When did the financial crisis end?
As I see it there are only a limited number of possible answers:
- There was no financial crisis.
- It ended in 2008 (Hennessey and Lazear’s contention).
- It ended some time after 2008 (at least implied by the president in his remarks on the five year anniversary of the fall of Lehman Brothers).
- It’s still ongoing.
I think the financial crisis is still ongoing. Although a lot of small banks have closed their doors since 2007, the financial crisis wasn’t caused by small banks. The big banks are even bigger than they were five years ago. They still have a boatload of bad paper on their books.
Despite its decrease from its peak, the percent of loans delinquent or in foreclosure is higher than it was five years ago.
If the ratings agencies had been doing their jobs, there would have been no financial crisis but very little has changed with the ratings agencies. Their ratings are still required for publicly-traded companies, their number is still limited by law, and they’re still paid by the companies they’re purporting to rate.
Total consumer credit is significantly higher than it was five years ago. A lot of that is in the form of education loans.
The Federal Reserve continues to apply “extraordinary measures”. Apparently, they’ve now become ordinary.
We have made no structural changes in the financial system over the last five years. The notion that Dodd-Frank has fixed the problem is laughable and even Dodd-Frank is being stripped of its enforcement powers.
If you pump enough air into it, you can keep a balloon with a hole in it inflated. That doesn’t patch the hole.
So, when did the financial crisis end? Please give your evidence.
One option: The financial crisis ends when we resume “normal” lending and borrowing explanations, as you state, but frankly, I’m not sure how that happens. If that’s the case, then I guess you want the 91-day T-bill to get off the floor, you want LIBOR to get off the floor.
The other option, which is what I’d say matters, is that the financial crisis is only important because it expands beyond the financial sector to ‘average Americans.’ By that indication, you want 1st time mortgages to get to their historical average, and perhaps, the employment/population ratio to go up.
What’s hard for everyone is that established businesses have virtually unlimited access to capital at historically unbelievable rates, and aren’t expanding – so aren’t hiring more workers.
If the ratings agencies had been doing their jobs, there would have been no financial crisis but very little has changed with the ratings agencies. …
I strongly disagree with this. There were a perverse and self-reinforcing incentives for bad behavior, and this was not limited to the banks.
Had the paper been rated lower, something would have devised to overcome lower ratings. The MBS’s were a mixture of bad and good mortages. The reasoning was was sound under specific conditions, but by making the conditions more general, a better rating could be obtained.
I do agree with the rest of your analysis.
When did the financial crisis end?
I would define the crisis as a critical insolvency issue. The insolvency is no longer critical, but the issue still exists. This has been addressed through various programs, but I suspect that the underlying assets are still worth far less.
Until these assets are written down, written off, or mature, the government will need to prop them up. Since the banks are sitting on a substantial number of risky assets, they do not want to extend more risky loans. There is more money available for lending, but there are more rules regulating lending.
Dodd-Frank is an attempt to have the benefits of repealing Glass-Steagall combined with the safety of Glass-Steagall. It cannot work, and as you noted, it is not working. The solution was to reinstate Glass-Steagall, but that would require giving up the go-go 2000’s.
I agree with that but it’s not in disagreement with the point I was making. IMO the basic root cause of the financial crisis had to do with evaluating risk. The ratings agencies weren’t the only ones who failed in their fiduciary responsibilities but those failings were necessary for the crisis to occur.
An assessment of risk is an assessment of value. That’s axiomatic. Under-estimating risk implies over-estimating value. The perverse incentives were a consequence of bad evaluation of risk.
I would chose (d), that the financial crisis is ongoing. There certainly has been an economical ebb and flow which has cajoled some people into thinking all is going well. However, IMO, these assurances have been justified more by statistical juggling and fed QE than by any real economic growth. Just look at yesterday, when the fed decided not to cut back on it’s easing measures — the stock market roared. However, the dollar dropped, oil went up and so did the inflationary precious metal hedge — gold.
In fact, according to an article in Zero hedge, The Fed is in the End Game.