Evaluating Obama's 8 years

[grumbler]

My impression might have been colored by the fact I was still in grad school, but it didn't seem to me that outside of cocaine snorting southwestern property developers/speculators and crooked S&L owners, that many people were directly affected.

Well, those guys and every single person who had a 401K or held any stock.  We got crushed (for a while).

[viper37]

My impression might have been colored by the fact I was still in grad school, but it didn't seem to me that outside of cocaine snorting southwestern property developers/speculators and crooked S&L owners, that many people were directly affected.

it was very bad in Canada and in Quebec.  We almost didn't survive the crisis as my dad's employer went bankrupt and he was still owed like 3 months wages.  And he lost all his actions in the company too.  Told him to get out way before.  Never listens.

[The Minsky Moment]

The financial crisis wasn't only limited to the S&Ls - the commercial banks were hit very hard, particularly those exposed to commercial RE.  The S&Ls "headlined" the crisis because so many collapsed outright.  The big commercial banks like Citi mostly survived, but had to lick their wounds and rebuild capital.

The 90-91 recession was like a dry run for 2008, a recession linked to financial crisis, resulting in a slower recovery.

[Hamilcar]

The financial crisis wasn't only limited to the S&Ls - the commercial banks were hit very hard, particularly those exposed to commercial RE.  The S&Ls "headlined" the crisis because so many collapsed outright.  The big commercial banks like Citi mostly survived, but had to lick their wounds and rebuild capital.

The 90-91 recession was like a dry run for 2008, a recession linked to financial crisis, resulting in a slower recovery.

This is clearly before my time so your insight would be appreciated. How did Congress and the Fed respond to it? Did the Fed engage in QE or similar measures?

[Admiral Yi]

This is clearly before my time so your insight would be appreciated. How did Congress and the Fed respond to it? Did the Fed engage in QE or similar measures?

The Resolution Trust Corporation was created to sell off the assets of failed S&Ls.  The remaining S&Ls were turned into plain vanilla banks.  I don't remember any special moves by the Fed.

[The Minsky Moment]

This is clearly before my time so your insight would be appreciated. How did Congress and the Fed respond to it? Did the Fed engage in QE or similar measures?

The Fed cut rates sharply but QE was never on the table because rates never got near 0%.  This was a very different macro environment - inflation was quite high coming out of the 80s boom compared to present near zero levels (although low compared to the 70s stagflation era).  There was no perceived deflation risk as materialized in 2009.  But overall the direction of the policy was similar.

The main legislative response was creation of an authority (the RTC) to warehouse the assets of all the collapsed S&Ls.  This turned out to be a policy success - the RTC managed the asset portfolio competently and ultimately the net loss to the taxpayer was contained despite the insolvency of so many insured banks.  Other legislative changes involved strengthening capital standards and  streamlining the alphabet soup of bank regulators.

[Hamilcar]

This is clearly before my time so your insight would be appreciated. How did Congress and the Fed respond to it? Did the Fed engage in QE or similar measures?

The Fed cut rates sharply but QE was never on the table because rates never got near 0%.  This was a very different macro environment - inflation was quite high coming out of the 80s boom compared to present near zero levels (although low compared to the 70s stagflation era).  There was no perceived deflation risk as materialized in 2009.  But overall the direction of the policy was similar.

The main legislative response was creation of an authority (the RTC) to warehouse the assets of all the collapsed S&Ls.  This turned out to be a policy success - the RTC managed the asset portfolio competently and ultimately the net loss to the taxpayer was contained despite the insolvency of so many insured banks.  Other legislative changes involved strengthening capital standards and  streamlining the alphabet soup of bank regulators.

Thanks!

If we entertain the counterfactual that inflation and interest rates had been high in '08, would the GFC have gone differently? Or would the housing bubble not have been able to reach its size in such an environment?

[The Minsky Moment]

If we entertain the counterfactual that inflation and interest rates had been high in '08, would the GFC have gone differently? Or would the housing bubble not have been able to reach its size in such an environment?

It's hard to answer that counter-factual in the abstract without knowing the reason why inflation was higher.  I.e. you would have to suppose a rather different macro environment, and so the answer would vary based on that specification.

With that huge caveat, I'd say:
1) The fact that inflation was relatively low may have contributed to the residential housing bubble to the extent that "money illusion" leads residential buyers to place greater emphasis on low nominal interest rates, as opposed to real.
2) Generally speaking, conventional monetary policy is going to be more effective in a higher inflation environment, because it is easier for the monetary authority to target negative real interest rates with conventional tools.

[Siege]

Obama is teh brillianz. Greatestest Prezidenth evah.
He fixed the health system, healed the racial divide, brought democracy to the middle east, reset the relations with Russia, stopped the proliferation of nuclelar weapons, contained the Ayatollahs, reduced the deficit, improved the economy, raised the standing of the USA in the wold, strengthened our allies, weakened our enemies, consolidated our position as the most powerful military evah, and completed our pacification of Iraq.

Last name Ever, first name Greatest.

[Eddie Teach]

Overselling it.

[Siege]

If we entertain the counterfactual that inflation and interest rates had been high in '08, would the GFC have gone differently? Or would the housing bubble not have been able to reach its size in such an environment?

It's hard to answer that counter-factual in the abstract without knowing the reason why inflation was higher.  I.e. you would have to suppose a rather different macro environment, and so the answer would vary based on that specification.

With that huge caveat, I'd say:
1) The fact that inflation was relatively low may have contributed to the residential housing bubble to the extent that "money illusion" leads residential buyers to place greater emphasis on low nominal interest rates, as opposed to real.
2) Generally speaking, conventional monetary policy is going to be more effective in a higher inflation environment, because it is easier for the monetary authority to target negative real interest rates with conventional tools.

Minsky, can you give me an example of number 2, so I understand how that works in practice?

[The Minsky Moment]

Minsky, can you give me an example of number 2, so I understand how that works in practice?

Sure. 
Say inflation is 5%.  Interest rates are 7%.  That means real interest rates are 2% (7-2)

If there is a recession the theory is that interest rates are too high to sustain normal economic activity.  This is often expressed in terms of Knut Wicksell's theory of a natural interest rate - recessions happen when the actual interest rate is higher than "natural interest rate" - the rate that is needed to bring the economy into equilibrium.

In this example, say the natural real interest rate is 0.5%.  Then the Fed just needs to cut interest rates to 5.5%.  Easy.

Now take the example of country "J"
In country J there is negative inflation (deflation) of -1.0%.  Nominal interest rates are at 0.5%, meaning real interest rates are 1.5% (0.5 - -1.0)
In this example, say the natural real interest rate is 0.5%.  So the monetary authority wants to reduce nominal interest rates to -0.5%.
Problem is that conventional monetary policy can't reduce interest rates below zero (people can just hold cash).  So some kind of unconventional policy is needed - like QE or putting some kind of a tax on cash.

The closer interest rates (real interest + inflation) is to zero, the harder it is to get conventional monetary policy to work.

[Alcibiades]

My impression might have been colored by the fact I was still in grad school, but it didn't seem to me that outside of cocaine snorting southwestern property developers/speculators and crooked S&L owners, that many people were directly affected.

 

If you read or watched the news at least even a little bit... or lived anywhere but under a rock, you would have had some kind of idea of how bad it was!   


I was at school at the time as well, post Army/Iraq, even, so it had zero impact on me personally.  Still couldn't go a day without hearing something relating to it, though.

[Eddie Teach]

He's talking about the S&L crisis in the 90s. 

[Alcibiades]

He's talking about the S&L crisis in the 90s. 

It's been a long day