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FirefightingIsters and central bank governors of other countries a valuable playbook for reducing the damage from future financial crises Firefighting provides a candid and powerful account of the choices they and their teams made during the crisis working under two presidents and with the leaders of Congres. I was expecting a lot technical insight in hindsight

Ben S. Bernanke ê 0 Free download

The 2008 financial crisis ten years on Recognizing that as Ben put it the enemy is forgetting they examine the causes of the crisis why it was so damaging and what it ultimately took to prevent a second Great Depression And they provide to their successors in the United States and the finance min. The Triumvirate of Safety has gathered to write Firefighting The Financial Crisis and its Lessons 2019 a short history of the nature and resolution of the 2008 financial crisis The Triumvirate is of course Ben Bernanke chairman of the Federal Reserve Board; Timothy Geithner president of the Federal Reserve Bank of New York; and Henry Paulson Secretary of the Treasury These three men at the very center of the conflagration will tell us what went on why it was such a surprise what was done and how the crisis changed our financial regulations and monetary policies My interest in this is both professional and personal Professional because of my career as a financial economist ending with a stint at the Federal Reserve System; personal because I was among the many of my ilk who didn't see the train wreck coming in spite of warnings by Karl Chip Case a friend and highly respected real estate economist who was a professor at Wellesley College Chip was way ahead of his time and I was among the many blind miceThe economic terrain for this review is consistent with the Triumvirate's experience but shaded by my own take on events The conclusions I draw are not necessarily theirs so if you are interested in precisely what they say read the book It's a worthwhile description of the backstage forces that directed the path breaking policies of the Federal Reserve and Treasury during the crisis The Back StoryThe last great financial collapse—and the last episode of major new financial regulation— was in the early 1930s In the following 75 years there was remarkable economic stability particularly from 1985 to 2008 and popular myths like housing prices don't go down had long replaced memories of years when they did By 2008 we had an old structure of financial regulations but an entirely new financial reality For example ¶ Commercial Banks were no longer the centerpiece of finance That role had moved to the shadow banking system of investment banks insurance companies brokerage companies mutual funds and other institutions that were major providers and users of credit and were also relatively free from the banking regulations of the 1930s ¶ In order to survive commercial banks were successfully pushing for deregulation that would allow them to extend their business into insurance securities brokerage and other lines that they had been excluded from by 1930s legislation Among the first big breaks was the acuisition of Travelers Insurance by CitiBank ¶ Leverage—the borrowing of money to finance activity—was in vogue The capital cushion at brokerage companies and shadow banks was slim at best and it was low at commercial banks as well In addition new leverage creating financial instruments like credit default swaps and other derivatives were hitherto unrecognized sources of financial risk So risk was increasing while euity was decreasing ¶ The watchword of the new times was innovation which included development of exotic and inscrutable financial instruments that would channel credit in new ways Among these was the development of the Collateralized Mortgage Obligation CMO that would allow investors to create virtually risk free investments in mortgages or so it was thought These innovations led to an increase in systemic risk as loans were made to subprime borrowers who couldn't normally get them under traditional credit standards ¶ In contrast to earlier episodes the financing of many shadow banks was out of whack Institutions were holding portfolios of long term securities of dubious value while financing them with short term liabilities like commercial paper This set the system up for a credit freeze if the long term assets fell in value much like the Penn Central crisis of the 1970s but with much greater ramifications This was the basis of the first major shadow bank failure at Bear Stearns ¶ The business of lending had become Big Politics as government sponsored credit agencies sprang up and grew large leading politicians to clamor for new lower credit standards for needy borrowers This acronymic politically motivated industry included FNMA the Federal National Mortgage Association Fannie Mae GNMA the Government National Mortgage Association Ginnie Mae FHLMC the Federal Home Loan Mortgage Corporation Freddie Mac the SLMC Student Loan Marketing Corporation Sallie Mae and the SBA Small Business Administration These became vehicles for socially active lending to favored groups groups that might not merit credit through normal channels Still in my view the underlying problem was not just the legacy of 1930s financial regulations the financial innovation and the proliferation of social lending Underneath it all was an underlying sense of security derived from ignorance about the effectiveness of regulation and about the new financial innovations This is an eternal problem financial innovation always outstrips financial regulations Regulations are constructed in a rear view mirror by folks who are slow to adapt to new things we call them Members of Congress and they are enforced by folks with no experience at identifying new sources of risk we call them Bureaucrats In contrast financial innovations are constructed by uick witted entrepreneurial minds who are actually in the trenches see the gaps in existing regulations want to do an end run have or hire uick minds to construct the end run and don't intend to hang around until the party is over There isn't a snowball's chance in Hell that the former will be ahead of the latter It's not a message people want to hear but regulation is not and never will be the effective instrument that we imagine—it's a short term solution and a long term palliative it might be necessary and inevitable if just for its veneer of safety but it won't ever prevent debaclesFinancial Psychology in the New EraThe particular financial innovations that undid the economy of Main Street in 2008 were CMOs particularly those containing subprime mortgages These were individual mortgage loans to borrowers on the financial edge that had been packaged together in a bundle and sold to investors Similar packages were constructed for business loans Collateralized Loan Obligations or CLOs corporate debt Collateralized Debt Obligations CDOs student loans and so on Each CMO was advertised as low risk because it was thought the probability of default on any one mortgage in a CMO was independent of the default probabilities of the others—Jane Roe's default on her mortgage would not be related to John Doe's default on his mortgage; bad default experience in the South had no implications for experience in the West This principle was derived from simple statistics aggregating independent risks reduces overall risk; it's the principle underlying all insurance contracts But while risks might be uncorrelated under normal conditions in a financial crisis all values are highly correlated— everything goes down in value This aggregation of risks was not alone in bringing down the financial system There had to be a cataclysmic flaw in the financial system to trigger the disaster That flaw was in the psychology of risk management in particular it was in the fundamental problem of moral hazard a problem well known to insurance companies The moral hazard problem is simple if I am insured against my house burning down I will invest less in preventing fires by buying alarm systems installing sprinkler systems cleaning up debris and so on So the act of insurance creates the fact of increased risk Insurance companies know this and monitor the properties they insure to confirm compliance But few saw that the appearance of insurance through financial innovations like credit default swaps led to an increase in financial risk taking; theory said that it just distributed existing risk toward those able to bear itBuilding a CMOCreating a CMO is a complex process allowing many parties to skew the product in their own interests Consider the innovation of the CMO Collateralized Mortgage Obligation the security package at the heart of the debacle Putting together a CMO reuires several steps each done by a different party with a different agendaFirst investors in the CMO will want assurance that the underlying assets are in place and are correctly valued So you need an assessment of the uality and value of each mortgaged property—the condition of the property its location and so on For this you turn to a real estate assessor often just a realtor Second you have to decide how to select which among the many available mortgages to put into a specific CMO—should they be on properties in the same location the same condition and so on For this you rely on the services of a CMO bundler typically a financial agent who understand the product and who hopefully works in his client's interests Here we find many instances of bundlers who knew how bad some of the mortgages were and still put them into a bundle; those folks knew that they were constructing something that could well collapse but by then they would be out of the picture Sometimes they bet against their own work by constructing fragile CMOs and betting against them by selling the product short That's not the right incentive system to createThird having put the CMO together selling it to financial agents with fiduciary obligations reuires confirmation of safety This was done by a rating agency like Moody's or Standard and Poor Those rating agencies would get paid by the CMO creators to put a stamp of approval on them This means that the rating agency should be able to determine just how the package not just the individual securities will behave under different economic scenarios But the rating agencies had no clue how to evaluate the new instruments a problem that didn't prevent them from liberally dispensing AAA ratingsSo what went wrong Well everything The CMOs were built on a flawed premise that the values of the individual properties were uncorrelated They were not Second the real estate assessors failed in their jobs—all to often the mortgaged properties didn't even exist or were at the wrong locations or were in much worse condition than stated Third the CMO bundlers often had no clue how to put the packages together to create lower risk; even worse in one highly publicized case the bundler also sold the package he created for a major investment short thus making a lot of money when the collapse came; it seems clear that he had put a bundle of dogs together knowing that it would go down in value Fourth the rating agencies failed dismally because they had absolutely no idea how the individual properties in a CMO were correlated; they simply bought into the flawed assumption of independence of risks and assigned AAA ratings to highly risky packagesOK everybody screwed up in this debacle—sometimes it was incompetence sometimes it was malice Was there some common problem that underlay the whole thing The answer is I think yes Way deep down underneath the mess was a kick the can down the road mentality When we observe something is wrong we can address it before the tsunami hits or we can simply move that something on to someone else and give them the risk; the latter protects you at the risk of systemic instability This psychological problem was inherent in the investment banking system of 2008 Banks no longer held the securities they originated—they sold them to someone else; realtors who assessed property had no skin in the game nor did bundlers or the salesmen who sold the CMOs or the rating agencies Each party played a temporary role in the movement of a CMO to its ultimate holders Everyone could kick the can down the road but the can itself never disappearedImplications for Financial RegulationSo what do you do about this Well the lesson of the Great Depression should be taken to heart There will be new financial regulations imposed they will be designed to address the problems of 2008 over time the financial system will adapt and risks will increase as a new financial world arises and when the generation of 2008 is gone—and with it the social memory of that debacle has faded away—those new risks will create another debacle which will come as a great surprise New regulation is the only soporific we have so it must be done to demonstrate that we are on top of the situation There is no choice But we are like the little Dutch boy putting our finger in the dike Our finger of new regulation is of course not really effective; but it appears to be effective because nothing bad happens for a very long time So we develop confidence in it Then at some future date we remove our finger from the dike—and the entire dike collapses From this experience the Dutch boy concludes that his finger of regulation was really holding the water back when in reality other people also had their fingers in the dike The water was really held back by the now gone social memory that raised red flags when risk levels increased So when the dike breaks we adopt new regulations to construct a new and stronger dike and so on The Post 2008 Regulatory EnvironmentSince 2008 there have been a number of changes in banking regulation and legislation proposed Many of these are embedded in the Dodd Frank Act Wall Street Reform and Consumer Protection Act passed in 2010 It is intended to strengthen the regulation of those areas shown particularly weak in 2008 The key elements are¶ Monitoring Financial Fragility Created the Financial Stability and Oversight Committee chaired by the Treasury Secretary to scrutinize the health of banks brokerage institutions and investment banks and express any concerns to their primary regulatory agency ¶ Consumer Lending Created a Consumer Financial Protection Bureau to protect consumers from inappropriate lending practices in credit cards and consumer loans¶ Insurance Created the Federal Insurance Office under the Treasury to monitor the health of large insurance companies like AIG that traded in financial derivatives like swaps¶ Proprietary Trading Mandated the Volcker Rule for commercial banks limiting their ability to engage in proprietary trading of risky securities for their own account ¶ Swaps and Derivatives Reuires that the SEC and CFTC monitor risky derivatives and that such instruments be traded within a clearing house that maintains data on who owns and who sells those instruments¶ Credit Ratings Created an Office of Credit Ratings at the SEC to monitor the activities of ratings like Moody's and Standard and Poor's with the goal of ensuring that their methods are appropriateAnd in 2018 After only eight years of Dodd Frank the Trump Administration is aready attempting to relax the Dodd Frank Act see Perhaps we won't have to wait 75 years for the next financial crisis

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Firefighting Free read ✓ 100 Ý From the three primary architects of the American policy response to the worst economic catastrophe since the Great Depression a magnificent big picture synthesis from why it happened to where we are nowIn 2018 Ben Bernanke Tim Geithner and Hank Paulson came together to reflect on the lessons of the 2008 financial criFrom the three primary architects of the American policy response to the worst economic catastrophe since the Great Depression a magnificent big picture synthesis from why it happened to where we are nowIn 2018 Ben Bernanke Tim Geithner and Hank Paulson came together to reflect on the lessons of. In what is a stunning turn of events the three Firefighters from the crisis of 2008 have published a mea culpa where they succinctly connect their unfortunate actions to the triumph of populism and the election of Donald Trump a short eight years laterFirefighters aside nobody escapes criticism here from i FDR who redlined black America out of the New Deal to ii Clinton who completely deregulated derivatives and slashed the capital gains tax to 20% indeed setting it to zero for one’s primary residence to iii the deductibility of interest expense from some of the planet’s highest corporate income taxes rendering the unleveraged CEO suicidal or iv the Greenspan Fed’s permanent policy of standing behind the value of assets in one way or another all together conspiring with some sixty years of post war prosperity to concentrate immense wealth in the hands of a narrow minority of white hyper leveraged urban baby boomersIt all came to a head in 2008 when it became clear that this minority i outright and ii via its pension plans and mutual fund holdings had successfully contracted to own the rights to all existing assets to say nothing of the rights to the future sweat of all other Americans and at least a couple yet unborn generations naturally also packaged into tradable assetsNot only that via trading with one another these boomers had “marked” these holdings at prices that the rest of the world to say nothing of the unborn could no longer afford to pay from its daily earnings The only vulnerability to the system was that it was held together by leverage and the leverage was a monster that needed to be fed by increasingly higher valuations in these contracts “The fundamental instability of capitalism is upward” the firefighters note wistfully but matters conspired in 2008 to momentarily halt this ascent And when this monster is not going up it goes down So down it wentFatefully the firefighters admit rather than do the right thing and wipe out the bankrupt owners inviting the rest of America and the world back into participation in the capitalist economy the easier choice was madeIn a stunning array of four letter programs trillions and trillions of government money was injected back into the system with particular care taken to get the government out of the scam before it explodes again and all property was placed even further beyond the reach of the average American making the owners whole and fast forwarding the country to its first proper existential crisis since the Civil WarThe book comes out just as we’re about to crash again and the authors warn that in a replay of the 1921 – 1929 episode this time round there’s probably nothing we can do to save the white urban baby boomers because well because they will all die very soon from natural causes WELL NOT UITEfor the avoidance of doubt the above is my attempt at parodyIn reality what we have here is the “official” blow by blow account of the heroic selfless fight the three Firefighters waged with one hand tied behind their back as they fought to prevent a re run of the Great Depression It all ends well Not only was the worst outcome prevented but the US has done better than any other major economy since 2008 with the economy enjoying its longest recovery ever and unemployment hitting some unprecedented lowsWhat’s not to likeuite a bit it turns outLet’s start with Paulson Paulson is deeply unhappy that the “canonical” book about the 2008 crisis that written by Blinder blames the crash on what is perceived to be Paulson’s decision to allow Lehman to fail The book makes it clear that Lehman was a symptom of a crisis that had been going for a while not a cause Somebody was bound to go down because the Firefighters did not have the authority to intervene Somebody big If it was not Lehman then it would be somebody else There was going to be a big failure And only after the big failure could the Firefighters get the authority to go ask for the necessary tools to deal with the crisisSo that’s Paulson sorted he was a good guy after all The blight on selfless public servant Tim Geithner has always been that he was the man who made the choice to protect the banks rather than the homeowners Not one but several books have come out by eyewitnesses who were there in the meetings when he talked about “foaming the runway” for the endangered banks with sundry programs to slow down the defaults My favorite is probably by SIGTARP Neil BarofskyThat is a total misunderstanding it turns out The Firefighters explain that herculean efforts were made to protect homeowners We are made to wait until page 103 out of 136 but there comes E and brings those mortgage rates right down Oh and make no mistake Timmy talks about “foaming the runway” in multiple contexts it’s just something he likes to say a lot For example on page 48 you can witness “foaming the runway” in the form of injecting liuidity into the markets after Bear Sterns goes down It comes up It’s just something he says a lotSo that’s Geithner sorted he was a good guy after allAnd that leaves us with Bernanke We all know what he stands accused of Yes fine he got rather inventive during the crisis he did some krazy stuff even FDR would not dare do in his most improvisational breakfast in bed times but that saved the dayWhat people want to know is why he kept rates down for so long after the crisis Even his biggest fans do acknowledge that a bad part of his legacy is that some very well connected people took advantage of the permanently low rates the homeowners were meant to benefit from and made for themselves some fortunes like we have not seen since the twenties Whisper it folks E bred ineualityAh no it didn’t Ineuality the Firefighters will have you know had been increasing for at least a decade prior to the crisis This was masked by the fact that there was growth But don’t go thinking it was caused by the response to the crisis It had been long in the making Charts are in the back that prove this in case the relevant prose is not good enough for youSo there you have it Something for everyone In the words of Winston Churchill “I know history will be kind to me because I intend to write it”But what we have here is something much grand than that It’s much akin to Chairman Mao’s Little Red bookOr perhaps Colonel Ghadaffi’s Little Green BookI propose we call it “the Little Brown Book”A five star effort