Crisis Economics Part 17

Chapter 6: The Last Resort.

135 Bernanke elaborated on that thesis: See, for example, Ben Bernanke, "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression," American Economic Review 73 (1983): 257-76.

136 "You're right, we did it . . .": Ben S. Bernanke, remarks at the conference to honor Milton Friedman, University of Chicago, November 8, 2002, online at http://www.federalreserve.gov/boarddocs/speeches/2002/20021108/default.htm.

136 "I was not going to be . . .": Shamim Adam and Liza Lin, "Krugman Says Bernanke Should Be Reappointed to Fed," Bloomberg.com, August 10, 2009, online at http://www.bloomberg.com/apps/news?pid=20601110&sid=aK3wlrRdMC38.

138 "gives economists chills": Peter Goodman, "Fear of Deflation Lurks as Global Demand Drops," New York Times, October 31, 2008.

138 robust economic growth: Michael D. Bordo and Andrew J. Filardo, "Deflation in a Historical Perspective," Bank for International Settlements Working Paper no. 186, November 2005, online at http://www.bis.org/publ/work186.pdf?noframes=1.

139 "debt-deflation theory of great depressions": Irving Fisher, "The Debt-Deflation Theory of Great Depressions," Econometrica 1 (1933).

140 "The very effort of individuals . . .": Ibid., 344, 346.

140 "great paradox": Ibid., 344.

142 brutal economic collapse: Peter Temin, "The Great Depression," in Stanley L. Engerman and Robert E. Gallman, eds., The Cambridge Economic History of the United States (Cambridge, U.K.: Cambridge University Press, 2000), 3:301-10. On prices of specific commodities, see the chart at http://www.visualizingeconomics.com /2009/08/02/prices-inflation-and-deflation-great-depression-vs-great-recession /.

142 "Unless some counteracting cause . . .": Fisher, "Debt-Deflation Theory," 346, 347.

143 "open market operations": A useful introduction is M. A. Akhtar, Understanding Open Market Operations (New York: Federal Reserve Bank of New York, 1997).

146 "our relative lack of experience . . .": Ben S. Bernanke, "Deflation: Making Sure 'It' Doesn't Happen Here," remarks to the National Economists Club, Was.h.i.+ngton, D.C., November 21, 2002, online at http://www.federalreserve.gov/boarddocs/speeches/2002/ 20021121/default .htm.

146 a series of new "liquidity" facilities: The following section draws heavily from Viral V. Acharya, Thomas Philippon, Matthew Richardson, and Nouriel Roubini, "A Bird's-Eye View," in Viral V. Archaya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (Hoboken, N.J.: John Wiley and Sons, 2008), 36-40; and on Federal Reserve Bank of New York, "Forms of Federal Reserve Lending," July 2009, online at http://www.newyorkfed.org/markets/Forms_of_Fed_Lending.pdf.

149 recent emerging-market crises: Roubini and Setser, Bailouts or Bail-Ins? 33-36.

149 It gave this support: Data in this section are derived from the IMF Web site, particularly the following doc.u.ments: Fact Sheet, "IMF Stand-By Arrangement," November 2009, http://www.imf.org/external/np/exr/facts/pdf/sba.pdf; Fact Sheet, "A Changing IMF-Responding to the Crisis," September 2009, http://www.imf.org/external/np/exr/facts/changing.htm; and "IMF Lending: IMF Implements Major Lending Policy Improvements," March 24, 2009, http://www.imf.org/external/np/pdr/fac/2009/032409.htm. For country-by-country data, see the interactive map at https://www.imf.org/external/np/exr/map/lending/index.htm.

150 "swap lines": Maurice Obstfeld, Jay C. Shambaugh, and Alan M. Taylor, "Financial Instability, Reserves, and Central Bank Swap Lines in the Panic of 2008," National Bureau of Economic Research Working Paper no. 14826, March 2009.

151 "quant.i.tative easing": Ben S. Bernanke, "The Crisis and the Policy Response," Stamp Lecture, London School of Economics, London, January 13, 2009, online at http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm; Volker Wieland, "Quant.i.tative Easing: A Rationale and Some Evidence from j.a.pan," National Bureau of Economic Research Working Paper no. 15565, December 2009; Paul Krugman, "Fiscal Aspects of Quant.i.tative Easing (Wonkish)," online at http://krugman.blogs.nytimes.com/ 2009/03/20/ fiscal-aspects-of-quant.i.tative-easing-wonkish/; and Chris Giles, Cynthia O'Murchu, Steve Bernard, and Jeremy Lemer, "Quant.i.tative Easing Explained," Financial Times, February 5, 2009, online at http://www.ft.com/cms/s/0/8ada2ad4-f3b9-11dd-9c4b-0000779fd2ac.html.

154 "some of the most esoteric components . . .": John Carlson, Joseph G. Haubrich, Kent Cherny, and Sarah Wakefield, "Credit Easing: A Policy for a Time of Financial Crisis," Federal Reserve Bank of Cleveland, February 11, 2009, online at http://www.clevelandfed.org/research/trends/2009/0209/02monpol.cfm.

154 the Asian financial crisis of 1998: See, for example, Scott Lanman, "Greenspan Says Hong Kong's Yam Was Right to Buy Stocks in 1998," Bloomberg.com, May 19, 2009, online at http://www.bloomberg.com/apps/news?pid=20601087&sid=aTDcelSOTQU4&refer=home; "Bank of j.a.pan to Spend 8bn Buying Shares Held by Banks," Telegraph, February 3, 2009.

155 from helicopters: Milton Friedman, Money Mischief: Episodes in Monetary History (New York: Harcourt Brace, 1992), 27-37.

155 Bernanke embraced this idea: Ben S. Bernanke, "The Crisis and the Policy Response," Stamp Lecture, London School of Economics, London, January 13, 2009, online at http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm.

155 "Capitalism without bankruptcy . . .": Borman quoted in J. Madeleine Nash, Bruce Van Voorst, and Alexander L. Taylor III, "The Growing Bankruptcy Brigade," Time, October 18, 1982.

156 "exit strategy": Ben S. Bernanke, "The Crisis and the Policy Response," Stamp Lecture, London School of Economics, London, January 13, 2009, online at http://www.federalreserve.gov/newsevents/speech/bernanke20090113a.htm.

Chapter 7: Spend More, Tax Less?.

158 "economic depression can not be . . .": Herbert Hoover, annual message to the Congress on the State of the Union, December 2, 1930, online at http://www.presidency.ucsb.edu/ws/index.php?pid=22458.

161 amount of construction: Jason Scott Smith, Building New Deal Liberalism: The Political Economy of Public Works, 1933-1956 (New York: Cambridge University Press, 2006).

161 from 1933 to 1937, unemployment fell: Peter Temin, "The Great Depression," in Stanley L. Engerman and Robert E. Gallman, eds., The Cambridge Economic History of the United States (Cambridge, U.K.: Cambridge University Press, 2000), 3:301-10. On the lessons drawn by the Obama adminstration-and a useful overview of the Great Depression-see Christina D. Romer, "Lessons from the Great Depression for Economic Recovery in 2009," speech to the Brookings Inst.i.tution, March 9, 2009, online at http://www.brookings.edu/~/media/Files/events/2009/0309_lessons/0309_lessons_romer.pdf.

161 j.a.panese government embraced his ideas: Tos.h.i.+hiro Ihori, Toru Nakazato, and Masumi Kawade, "j.a.pan's Fiscal Policies in the 1990s," World Economy 26, no. 3 (March 2003): 325-38; Martin Fackler, "j.a.pan's Big-Works Stimulus Is Lesson," New York Times, February 5, 2009.

161 Economists continue to argue: See, for example, Kenneth N. Kuttner and Adam S. Posen, "The Great Recession: Lessons for Macroeconomic Policy from j.a.pan," Brookings Papers on Economic Activity 2 (2001): 93-160; Sanjay Kalra, "Fiscal Policy: An Evaluation of Its Effectiveness," in Tim Callen and Jonathan D. Ostry, eds., j.a.pan's Lost Decade: Policies for Economic Revival (Was.h.i.+ngton, D.C.: International Monetary Fund, 2003), 164-78.

162 Hoover raised taxes, and so did Roosevelt: Paul Studenski and Herman E. Krooss, Financial History of the United States (New York: McGraw-Hill, 1963), 361-64, 419-25.

162 Economic Stimulus Act of 2008: The text of the act is online at http://www.govtrack.us/congress/billtext.xpd?bill=h110-5140. For a detailed account of the American Recovery and Reinvestment Act of 2009, see http://www.recovery.gov/Pages/home.aspx.

164 only 25 or 30 cents: See, for example, http://www.federalreserve.gov/Pubs/Feds/2009/200945/200945pap.pdf.

165 between 1866 and 1933: Federal Deposit Insurance Corporation, A Brief History of Deposit Insurance in the United States (Was.h.i.+ngton, D.C.: FDIC, 1998), 17.

166 overwhelmed the FSLIC: Timothy Curry and Lynn s.h.i.+but, "The Cost of the Savings and Loan Crisis: Truth and Consequences," FDIC Banking Review 13 (2000): 26-35.

166 "backed by the full faith and credit . . .": See http://www.fdic.gov/regulations/laws/rules/4000-2660.html.

166 upwards of 40 percent of the deposits: See, for example, Mike Shedlock, "How Many Uninsured Deposits Are at Risk?" July 15, 2008, online at http://globaleconomica.n.a.lysis.blogspot.com/2008/07/how-much-uninsured-deposits-are-at-risk.html. Raising the ceiling on insured deposits did not mean that all deposits were covered. See Felix Salmon, "Are Uninsured Bank Depositors in Danger?" February 14, 2009, online at http://seekingalpha.com/article/120608-are-uninsured-bank-depositors-in-danger.

166 new round of government guarantees: New York Federal Reserve Bank, "International Responses to the Crisis Timeline," chart updated monthly, online at http://www.ny.frb.org/research/global_economy/IRCTimelinePublic.pdf.

167 National Credit Union Administration: Mark Maremont, "U.S. Moves to Bail Out Credit Union Network," Wall Street Journal, January 29, 2009.

167 European Union guaranteed: Mark Landler and Kartin Bennhold, "Bold Pledges from Leaders, but Investors Await Details," New York Times, October 12, 2008; and Mark Landler, "U.S. Investing $250 Billion in Banks," New York Times, October 14, 2008.

168 The biggest bailout of all: Detailed information on recipients of TARP funds can be found online at http://online.wsj.com/public/resources/doc.u.ments/st_TARPREPAYMENTS0906_20090609.html.

173 A version of this scenario: Max Holmes, "Good Bank, Bad Bank; Good Plan, Better Plan," New York Times, January 31, 2009, online at http://www.nytimes.com/2009/02/01/opinion/01holmes.html; Dominic Barton, Robert Newel, and Gregory Wilson, "Managing Successful Bank Restructuring: The Mellon Bank Story," McKinsey and Company, November 2003.

174 Bank of America's case: Binyamin Appelbaum and Neil Irwin, "Bank of America Gets New Round of U.S. Aid," Was.h.i.+ngton Post, January 16, 2009.

175 PPIP: See http://www.financialstability.gov/roadtostability/publicprivatefund.html.

178 hit an all-time high in 1946: Simon Johnson and James Kwak, "National Debt for Beginners," National Public Radio, February 4, 2009, online at http://www.npr.org/templates/story/story.php?storyId=99927343.

Chapter 8: First Steps.

182 "They say there are no atheists in foxholes . . .": Jeffrey Frankel, "Responding to Crises," Cato Journal 27 (2007): 165.

182 radical reforms of financial systems: Eugene N. White, "Banking and Finance in the Twentieth Century," in Stanley L. Engerman and Robert E. Gallman, eds., The Cambridge Economic History of the United States (Cambridge, U.K.: Cambridge University Press, 2000), 3:764-73.

185 incentive to do crazy things: Gian Luca Clementi, Thomas F. Cooley, Matthew Richardson, and Ingo Walter, "Rethinking Compensation in Financial Firms," in Viral V. Acharya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (Hoboken, N.J.: John Wiley and Sons, 2008), 198-201.

186 "As long as the music is playing . . .": Michiyo Nakamoto and David Wighton, "Citigroup Chief Stays Bullish on Buy-Outs," Financial Times, July 9, 2007.

187 "gambling for redemption": Nouriel Roubini, "Ten Fundamental Issues in Reforming Financial Regulation and Supervision in a World of Financial Innovation and Globalization," March 31, 2008, online at www.roubini.com/a.n.a.lysis/pdf/Ten_Fundamental_Issues_in_Reforming.pdf.

187 no easy solutions: See, for example, Eli Ofek and David Yermack, "Taking Stock: Equity-Based Compensation and the Evolution of Managerial Owners.h.i.+p," Journal of Finance 55 (2000): 1367-84.

188 "bonus-malus": Raghuram Rajan, "Bankers' Pay Is Deeply Flawed," Financial Times, January 8, 2008.

188 Credit Suisse: Aaron Lucchetti, "Bankers Beat Odds in Toxic Pay Plan," Wall Street Journal, August 7, 2009; Graham Bowley, "Credit Suisse Overhauls Compensation," New York Times, October 20, 2009.

189 forbid employees to hedge: On these difficulties, see, for example, William A. Sahlman, "Management and the Financial Crisis (We have met the enemy and he is us . . .)," Harvard Business School Working Paper no. 10-033, 2009.

189 exorbitant and utterly unwarranted growth: David Wessel, "The Source of Our Bubble Trouble," Wall Street Journal, January 17, 2008; and Mercedes Rule, "Flocking to Finance," Harvard Magazine, May-June 2008, 18-19. The discussion in this section owes a great deal to Thomas Philippon and Ariell Reshef, "Skill Biased Financial Development: Education, Wages and Occupations in the U.S. Financial Sector," National Bureau of Economic Research Working Paper no. 13437, 2007; and to Thomas Philippon and Ariell Reshef, "Wages and Human Capital in the U.S. Financial Industry: 1909-2006," National Bureau of Economic Research Working Paper no. 14644, January 2009.

191 elaborate system of securitization: An excellent introduction can be found in Dwight Jaffee, Anthony W. Lynch, Matthew Richardson, and Stijn Van Nieuwerburgh, "Mortgage Origination and Securitization in the Financial Crisis," in Viral V. Acharya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (Hoboken, N.J.: John Wiley and Sons, 2008).

192 Credit Risk Retention Act: See http://www.govtrack.us/congress/bill.xpd?bill=h111-1731. For an a.n.a.lysis of this legislation, see Cadwalader, Wickersham & Taft LLP, "Securitization Reform Proposals: The Credit Risk Retention Act of 2009 and the Restoring American Financial Stability Act of 2009," Clients & Friends Memo, December 17, 2009, online at http://www.cadwalader.com/a.s.sets/client_friend/121709SecuritizationReformProposals.pdf.

192 approximately 34 percent of all the a.s.sets of major banks: See "Statistical Supplement to the Federal Reserve Bulletin," December 2008. The data for 2007 on large and small domestically chartered commercial banks is at http://www.federalreserve.gov/Pubs/supplement/2008/12/table1_26d.htm and http://www.federalreserve.gov/Pubs/supplement/2008/12/table1_26c2.htm.

195 Regulation Z: See the Board of Governors of the Federal Reserve, press release, July 23, 2009, online at http://www.federalreserve.gov/newsevents/press/bcreg/20090723a.htm.

195 ratings agencies' rise: The following account relies heavily on Richard Sylla, "An Historical Primer on the Business of Credit Ratings," in Richard M. Levich, Carmen Reinhart, and Giovanni Majnoni, eds., Ratings, Rating Agencies, and the Global Financial System (Boston: Kluwer, 2002); Matthew Richardson and Lawrence J. White, "The Rating Agencies: Is Regulation the Answer?" in Viral V. Acharya and Matthew Richardson, eds., Restoring Financial Stability: How to Repair a Failed System (Hoboken, N.J.: John Wiley and Sons, 2008); and Patrick Bolton, Xavier Freixas, and Joel Shapiro, "The Credit Ratings Game," National Bureau of Economic Research Working Paper no. 14712, February 2009.

198 "time bombs, both for the parties . . .": Berks.h.i.+re Hathaway Annual Report for 2002, p. 13, online at http://www.berks.h.i.+rehathaway.com/2002ar/2002ar.pdf.

199 Senator Phil Gramm: Eric Lipton and Stephen Labaton, "A Deregulator Looks Back, Unswayed," New York Times, November 16, 2008.

200 infamous episodes: An excellent overview of their checkered history can be found in Lynn A. Stout, "Why We Need Derivatives Regulation," New York Times, October 7, 2009, online at http://dealbook.blogs.nytimes.com/2009/10/07/dealbook-dialogue-lynn-stout/; also Satyajit Das, Traders, Guns, and Money: Knowns and Unknowns in the Dazzling World of Derivatives (Upper Saddle River, N.J.: Financial Times Press, 2006).

200 some sensible steps: Some of the following proposals echo those found in Viral A. Acharya et al., "Derivatives: The Ultimate Financial Innovation," in Acharya and Richardson, eds., Restoring Financial Stability; and Rym Ayadi and Patrick Behr, "On the Necessity to Regulate Credit Derivatives Markets," Journal of Banking Regulation 10 (2009): 179-201.

204 Basel Committee on Banking Supervision: For basic information on the Basel Committee, see "The New Basel Capital Accord: An Explanatory Note," Bank for International Settlements, 2001, online at http://www.bis.org/publ/bcbsca01.pdf; see also Bryan J. Balin, "Basel I, Basel II, and Emerging Markets: A Nontechnical a.n.a.lysis," Johns Hopkins University School of Advanced International Studies, May 10, 2008, online via Johns Hopkins University Library; and "History of the Basel Committee and Its Members.h.i.+p," Bank for International Settlements, August 2009, online at http://www.bis.org/bcbs/history.pdf.

206 "dynamic provisioning": Jesus Saurina, "Dynamic Provisioning: The Case of Spain," World Bank Crisis Response Note no. 7, July 2009, online at http://rru.worldbank.org/doc.u.ments/CrisisResponse/Note7.pdf.

206 "contingent capital": Nicholas Paisner and Hugo Dixon, "Newfangled Bank Capital," New York Times, November 12, 2009, online at http://www.nytimes.com/2009/11/13/business/13views.html.

Chapter 9: Radical Remedies.

211 "The lesson I take from this experience . . .": Ben S. Bernanke, "Monetary Policy and the Housing Bubble," speech to annual meeting of the American Economic a.s.sociation, January 3, 2010, http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.pdf.

214 standard industry guide to derivatives: Satyajit Das, The Das Swaps & Financial Derivatives Library (Hoboken, N.J.: John Wiley and Sons, 2006).

215 a bewildering array of regulatory bodies: See Richard H. K. Vietor, "Government Regulation of Business," in Stanley L. Engerman and Robert E. Gallman, eds., The Cambridge Economic History of the United States (Cambridge, U.K.: Cambridge University Press, 2000), 3:969-1012, particularly the chart on 3:980; also Andreas Busch, Banking Regulation and Globalization (New York: Oxford University Press, 2009), 33-66.

216 beneficial "compet.i.tion": See, for example, Richard J. Rosen, "Is Three a Crowd? Compet.i.tion Among Regulators in Banking," Journal of Money, Credit, and Banking 35 (2003): 967-98; Richard J. Rosen, "Switching Primary Federal Regulators: Is It Beneficial for U.S. Banks?" Federal Reserve Bank of Chicago Economic Perspectives 29 (2005): 16-33.

216 every incentive to be lenient: Ann B. Matasar and Deborah D. Pavelka, "Federal Banking Regulators' Compet.i.tion in Laxity: Evidence from CRA Audits," International Advances in Economics Research 4 (1998): 56-69.

216 "regulatory shopping": "Regulator Shopping," New York Times, May 20, 2009, online at http://www.nytimes.com/2009/05/21/opinion/21thu1.html; Busch, Banking Regulation, 53.

217 a serious overhaul: U.S. Treasury, Financial Regulatory Reform. A New Foundation: Rebuilding Financial Supervision and Regulation (Was.h.i.+ngton, D.C., 2009), online at http://www.financialstability.gov/docs/regs/FinalReport_web.pdf.

218 "global superregulator": Leigh Phillips, "Germany and UK Want Global Financial Regulator," EuObserver, September 22, 2008, online at http://euobserver.com/9/26784.

219 Quis custodiet ipsos custodes?: Charles Stocker, ed., The Satires of Juvenal and Persius (London: Longman, Orme and Company, 1839), 141.

219 "n.o.ble lie": See Malcolm Schofield, "The n.o.ble Lie," in G. R. F. Ferrari, ed., The Cambridge Companion to Plato's Republic (Cambridge, U.K.: Cambridge University Press, 2007), 138-64.

220 one of the worst-paid agencies: David Simons, "The High Price of Low Salaries at the SEC," Forbes.com, March 27, 2002, online at http://www.forbes.com/2002/03/27/0327simons.html; Andrew Ross Sorkin, "What If Watchdogs Got Bonuses?" New York Times, February 2, 2009, online at http://www.nytimes.com/2009/02/03/business/03sorkin.html.

221 "revolving door": Julie Creswell and Ben White, "The Guys from 'Government Sachs,' " New York Times, October 17, 2008; Marcus Baram, "Government Sachs: Goldman's Close Ties to Was.h.i.+ngton Arouse Envy, Raise Questions," Huffington Post, June 2, 2009, online at http://www.huffingtonpost.com/2009/06/02/government-sachs-goldmans_n_210561.html.

221 hiring a managing executive: "Adam Storch Named Managing Executive of SEC's Enforcement Division," SEC press release, October 16, 2009, online at http://www.sec.gov/news/press/2009/2009-220.htm.

221 banned government employees: Sheryl Gay s...o...b..rg, "On First Day, Obama Quickly Sets New Tone," New York Times, January 21, 2009.

222 funnel ma.s.sive amounts: See statistics in Americans for Campaign Reform, "Wall Street Money in Politics," August 25, 2009, online at http://youstreet.org/sites/default/files/Fact%20Sheet%20%20Wall%20Street%20Money%20in%20Politics.pdf.

222 make regulators . . . more independent: Marc Quintyn and Michael W. Taylor, "Should Financial Sector Regulators Be Independent?" International Monetary Fund, Economic Issues no. 32, March 8, 2004, online at http://www.imf.org/external/pubs/ft/issues/issues32/index.htm.

224 "living wills": Noam Scheiber, "Can We Fix Too Big to Fail Without Shrinkage?" New Republic, October 28, 2009, online at http://www.tnr.com/blog/the-stash/can-we-fix-too-big-to-fail-without-shrinkage; David Wessel, "Three Theories on Solving the 'Too Big to Fail' Problem," Wall Street Journal, October 29, 2009; Mike Konczal, "Fixing Too Big to Fail," Nation, November 6, 2009, online at http://www.thenation.com/doc/20091123/konczal.