Historians still argue about the causes of the Great Depression. Arguments like that will also go on re the Great Recession. Nevertheless, pundits and
politicians (and and the NY Times
editorial page, among others) complain, for example, that "no one went to jail." See here
that "America got fleeced and no one was punished."
Who should go to jail? What do we know? The pre-conditions for forest fires accumulate
over many years; an unpredicted spark then sets off the fire. Likewise, at least ten political-economy
events interacted to form a “perfect storm” -- the best descriptor we have
until these are sorted out
1. Federal Reserve policy. In the years 2001-2006, the Fed kept short-term interest rates
too low too long (in the post-dot.com bust fear of deflation -- even
during 4% GDP growth). Low interest fanned a speculative bubble in real
estate. This was followed by typical over-reaction when the Fed tightening in 2005.
2 2. Local land use policies. The housing price bubble was magnified by
(varying) state, local development restrictions; these made local housing
supply less elastic (many local “bubbles”) and further boosted home prices.
Federal housing policy.
Since at least 1968 (GNMA
it has been national policy to promote home ownership.
promoted home ownership -- and pushed debt (and speculation). More recently, 20% down
payments were no longer required; underwriting standards were steadily loosened. Over-leveraged
households were encouraged.
Many new savers around the world. World’s middle
class grew by 2-billion+ in recent years (“Burgeoning bourgeoisie” Economist,Feb 14, 2009
). There was a new large international demand for developed-country
(mainly U.S.) assets which prompted a huge asset inflow to the U.S. Banks
4 5. Advances in finance. Securitization made it
possible to tap into more money available for mortgage lending.More risk-spreading; international pools of
capital made available (advantage of gains and losses spread far and wide). But
loan originators did less to screen out high-risk borrowers. Regulators did equally
poor job assessing sub-prime loans packaged with good loans in a single
Moral hazard. Previous bail-outs encouraged risk-taking and over-leveraging;
profit-loss system requires possibility of loss. Public choice economics
explains bail-outs; corporate bondholders/creditors less vigilant if 100-cents-to-the-dollar
bail-outs are expected -- 100-cents-to-the-dollar bail-outs became
7. Too few SEC-sanctioned bond ratings groups. Call
it oligopoly. Competition would have been better. Many inflated bond (including mortgage-backed
securities) ratings. Risk-averse pension
fund by-laws require a certain allocation of the portfolio to be AAA -- by
one of big-three ratings agencies. Regulators require less capital held -- if
against AAA-rated government bonds; greater leverage allowed if AAA-rated
8. Normal due diligence by auditors and
regulators overwhelmed. There never were “unfettered free markets.” Where/when/how
would we get better regulators? Financial innovation usually outpaces regulators
9. Panic policies (start with Dodd-Frank) and panic messages from policy makers. Robert Higgs
might say these prompted extraordinary “regime uncertainty”
More bad Fed policy. Post-2008, member banks were
paid interest on their excess reserves at the Fed. This bailed out many banks –
and also reduced their lending.
So, who should go to jail? Best not to ask the politicians
who had a hand in all but one or two my top ten.
Central bankers, now including Janet Yellen, are talking about or actually doing negative interest rates. We hear that there are three kinds of macro-economic policy: fiscal policy, monetary policy, economic reform (which can include tax code reform). The first two have apparently failed to deliver real growth. The third remains the much discussed but seemingly untouchable "third rail".
The problem with policy. Found this