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.
Meet the Bernie Sanders supporters who say they won’t switch allegiances, no matter what happens in the general election.
Loyal fans of Bernie Sanders have a difficult decision to make. If Hillary Clinton faces off against Donald Trump in the 2016 presidential election, legions of Sanders supporters will have to decide whether to switch allegiances or stand by Bernie until the bitter end.
At least some supporters of the Vermont senator insist they won’t vote for Clinton, no matter what. Many view the former secretary of state with her deep ties to the Democratic establishment as the polar opposite of Sanders and his rallying cry of political revolution. Throwing their weight behind her White House bid would feel like a betrayal of everything they believe.
These voters express unwavering dedication to Sanders on social media, deploying hashtags like NeverClinton and NeverHillary, and circulating petitions like www.wontvotehillary.com, which asks visitors to promise “under no circumstances will I vote for Hillary Clinton.” It’s garnered more than 56,500 signatures so far. Many feel alienated by the Democratic Party. They may want unity, but not if it means a stamp of approval for a political status quo they believe is fundamentally flawed and needs to be fixed.
There’s no escaping the pressure that U.S. inequality exerts on parents to make sure their kids succeed.
More than a half-century ago, Betty Friedan set out to call attention to “the problem that has no name,” by which she meant the dissatisfaction of millions of American housewives.
Today, many are suffering from another problem that has no name, and it’s manifested in the bleak financial situations of millions of middle-class—and even upper-middle-class—American households.
Poverty doesn’t describe the situation of middle-class Americans, who by definition earn decent incomes and live in relative material comfort. Yet they are in financial distress. For people earning between $40,000 and $100,000 (i.e. not the very poorest), 44 percent said they could not come up with $400 in an emergency (either with cash or with a credit card whose bill they could pay off within a month). Even more astonishing, 27 percent of those making more than $100,000 also could not. This is not poverty. So what is it?
Heidi Cruz got an elbow to the face—will Melania Trump get much more?
Ted Cruz stood on stage Tuesday evening and announced to the world that he would be suspending his campaign for the presidency of the United States. Just weeks earlier, the soon-to-be-former candidate had nearly convinced the Republican establishment that, contrary to both inclination and history, he might be its savior. His exit would effectively hand the nomination to a man the senator himself had called a “sniveling coward,” a “pathological liar,” “an arrogant buffoon,” and “Biff Tannen” (a Back to the Future reference that no doubt took some serious consideration).
In this particular moment of crisis and reconciliation, Heidi Cruz stood at her husband’s side, ready to meet his embrace as he turned from the lectern and (symbolically, at least) away from a party that had very nearly been his to lead. They embraced for eight seconds—Cruz’s face obscured from the cameras, an intimate moment between two partners.
David Clarke, the Trump-loving, pro-mass-incarceration, Fox News favorite, is challenging criminal-justice reform—and stereotypes.
Milwaukee Sheriff David A. Clarke Jr.’s podcast, The People’s Sheriff, begins with a slide-guitar and a boot-stomp beat before segueing into the rich baritone of the sheriff himself. Over the next 40 minutes, Clarke holds forth on the topics of the day: Planned Parenthood is “what I call ‘Planned Genocide.’” Public schools are so dangerous “there should be a body camera on every teacher.” Higher education has become “a racketeering ring.” The sheriff is also a big fan of presidential candidate Donald Trump: “He gets us. He understands us.”
Clarke, an African American law-enforcement leader who favors cowboy hats and often appears atop a horse, fights crime in Milwaukee, the U.S. city that has been called “the worst place” for African Americans to live. He has become a fixture of conservative media. Glenn Beck presents the sheriff’s podcast on his multimedia juggernaut, The Blaze, and he is a frequent guest on Fox News. Clarke is also popular on Twitter, where he recently tweeted to his 127,000 followers that the young activists of the Black Lives Matter movement—he calls it “Black Lies Matter”—will eventually “join forces with ISIS.” He made sure to note, “You heard it first here.”
Nearly half of Americans would have trouble finding $400 to pay for an emergency. I’m one of them.
Since 2013,the Federal Reserve Board has conducted a survey to “monitor the financial and economic status of American consumers.” Most of the data in the latest survey, frankly, are less than earth-shattering: 49 percent of part-time workers would prefer to work more hours at their current wage; 29 percent of Americans expect to earn a higher income in the coming year; 43 percent of homeowners who have owned their home for at least a year believe its value has increased. But the answer to one question was astonishing. The Fed asked respondents how they would pay for a $400 emergency. The answer: 47 percent of respondents said that either they would cover the expense by borrowing or selling something, or they would not be able to come up with the $400 at all. Four hundred dollars! Who knew?
With Donald Trump its presumptive nominee after his win in the Indiana primary, the GOP will never be the same.
NEW YORK—Where were you the night Donald Trump killed the Republican Party as we knew it? Trump was right where he belonged: in the gilt-draped skyscraper with his name on it, Trump Tower in Manhattan, basking in the glory of his final, definitive victory.
“I have to tell you, I’ve competed all my life,” Trump said, his golden face somber, his gravity-defying pouf of hair seeming to hover above his brow. “All my life I’ve been in different competitions—in sports, or in business, or now, for 10 months, in politics. I have met some of the most incredible competitors that I’ve ever competed against right here in the Republican Party.”
The combined might of the Republican Party’s best and brightest—16 of them at the outset—proved, in the end, helpless against Trump’s unorthodox, muscular appeal to the party’s voting base. With his sweeping, 16-point victory in Tuesday’s Indiana primary, and the surrender of his major remaining rival, Ted Cruz, Trump was pronounced the presumptive nominee by the chair of the Republican National Committee. The primary was over—but for the GOP, the reckoning was only beginning.
The U.S. president talks through his hardest decisions about America’s role in the world.
Friday, August 30, 2013, the day the feckless Barack Obama brought to a premature end America’s reign as the world’s sole indispensable superpower—or, alternatively, the day the sagacious Barack Obama peered into the Middle Eastern abyss and stepped back from the consuming void—began with a thundering speech given on Obama’s behalf by his secretary of state, John Kerry, in Washington, D.C. The subject of Kerry’s uncharacteristically Churchillian remarks, delivered in the Treaty Room at the State Department, was the gassing of civilians by the president of Syria, Bashar al-Assad.
Trump’s only viable road to the White House requires him to improve his standing within a group that has favored the GOP, but been cool to Trump.
It’s entirely possible that for all the talk about the gender gap, Donald Trump could prove more competitive among white women against Hillary Clinton than it appears today.
But Trump faces at least as much risk that white women could seal his doom in the general election match-up against Clinton that now appears certain.
How could both things be true? The answer is that the electorate’s changing composition makes it virtually impossible for Trump to prevail in November unless he not only wins most white women, but also carries that group by a convincing margin. Even a narrow lead for Trump over Clinton among white women would likely ensure his defeat.
The good news for Trump is that the Republican edge among white women has widened substantially since 2000, providing him a foundation on which to build. The bad news is he faces enormous, possibly unprecedented headwinds in defending that advantage. “There is something really basic, elemental, going on here with women reacting to [Trump],” said the Democratic pollster Stanley Greenberg, who has polled extensively for the Women’s Voices Women Vote Action Fund, a liberal voter mobilization group. “Every signal he’s sent that has built up his support with men and Republicans has had the opposite effect with women.”
Terms such as “racial conflict” fail to describe the challenge Obama faced, or the resentment that has powered Trump’s rise.
Stop me if you’ve heard this one before: Barack Obama’s election as the first black president was supposed to usher in a golden “post-racial” age but instead was met with racial conflict, a battle Obama failed, in his role as conciliator-in-chief, to either predict or control. The conflict has blossomed into a war, producing Donald Trump’s racial-angst-fueled campaign and the anger of Black Lives Matter protesters. At the heart of this racial conflict is Obama’s divisive presidency.
If that storyline sounds familiar, it’s the tack that many analyses have taken as they try to tease apart the interconnected issues of race and politics. It’s an exercise––an important one––that writers attempt every few months. Two years ago, commentators chronicled “unrest over race” in Obama’s legacy, and even before that speculated at racial tensions or unrest that might ensue should he ever lose an election. One recent column by Peniel Joseph in the Washington Post chronicles Obama’s failure to stop the “open warfare” of racial conflict during his term in office.
With a fast reversal on the minimum wage, the de-facto Republican nominee shows why Hillary Clinton is attacking his character more than his policies.
It took Donald Trump less than a day as the presumptive Republican nominee to reverse himself on a major economic-policy issue.
Don’t pretend to be surprised.
In an interview Wednesday with CNN’s Wolf Blitzer, Trump said he was “looking” at a possible increase in the federal minimum wage, which has stood at $7.25 an hour for nearly seven years. “I’m open to doing something with it because I don’t like that,” Trump said. This from a man who said during a November GOP debate that wages were “too high” and that he was “sorry to say it, but we have to leave [the federal floor] where it is.”
Was Trump’s flip-flop the start of a carefully-planned and much-anticipated pivot to the general election? Is he suddenly trying to appeal to Democrats now that he has dispatched each of the small-government conservative ideologues who ran in the Republican primary? Or did he simply forget what his position was on the minimum wage?