I think the conventional narrative under academic economists is that the failure of the Fed to bailout [even better: nationalize] Lehman Brothers which led to a liquidity crises. Since our modern economy is so tied up with a smooth-functioning financial sector this led to the Great Recession. The housing bubble was mostly a distraction that would have had no large impact if it wasn’t for this mistake.
The take-away message [if this narrative is indeed correct]: the financial sector is really important, federal banks are unelected institutions where a single bad call can have enormous repercussions, people who ‘predicted the financial crisis’ are overrated—the failure to bailout Lehman Brothers was not seriously predicable in advance, narratives around economic fundamentals are wrong.
source: talking with a mainstream economist I respect, Jacob Falkovich
I don’t know enough about these things to have my own opinion, but I thought I might share this ‘conventional’ narrative and what I found surprising about the implications.
The housing bubble was mostly a distraction that would have had no large impact if it wasn’t for this mistake.
I doubt that a majority of economists would agree with that sentence.
I mostly agree with your first two sentences, and with most of Jacob’s comments. I disagree with him about the moral hazards, but that’s not very relevant to the near term consequences of bailout decisions.
If the Fed had increased the money supply in the fall of 2008 as aggressively as it did in the spring of 2020, I think that would have been more effective at stabilizing the economy than bailing out Lehman Brothers.
I want to signal-boost another point from Jacob’s post:
The US government decreed that US treasuries have a risk-weight of 0%, that they’re considered a highly liquid asset on par with cash, that the government is exempt from single-counterparty limits, and so on and so forth. Every major European and Asian regulator does the same. The only way banks can comply with all the regulations is by being massively exposed to government debt in all its forms.
There were a few days in March 2020 when US government bonds became rather risky investments. That should scare people more than it has.
Thank you for your comments. You are probably right that most economists would disagree with that sentence, but it was the sense I got from this particular economist—perhaps his views are more idiosyncratic than he presented them. I am not knowledgeable to say much more I’m afraid.
I think the conventional narrative under academic economists is that the failure of the Fed to bailout [even better: nationalize] Lehman Brothers which led to a liquidity crises. Since our modern economy is so tied up with a smooth-functioning financial sector this led to the Great Recession. The housing bubble was mostly a distraction that would have had no large impact if it wasn’t for this mistake.
The take-away message [if this narrative is indeed correct]: the financial sector is really important, federal banks are unelected institutions where a single bad call can have enormous repercussions, people who ‘predicted the financial crisis’ are overrated—the failure to bailout Lehman Brothers was not seriously predicable in advance, narratives around economic fundamentals are wrong.
source: talking with a mainstream economist I respect, Jacob Falkovich
I don’t know enough about these things to have my own opinion, but I thought I might share this ‘conventional’ narrative and what I found surprising about the implications.
I doubt that a majority of economists would agree with that sentence.
I mostly agree with your first two sentences, and with most of Jacob’s comments. I disagree with him about the moral hazards, but that’s not very relevant to the near term consequences of bailout decisions.
If the Fed had increased the money supply in the fall of 2008 as aggressively as it did in the spring of 2020, I think that would have been more effective at stabilizing the economy than bailing out Lehman Brothers.
I want to signal-boost another point from Jacob’s post:
There were a few days in March 2020 when US government bonds became rather risky investments. That should scare people more than it has.
Thank you for your comments. You are probably right that most economists would disagree with that sentence, but it was the sense I got from this particular economist—perhaps his views are more idiosyncratic than he presented them. I am not knowledgeable to say much more I’m afraid.