am 20. Oktober 2014
The financial crisis 2007/2008 has raised the interest in books written by three different groups of authors:
journalists like Walter Bagehot - "Lombard Street, 1873, edition 2006" - and Andrew Ross Sorkin - "Too Big to Fail" -,
academics like Charles P. Kindleberger and Robert Aliber - "Manias, Panics and Crashes, 6th edition" - and Carmen Reinhart & Kenneth Rogoff - "This Time is Different, edition 2009" -, insiders like Thilo Sarrazin - Europa braucht den Euro nicht, 1. Auflage 2010 -, Henry M. Paulson, Jr. - "On the Brink, edition 2013" - and Timothy Geithner - "Stress Test, edition 2014" - and
experts with a mixed background like Nassim Nicholas Taleb - "The Black Swan, edition 2010" - and Wilfried Stadler - "Der Markt hat nicht immer Recht, edition 2011" - both insiders and academics.
All these books are recommendable, among them Timothy Geithner's book is of utmost importance; it is written by one of the three insiders in the eye of the hurricane who wrote a book about what has been done to get out of the crisis.
To understand the 2007/2008 crisis in relation to the Great Depression 1929 the following books are recommendable: "The Great Crash 1929, edition 1997" by John Kenneth Galbraith (academic) and "Lords of Finance - 1929, The Great Depression, and the bankers who broke the world, edition 2010" by Liaquat Ahamed, former professional investment banker for twenty-five years.
Below you find some parts of "Stress Test" which could motivate you to read the author's excellent book and keep in mind what he describes and explains:
"On the morning of January 27, 2009, my first full day as secretary of Treasury, I met with President Barack Obama ... The worst financial crisis since the Great Depression was still raging ...The banking system was broken. I wasn't a banker, an economist, a politician, or even a Democrat. I was a registered independent without much of a public profile-and the profile I had didn't exactly signal Obama-style hope and change. (Page 1).
I had spent the past year working with a Republican Fed chairman, Ben Bernanke, and Republican Treasury secretary, Henry Paulson, Jr., to design a series of spectacularly unpopular rescues of financial firms. I didn't look like a Treasury secretary, either. I was forty-seven. ... Barney Frank, one of my closest allies in Congress, later observed that when I spoke in public, I looked like I was at my own bar mitzvah. And I was already politically damaged goods. ... I was eventually confirmed, by the narrowest margin since before the Civil War. ... But now it was time to get to work. ... It felt dark and daunting.
I had spent much of my career dealing with financial crises - in Mexico, Thailand, Indonesia, Korea and beyond - but this was the big one, the hundred year storm. Bernanke, Paulson and I had already engineered a series of emergency interventions for a variety of financial giants. (2)
Wall Street and Main Street were going down together. I had recently started reading Liaquat Ahamed's Lords of Finance ... but I had put it down after a few chapters. It was too scary ....
No economy can grow without a financial system that works (3)
I told the President, we still had `five bombs' to defuse ... Fannie Mae, Freddie Mac, AIG, Citigroup, and Bank of America. They all were much larger than Lehman. (4)
Every Financial Crisis is a crisis of confidence ... Confidence is a fragile thing ... And it's hard to get back once it's lost. A financial crisis is a bank run writ large, a run on an entire financial system. (7)
Ben Bernanke, my closest colleague when I served at the Fed and then as Treasury secretary, was the only other principal combatant who fought the entire war. (18).
I hope this book will help answer some of the questions that still linger about the crisis. Financial crises are perilous, and this won't be the last one. Yet the United States has no standing army for fighting financial wars ...It also had no playbook. (20f)
All financial crises are different, but they have a lot in common, and there are lessons to learn from this extreme one that can help policymakers and the public during the next one. I hope this story can help illuminate them.
The heart of the story will be my perspective on the most harrowing crisis since the Great Depression, from its outbreak in 2007 through its resolution in 2009 ... By the end of 2009, the worst of the crisis was over in the United States, but I still had a few challenges ahead of me. ... Then Europe began to crumble, and I spent much of my remaining tenure urging the Europeans to tackle the crisis more aggressively. ... our congressional Republican counterparts where threatening to force the U.S. government to default on our financial obligations, a true doomsday scenario. (21)
In his 1873 book Lombard Street, the bible of central banking, Walter Bagehot explained that the way to stop a run is to show the world there's no need to run, to put money in your window, to `lend freely, boldly, and so that the public may feel you mean to go on lending.' The loans should be expensive. (118)
Chairman Bernanke believed in Bagehot, and he believed that central bankers who fail to act in a crisis could make it exponentially worse. In his academic life, Bernanke had been a leading scholar of the Great Depression. (119)
The two government-sponsored enterprises - Fannie Mae and Freddie Mac - held or guaranteed more than $5 trillion in mortgages, propping up what was left of the housing market. But they were heading for the abyss. Fannie's stock price plunged to $10.25 the day IndyMac failed, down 90 percent from its peak. (169)
Early Sunday morning - September 14th, 2008 - I took a call from Callum McCarthy, a former Barclay's banker who was the United Kingdom's top financial regulator. ... He also told me Barclays wouldn't even be legally permitted to stand behind Lehman's trades before a shareholder vote that could take months to arrange. I was absolutely stunned. We were on the brink of Armageddon. (185)
Hank called Alistair Darling, the U.K. finance minister, to see if he could waive the requirement for a shareholder vote so that Barclays could guarantee Lehman's book immediately. Darling wouldn't do it. `He said he didn't want to import our cancer,' Hank told me. (186)
This would be the largest bankruptcy in U.S. history by far - Lehman was six times the size of WorldCom - Lehman finally filed at 1:45 a.m. - September 15th, 2008. (189)
The most extreme flight was from AIG, whose shares dropped another 60 percent to less than $5 after drastic downgrades by the raging agencies, a harsh landing for a stock that traded above $150 at its peak. (191)
By early Tuesday, September 16, I had changed my mind. Letting AIG fail seemed like a formula for a second Great Depression. It was essential that we do everything in our power to try to avoid that. ... It had seventy-four million policyholders in 130 countries who paid it premiums. (193)
Central banks exist to take out the extreme tail, the catastrophic risk ... In times of crisis, you will do things you thought you'd never do. (197)
Market volatility was more than a third higher than it had been after the crash of 1929. ... My colleagues and I thought we were looking at another global depression that would hurt billions of people. The world was looking to us ... (199)
The Lehman aftermath was absolutely horrifying, transmitting panic through global markets like never before. (201)
Ben Bernanke warned that if they - Congress - didn't act quickly, there wouldn't be an economy left to save. (202)
Today, though, the world still believes we made a conscious choice to let Lehman go. That's the standard journalistic account, shared by many economists and financial players. ... But I do not believe we could have done it without violating the legal constraints placed on the Fed, ... To save Lehman, we would have needed a private company willing and able to buy most if not all of it, and we didn't have one. (207)
It was easy for me to clamor for unpopular actions behind the scenes, but Hank Paulson had to make the case in the public glare ... he was working around the clock to save the country from disaster.
On Wednesday, October 1, the tweaked version of TARP passed the Senate with broad bipartisan support, 74-25. On Friday, it passed the House as well, as 57 representatives flipped from no to yes. (221)
It had been a brutal year. Of the twenty-five largest financial institutions at the start of 2008, thirteen either failed (Lehman, WaMu), received government help to avoid failure (Fannie, Freddie, AIG, Citi, BofA), merged to avoid failure (Countrywide3, Bear, Merrill, Wachovia), or transformed their business structure to avoid failure (Morgan Stanley, Goldman). (255/256)
The President-elect would be inheriting an economy in absolute free fall ... the financial system was still broken. ... `I have a plan for catastrophe,' Ben Bernanke said with a smile. `My plan is to call you.' ... And I didn't have a plan yet, either. (257).
The next morning - January 27, 2009 - I briefed the President in the Oval Office about the five big bombs we had to defuse - Fannie, Freddie, AIG, Citi, and Bank of America - as well as the deeper problems in the financial system. ... The world's most powerful government was now providing support, in various forms, for financial institutions and markets with more than $30 trillion in liabilities. (276)
We thought we were losing about 500,000 jobs a month; the initial government estimates were later revised to more than 750,000. (Pg. 277)
In late March 2009, ... the President asked me: `Tim, are you sure your plan is going to work?' I said no. I was not sure. ... Nothing in life was certain ... `But I'm confident that our plan is better than the alternatives, Mr. President,' I said. (334)
The Stress Test Was Truly Stressful (Graphics 1920-2010). As our strategy became clearer, and fears of widespread nationalization faded, confidence returned to the financial system, and confidence bred stability. The system had become investable again. (353)
Economists would later peg the end of the Great Recession to June 2009.
By summer's end, even though job losses were slowing, the jobless rate had soared to a gruesome 9.6 percent (360). Nevertheless, the dominant story at home was unemployment, which broke into double digits in October. (370)
... President Bush had inherited a $5.6 trillion ten-year surplus before leaving President Obama an $8 trillion ten-year deficit. (372)
The U.S. economy was growing again, and by March 2010, it would be adding jobs again. In April 2009, the IMF predicted we would spend up to $2 trillion bailing out the U.S. banking system; by the end of the year, it already looked like taxpayers might turn a profit on our financial rescues. (385)
The financial system is safer, but it certainly isn't perfectly safe. (Pg. 434)
Germany and France didn't want lectures from the United States, anyway; they still blamed our Wild West financial system for the meltdown of 2008. ... In reality, Europe had enjoyed a wild credit boom of its own, with much of the risky borrowing in the periphery funded by risky lending by banks in the German and French "core."
Now Europe was burning again, and it did not seem to have the tools or the desire to contain the fire. The Eurozone was sixteen nationals with sixteen fiscal policies and sixteen banking systems, all joined together under a common monetary policy. A default by one would affect them all, but they all had different priorities, and it wasn't clear how the stronger and weaker nationals could coordinate a response that could be approved by sixteen parliaments. (443/444)
We had the outlines of an agreement on Sunday morning, July 31, 2011) ... That afternoon, two days before the deadline, we met in the Oval Office to discuss whether I should make a statement preparing the world for the gruesome spectacle of the United States defaulting on its obligations for the first time in history. Even at my lowest points after Lehman and in early 2009, I had never felt this kind of dread. (468/469)
On July 26, 2012 ... That day, toward the end of a speech at a London investment conference, Draghi uttered twenty-three words that would prove to be a turning point. `Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,' he said. `And believe me, it will be enough.' Draghi had not planned to say this, but he was so alarmed by the darkness expressed by hedge funds and bankers at the conference that he ad-libbed an unequivocal commitment to defend Europe. Markets were delighted. (482)
My last day would be January 25, 2013, so those fights would no longer be my fights. (Pg. 489)
Overall, after widespread predictions of trillions in losses, the U.S. government's financial interventions were in black. Every major program turned a profit except the auto rescue and, of course, our foreclosure prevention programs, which were never supposed to be recouped. Taxpayers would end up making $24 billion on TARP's bank investments alone. (491)
As I write this in March 2014, we have enjoyed forty-eight consecutive months of private-sector job growth, with 8.7 million private-sector jobs created. Out 6.7 percent unemployment rate is still high, but it is a lot lower than our peak of 10 percent, or the current Eurozone rate of 12 percent. (495)
The $1.2 trillion budget he - Obama - inherited in 2009 shrank to $680 billion by 2013, the fastest reduction since the demobilization after World War II. On the President's watch, the deficit will fall from a scary 10 percent of GDP to about 3 percent in just over five years ... (500/501)
Herein lies the paradox. In a brutal financial crisis like ours, actions that seem reasonable - letting banks fail, forcing their creditors to absorb losses, balancing government budgets, avoiding moral hazard - only make the crisis worse. And the actions necessary to ease the crisis seem inexplicable and unfair. (509)
It was only after Hank Paulson and Ben Bernanke persuaded a reluctant and angry Congress to give us the authority to inject capital into troubled firms, and the FDIC agreed to guarantee bank debts, that we were able to break the momentum of the panic. We eventually put out the fire, and Congress ultimately provided resolution authority in Dodd-Frank, but we would have put out the fire a lot faster if we had had all those tools from the start, and that would have limited the damage suffered by millions of Americans. (516)
The inconvenient truth of financial-crisis response is that the actions that feel right are often wrong.
The principles of effective crisis response are mostly counterintuitive. The more you commit to do, the less you'll have to do. (518)
A Republican president and a Democratic president both stood behind good policy at a time when the politics could not have been worse. (525)
There are lessons for the world in our mistakes as well as our successes. My hope is that they won't have to be rediscovered in the fires of the next crisis. (528)"