I’ve read probably 100 of those “lessons learned (or not)” pieces about the crisis on the 10-year anniversary of Lehman’s collapse.
Here are some that stood out to me, though one inevitably leaves out some worthy of your attention, so feel free to add others. (My own piece is out today on WaPo.)
–I found this Steve Pearlstein piece interesting on a couple of levels. It’s a solid take of the shampoo economy dynamics (bubble, bust, repeat) that I’ve long bemoaned, citing the insights of Minsky’s analysis (by putting financial cycles and regulatory amnesia at the heart of his model, Minsky explains a reality that conventional economics, which assigns finance a benign, intermediary role, assumes away).
But on a deeper level, as someone who’s read Pearlstein’s work over the years–he’s long been a celebrated business writer for the WaPo–his identification of the flaws in capitalism take on greater weight as they come from a writer who did not start out looking for such flaws.
–As I note in my WaPo piece, for all the ink spilled on these 10-year anniversary pieces, there’s one critical question that hardly gets asked at all: how did we miss it? Dean Baker, one of the few who didn’t miss the housing bubble, points out that this shouldn’t have been so hard to see.
“The [housing] bubble and the risks it posed should have been evident to any careful observer. We saw an unprecedented run-up in house prices with no plausible explanation in the fundamentals of the housing market…The fact that prices were being driven in part by questionable loans was not a secret. The fact that lenders were issuing loans to people who had not previously been eligible was widely touted by the financial industry. The fact that many of these loans involved little or no down payment was also widely known.”
–Dean’s piece gets into the response to the crisis from the perspective of the negative impact on consumer spending from the loss of trillions in housing wealth, along with tanking home building/residential investment. Others, as in a recent piece by Ben Bernanke, argue that panicked credit markets were a more important driver of the loss of output and jobs in the downturn. Krugman agrees with Dean, emphasizing that output and jobs remained weak well after credit conditions thawed.
Surely both–the credit freeze and the negative demand shock–mattered. Banks and non-bank lenders were engaged in a carry trade of borrowing low in short-term money markets and lending long in asset markets, especially housing. The bank run that ensued when the loans soured and the short-term credit evaporated practically overnight was, of course, as Bernanke argues, an important driver of the output losses that followed. But absent bolder Keynesian interventions, reflating credit alone would have, and in fact, did, amount to pushing on a string (though see Furman below for a somewhat upbeat take of the U.S. fiscal case).
–This engenders bailout questions and arguments that have been going on since TARP was born. John Cassidy takes us through the issues in a review of Adam Tooze’s new book Crashed, which looks like a very deep dive into the global finance aspects of the crash.
–Neil Irwin provides a painful reminder of how horribly unpopular the bailouts were. He argues that they accomplished their goals of reflating credit markets, but at tremendous political cost, a cost I’m reminded of with every presidential tweet.
–Based on this moral hazard problem, Robert Samuelson asks: “How do you protect the system without seeming to reward the guilty?” This seems very straightforward to me: regulate the heck out of the financial markets. The extent of regulation should be proportional to the risk posed to the rest of the economy. And the time to worry about moral hazard is not in the crunch. It’s precisely now, when markets are ebullient and policy makers are reading urging regulators to go night-night at the switch.
–Jason Furman reminds us that the fiscal policy response to the downturn was a lot more robust than the Recovery Act. In fact, if you sum up all the countercyclical fiscal programs over the period of the Great Recession, the price tag is twice that of the Recovery Act ($1.5 trillion according to his Table 1). While Furman gives a relatively favorable review of the fiscal actions taken back then (with solid evidence), he doesn’t look at the Obama administration’s housing relief policies, which were arguably woeful under-performers.