These days are the tenth anniversary of the biggest Minsky Moment since the Great Depression. While when it happened, most commentators mentioned Minsky and many even called it a “Minsky Moment,” most of the commentary now does not use that term and much does not even mention Minsky, much less Charles Kindleberger or Keynes. Rather much of the discussion has focused now on the failure of Lehman Brothers on September 15, 2017. A new book by Lawrence Ball has argued that the Fed could have bailed LB out as they did with Bear Stearns in February of that year, with Ball at least, and some others, suggesting that would have resolved everything, no big crash, no Great Recession, no angry populist movement more recently, heck, all hunky dory if only the Fed had been more responsible, although Ball especially points his finger at Bush’s Treasury Secretary, Hank Paulson, for especially pressuring Bernanke and Geithner at the Fed not to repeat Bear Stearns. And indeed, when they decided not to support Lehman, the Fed received widespread praise in much of the media initially, before its fall blew out AIG and brought down most of the pyramid of highly leveraged derivatives of derivatives coming out of the US mortgage market, which had been declining for over two years.
Indeed, I agree with Dean Baker as I have on so many times regarding all this that while Lehman may have been the straw that broke the camel’s back, it was the camel’s back breaking that was the problem, and it was almost certainly going to blow big time reasonably soon then. It was not Lehman, it was going to be something else. Indeed, on July 12, 2008, I posted here on Econospeak a forecast of this, declaring “It looks like we might be finally reaching the big crash in the US mortgage market after a period of distress that started last August (if not earlier).”
I drew on Minsky’s argument (backed by Kindleberger in his Manias, Panics, and Crashes) that the vast majority of major speculative bubbles experience periods of gradual decline after their peaks prior to really seriously crashing during what Minsky labeled the “period of financial distress,” a term he adopted from the corporate finance literature. The US housing market had been falling since July, 2006. The bond markets had been declining since August, 2007, the stock market had been declining since October, 2007, and about the time I posted that, the oil market reached an all-time nominal peak of $147 per barrel and began a straight plunge that reached about $30 per barrel in November, 2008. This was a massively accelerating period of distress with the real economy also dropping, led by falling residential investment. In mid-September the Minsky Moment arrived, and the floor dropped out of not just these US markets, but pretty much all markets around the world, with the world economy then falling into the Great Recession.
Let me note something I have seen nobody commenting on in all this outpouring on this anniversary. This is how the immediate Minsky Moment ended. Many might say it was the TARP or the stress tests or the fiscal stimulus. All of these helped to turn around the broader slide that followed by the Minsky Moment. But there was a more immediate crisis that went on for several days following the Lehman collapse, peaking on Sept. 17 and 18, but with obscure reporting about what went down then. This was when nobody at the Board of Governors went home; cots made an appearance. This was the point when those at the Fed scrambled to keep the whole thing from turning into 1931 and largely succeeded. The immediate problem was that the collapse of AIG following the collapse of Lehman was putting massive pressure on top European banks, especially Deutsches Bank and BNP Paribas. Supposedly the European Central Bank (ECB) should have been able to handle this but along with all this the ECB was facing a massive run on the euro as money fled to the “safe haven” of the US dollar, so ironic given that the US markets generated this mess.
Anyway, as Neil Irwini The Alchemists (especially Chap. 11) documented, the crucial move that halted the collapse of the euro and the threat of a full out global collapse was a set of swaps the Fed pulled off that led to it taking about $600 billion of Eurojunk from the distressed European banks through the ECB onto the Fed balance sheet. These troubled assets were gradually and very quietly rolled off the Fed balance sheet over the next six months to be replaced by mortgage backed securities. This was the save the Fed pulled off at the worst moment of the Minsky Moment. The Fed policymakers can be criticized for not seeing what was coming (although several people there had spotted it earlier and issued warnings, including Janet Yellen in 2005 and Geithner in a prescient speech in Hong Kong in September, 2006, in which he recognized that the housing related financial markets were highly opaque and fragile). But this particular move was an absolute save, even though it remains today very little known, even to well-informed observers.
A few days ago, it was just a housing bubble to which a few of us pointed out an abnormal housing bubble created by fraud and greed on Wall Street. The market was riddled with false promises to pay through CDS, countering naked-CDS both of which had little if any reserves in this case to back up each AIG CDS insuring Goldman Sachs securities. When Goldman Sachs made that call to AIG, there were few funds to pay out and AIG was on the verge of collapse.
And today, some of those very same created banks under TARP which were gambling then and some of which had legal issues are free from the stress testing Dodd – Frank imposed upon banks with assets greater than $50 billion. Did the new limit need to be $250 billion? Volcker thought $100 billion was adequate and Frank argued for a slightly higher limit well under $250 billion. The fox is in the chicken coop again with Deutsche Bank, BNP Paribas, UBS, and Credit Suisse not being regulated as closely and 25 of the largest 38 banks under less regulation. These are not community banks and they helped to bring us to our knees. Is it still necessary for American Express to be a bank and have access to low interest rates the Fed offers? I think not; but, others may disagree with me. It is not a bank.
You remember the miracle the Fed pulled off as detailed in The Alchemists which I also read at your recommendation. I remember the fraud and greed on Wall Street for which Main Street paid for with lost equity, jobs, etc. I remember the anger of Wall Street Execs who were denied bonuses and states who had exhausted unemployment funding denying workers unemployment. We were rescued from a worse fate; but, the memory of the cure the nation’s citizenry had to take for Wall Street greed and fraud leaves a bitter taste in my mouth.
This never ending meme about Tarp saving the banks is really starting to aggravate me. The Fed saved the banking system(on both sides of the Atlantic) before Tarp issued one dollar, and they did so with trillions, not billions, of loans and guarantees that stopped the run on the banks and mutual funds on both sides of the Atlantic.
Just look at the amounts. Tarp gave out $250 billion to the banks. Do people seriously think this saved the banking system? Or that Wells goes under without their $25 billion loan?
Tarp was window dressing and pr, not a solution by any stretch of the imagination.
“Bloomberg ran quite a story, yesterday. It stems from a Freedom of Information Act Request that yielded the details of previously secret borrowing from the federal government to the biggest banks.
The bottom line, reports Bloomberg, by March of 2009, the Fed had committed $7.77 trillion “to rescuing the financial system, more than half the value of everything produced in the U.S. that year.” The lending began in August of 2007.
The reporting from Bloomberg Markets Magazine is spectacular, so we hope you click over and give the exhaustive piece a read.”
If you pick up The Alchemist, I believe you will see all of this ($7 trillion) explained in there. TARP was used to buy up junk MBS from banks by the Treasury and separate from the FED. It was also used to buy up bank stock to give them reserves. It saved two of the three OEMs too.
The general U.S. mortgage market died on Hallwe’en 2006. By the first quarter of 2007, it was dead even for IBs who owned originators.
There were two IBs who were dependent on MBS for their profits: Bear and Lehmann. Doesn’t mean they didn’t have other businesses, but their earnings would go from a V-8 to a 3-cylinder.
Bear went first, and ShitforBrains Fuld & Co. had six months after that to shore up capital, find a buyer, or go under.
We all knew that the reason Bear was saved wasn’t out of generosity, but because it really would have had a systemic effect had it gone through bankruptcy proceedings. But THAT was because Bear had two core businesses, and the other one was Custodial Services.
Had Bear gone through bankruptcy, those Customer funds would have been inaccessible for at least 30 days.
Lehmann had no similar function; failure of Lehmann was failure of Lehmann.
Fuld knew all of this and still fucked around for six months pretending he was driving a 911 instead of a Geo Metro.
Lawrence Ball is a brain-dead idiot if he thinks saving that firm would have in any way made things better.
My take on Minsky moment is that banking introduces positive feedback loop into the system, making it (as any dynamic system with strong positive feedback loop) unstable.
To compensate you need to introduce negative feedback loop in for of regulation and legal system that vigorously prosecute financial oligarchy “transgressions,” instilling fear and damping its predatory behavior and parasitic rents instincts. Which was a feature (subverted and inconsistent from the beginning and decimated in 70th) of New Deal Capitalism.
As neoliberalism is essentially revenge of financial oligarchy which became the ruling class again, this positive feedback loop is an immanent feature of neoliberalism.
Financial oligarchy is not interesting at regulation and legal framework that suppresses its predatory and parasitic “instincts.” So this is by definition is an unstable system prone to periodic financial “collapses.” In which the government needs to step in and save the system.
So the question about the 2008 financial crisis is when the next one commences and how destructive it will be. Not why it happened.
In a perverse way the percentage of financial executives who go to jail each year might be viewed as a metric of stability of the financial system 😉
Best part about the next financial crisis, it will be nonbank. How much CDS and Derivatives do they have? Probably not much.
I note that I have corrected some minor snafus in my original post on Econospeaak.
Run, ironically, especially in light of the general strength of the German economy, Deutsches Bank is in simply terrible shape right now, barely hanging on. It may well go under even if we have no major or even minor financial crisis in the near future.
Do you need me to fix the post here for you?
Deutsches Bank heh? Maybe the trade for Justice Anthony Kennedy’s retirement was or is help for Deutsches Bank to save Anthony’s son. I will have to read. One month after the limit was increased and Deutsche fails the tests?