israel, the West Bank, and in particular, Jerusalem, would fully culminate in a third Palestinian uprising.