Causes and consequences of the financial crisis of 2007-2009

Harvard Journal of Law and Public Policy

Volumn 33, Issue 2, 2010, Pages 421-441

  Poole, William ^a,b  

^a CATO INSTITUTE   (United States)

^b UNIVERSITY OF DELAWARE   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 78049278978     PISSN: 01934872     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (103)

1. NAT'L BUREAU OF ECON. RESEARCH, DETERMINATION OF THE DECEMBER 2007 PEAK IN ECONOMIC ACTIVITY (2008);
2. BD. OF GOVERNORS OF THE FED. RESERVE SYS., SUMMARY OF COMMENTARY ON CURRENT ECONOMIC CONDITIONS BY FEDERAL RESERVE DISTRICT, OCTOBER 2009, at i-vi (2009) [hereinafter CURRENT CONDITIONS].
3. Shobhana Chandra & Matthew Benjamin, Bernanke 'Green Shoots' May Signal False Spring Amid Job Losses, BLOOMBERG.COM, Apr. 6, 2009, http://www.bloomberg.com/ apps/news?pid=20601103&sid=aJa8WNMvKaxg.
4. See Press Release, Bureau of Labor Statistics, U.S. Dep't of Labor, The Employment Situation-February 2010, at 1 (Mar. 5, 2010), available at http://www.bls.gov/ news.release/pdf/empsit.pdf.
5. See CURRENT CONDITIONS, supra note 1, at i.
6. DAVID WESSEL, IN FED WE TRUST: BEN BERNANKE'S WAR ON THE GREAT PANIC (2009).
7. CONG. RESEARCH SERV., FINANCIAL CRISIS? THE LIQUIDITY CRUNCH OF AUGUST 2007, at 9 (2007).
8. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Reserve Board Discount Rate Action (Aug. 17, 2007), available at http://www. federalreserve.gov/ newsevents/press/monetary/20070817a.htm.
9. Fed. Reserve Bank of N.Y., Historical Changes of the Target Federal Funds and Discount Rates, http://www.newyorkfed.org/markets/statistics/dlyrates/ fedrate.html (last visited Mar. 24, 2010).
10. Id.
11. Id.
12. Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 110th Cong. (2008) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys.).
13. Minutes of the Bd. of Governors of the Fed. Reserve Sys. (Mar. 16, 2008), available at http://www.federalreserve.gov/newsevents/press/other/ other20080627a2.pdf.
14. Fed. Reserve Bank of N.Y., supra note 8.
15. Id.
16. Press Release, Lehman Brothers, Lehman Brothers Holdings Inc. Announces It Intends to File Chapter 11 Bankruptcy Petition (Sept. 15, 2008), available at http://www.lehman.com/press/pdf-2008/091508-lbhi-chapter11-announce.pdf.
17. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Reserve Board, with full support of the Treasury Department, authorizes the Federal Reserve Bank of New York to lend up to $85 billion to the American International Group (AIG) (Sept. 16, 2008), available at http://www. federalreserve.gov/newsevents/ press/other/20080916a.htm.
18. Fed. Reserve Bank of N.Y., supra note 8.
19. John Waggoner, Investors rush to earn nothing: 4-week T-bills sell like hotcakes at 0% interest, USA TODAY, Dec. 10, 2008, at 1B.
20. Output Slumps Across Europe, EURONEWS, Oct. 12, 2008, http://www.euronews.net/ 2008/12/10/output-slumps-across-europe/.
21. Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Address at the Federal Reserve Bank of San Francisco's Conference on Asia and the Global Financial Crisis: Asia and the Global Financial Crisis (Oct. 19, 2009), available at http://www.federalreserve.gov/newsevents/speech/ bernanke20091019a.ntm.
22. For a more complete treatment, see William Poole, The Credit Crunch of 2007-08: Lessons Private and Public, 44 Bus. ECON. 38 (2009).
23. Fed. Reserve Bank of N.Y., supra note 8.
24. Roger Lowenstein, Triple - A Failure, N.Y. TIMES, Apr. 27, 2008 (Magazine), at 36.
25. Kurt Eggert, The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 CONN. L. REV. 1257, 1276 (2009).
26. Id. at 1281-82.
27. Id. at 1288-89.
28. Arthur E. Wilmarth, Jr., The Dark Side of Universal Banking: Financial Conglomerates and the Origins of the Subprime Financial Crisis, 41 CONN. L. REV. 963, 1033 (2009).
29. Id.
30. Id.
31. Id.
32. Id.; see also INT'L MONETARY FUND, GLOBAL FINANCIAL STABILITY REPORT: CONTAINING SYSTEMIC RISKS AND RESTORING FINANCIAL SOUNDNESS 72 (2008) (explaining how consolidation of SIVs impacts a company's balance sheet).
33. Russell Roberts, How Government Stoked the Mania, WALL ST. J., Oct. 3, 2008, at A21.
34. Id.
35. U.S. GOV'T ACCOUNTABILITY OFFICE, FANNIE MAE AND FREDDIE MAC: ANALYSIS OF OPTIONS FOR REVISING THE HOUSING ENTERPRISES' LONG-TERM STRUCTURES 2 n.7 (2009).
36. Lawrence H. White, Federal Reserve Policy and the Housing Bubble, 29 CATO J. 115, 119 (2009).
37. Roberts, supra note 32.
38. See Press Release, S & P Indices, Home Prices Continue to Send Mixed Messages as 2009 Comes to a Close According to the S & P/Case-Shiller Home Price Indices (Feb. 23, 2010) (showing a graph depicting the fall in housing prices in 2006).
39. Randall S. Kroszner, Governor, Bd. of Governors of the Fed. Reserve Sys., Address at the Consumer Bankers Association 2007 Fair Lending Conference: The Challenges Facing Subprime Mortgage Borrowers (Nov. 5, 2007), available at http://www.federalreserve.gov/newsevents/speech/kroszner20071105a.htm.
40. See NAT'L BUREAU OF ECON. RESEARCH, supra note 1.
41. See Press Release, Bd. of Governors of the Fed. Reserve Sys., supra note 7.
42. Fed. Reserve Bank of N.Y., supra note 8.
43. Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Address at the Federal Reserve Bank of Richmond 2009 Credit Markets Symposium: The Federal Reserve's Balance Sheet (Apr. 3, 2009), available at http:// www.federalreserve.gov/newsevents/speech/bernanke20090403a.htm.
44. Id.
45. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Reserve and other central banks announce measures designed to address elevated pressures in short-term funding markets (Dec. 12, 2007), available at http://www.federalreserve.gov/ newsevents/press/monetary /20071212a.htm.
46. Id.
47. Id.
48. Press Release, Bd. of Governors of the Fed. Reserve Sys., Federal Reserve and other central banks announce further coordinated actions to expand significantly the capacity to provide U.S. dollar liquidity (Sept. 29, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20080929a. htm.
49. See BD. OF GOVERNORS OF THE FED. RESERVE SYS., FEDERAL RESERVE STATISTICAL RELEASE H.4.1 FACTORS AFFECTING RESERVE BALANCES OF DEPOSITORY INSTITUTIONS AND CONDITION STATEMENT OF FEDERAL RESERVE BANKS, SEPTEMBER 11, 2008 (2008).
50. Id.
51. See id.
52. See Press Release, Bureau of Labor Statistics, supra note 3;
53. see also The Semiannual Monetary Policy Report to the Congress: Hearing Before the S. Comm. on Banking, Hous. & Urban Affairs, 110th Cong. (2008) (statement of Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys.).
54. This figure is based on the weekly average for the week ending December 31.
55. BD. OF GOVERNORS OF THE FED. RESERVE SYS., FEDERAL RESERVE STATISTICAL RELEASE H.4.1 FACTORS AFFECTING RESERVE BALANCES OF DEPOSITORY INSTITUTIONS AND CONDITION STATEMENT OF FEDERAL RESERVE BANKS, DECEMBER 29, 2008 (2008);
56. BD. OF GOVERNORS OF THE FED. RESERVE SYS., FEDERAL RESERVE STATISTICAL RELEASE H.4.1 FACTORS AFFECTING RESERVE BALANCES OF DEPOSITORY INSTITUTIONS AND CONDITION STATEMENT OF FEDERAL RESERVE BANKS, SEPTEMBER 4, 2008 (2008).
57. FED. RESERVE BANK OF N.Y., DOMESTIC OPEN MARKET OPERATIONS DURING 2008, at 24 (2009).
58. Pub. L. No. 110-185, 122 Stat. 613.
59. Id. §§ 101-103.
60. CONG. BUDGET OFFICE, COST ESTIMATE: HR. 5140, ECONOMIC STIMULUS ACT OF 2008, at 1-2 (2008).
61. CONG. BUDGET OFFICE, DID THE 2008 TAX REBATES STIMULATE SHORT-TERM GROWTH? 1 (2009).
62. Pub. L. No. 111-5, 123 Stat. 115.
63. See Letter from Douglas W. Elmendorf, Dir., Cong. Budget Office, to Charles E. Grassley, Ranking Member, Comm. on Fin., U.S. Senate (Mar. 2, 2009).
64. Jeanne Sahadi, Senate Passes Landmark Housing Bill, CNNMONEY.COM, July 26, 2008, http://money.cnn.com/2008/07/26/news/economy/housing-bill-Senate/ index.htm.
65. CONG. RESEARCH SERV., FANNIE MAE AND FREDDIE MAC IN CONSERVATORSHIP 1 (2008), available at http://fpc.state.gov/documents/organization/110097.pdf.
66. Emergency Economic Stabilization Act of 2009, Pub. L. No. 110-343, 122 Stat. 3765.
67. Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Address at the National Association for Business Economics 50th Annual Meeting: Current Economic and Financial Conditions (Oct. 7, 2008), available at http:// www.federalreserve.gov/newsevents/speech/bernanke20081007a.htm.
68. Henry M. Paulson, Jr., Secretary, U.S. Dep't of the Treasury, Remarks on Financial Rescue Package and Economic Update (Nov. 12, 2008), available at http://www.financialstability.gov/latest/hp1265.html.
69. CONG. BUDGET OFFICE, THE TROUBLED ASSET RELIEF PROGRAM: REPORT ON TRANSACTIONS THROUGH JUNE 17, 2009, at 2 (2009).
70. Id.
71. WESSEL, supra note 5, at 93.
72. See id. (noting that the Fed's main policy concern as of July 2007 was the risk of rising inflation and not the housing bubble).
73. See id. at 178-80.
74. Id. at 179 ("Paulson and Bernanke concluded that there wasn't any point in asking Congress-unless the crisis intensified to the point where there were no other options.").
75. Id. at 186-87.
76. The Senate is now considering a reform bill, and the House passed a bill in December 2009. Sewell Chan, Reform Bill Adds Layers of Oversight, N.Y. TIMES, Mar. 16, 2010, at B1.
77. See DEAN BAKER & TRAVIS MCARTHUR, CTR. FOR ECON. & POL'Y RESEARCH, THE VALUE OF THE "TOO BIG TO FAIL" BIG BANK SUBSIDY 2 (2009).
78. Id. (arguing that the mentioned subsidy arises precisely from the fact that banks enjoying protection under the "too big to fail" concept are able to borrow more cheaply).
79. WESSEL, supra note 5, at 1.
80. See William Poole, The Bernanke Question, CATO.ORG, July 28, 2009, http:// www.cato.org/pub-display.php7pub-id=10388.
81. David Fettig provides useful background information on Section 13(3). See David Fettig, The History of a Powerful Paragraph: Section 13(3) enacted Fed business loans 76 years ago, REGION, June 2008, at 33;
82. see also David Fettig, Lender of More Than Last Resort: Recalling Section 13(b) and the years when the Federal Reserve opened its discount window to business, REGION, Dec. 2002, at 14.
83. The Federal Reserve Act of 1913, Pub L. No. 63-43, ch. 6, § 13, 38 Stat. 251, 263 (codified as amended at 12 U.S.C. § 343 (2006)).
84. Pub. L. No. 72-302, ch. 520, § 210, 47 Stat. 709, 715 (codified at 12 U.S.C. § 343 (2006)).
85. 12 U.S.C. § 343 (2006) ("In unusual and exigent circumstances, the Board of Governors of the Federal Reserve System, by the affirmative vote of not less than five members, may authorize any Federal Reserve bank, during such periods as the said board may determine, at rates established in accordance with the provisions of section 357 of this title, to discount for any individual, partnership, or corporation, notes, drafts, and bills of exchange when such notes, drafts, and bills of exchange are indorsed or otherwise secured to the satisfaction of the Federal reserve bank: Provided, That before discounting any such note, draft, or bill of exchange for an individual or a partnership or corporation the Federal reserve bank shall obtain evidence that such individual, partnership, or corporation is unable to secure adequate credit accommodations from other banking institutions. All such discounts for individuals, partnerships, or corporations shall be subject to such limitations, restrictions, and regulations as the Board of Governors of the Federal Reserve System may prescribe.").
86. See Good Roads Mach. Co. of New Eng. v. United States, 19 F. Supp. 652, 653 (D. Mass. 1937);
87. Carson v. Allegany Window Glass Co., 189 F. 791, 796 (D Del. 1911).
88. BLACK'S LAW DICTIONARY 721 (3rd ed. 1933).
89. Pub. L. No. 107-297, tit. III, § 301, 116 Stat. 2322, 2340 (2002) (codified at 12 U.S.C. § 248(r) (2006)).
90. 12 U.S.C. § 248 (r).
91. 12 U.S.C. § 248(r)(2)(A)(ii)(III) (requiring before the Board exercises its 13(3) powers that it determine that exigent circumstances existed, that the borrower is unable to secure credit through other means, that action is necessary to prevent "serious harm to the economy or the stability" of the U.S. financial system, that they have been unable to contact the other board members by any means available, and that waiting any further to do so would be impossible).
92. Press Release, Bd. of Governors of the Fed. Reserve Sys. (Oct. 7, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081007c. htm.
93. WESSEL, supra note 5, at 228-29.
94. Id. at 229.
95. Id. at 269.
96. Press Release, Bd. of Governors of the Fed. Reserve Sys. (Nov. 25, 2008), available at http://www.federalreserve.gov/newsevents/press/monetary/20081125b. htm.
97. BD. OF GOVERNORS OF THE FED. RESERVE SYS., FEDERAL RESERVE STATISTICAL RELEASE H.4.1 FACTORS AFFECTING RESERVE BALANCES OF DEPOSITORY INSTITUTIONS AND CONDITION STATEMENT OF FEDERAL RESERVE BANKS, JANUARY 15, 2009, tbl. 1(2009).
98. WESSEL, supra note 5, at 7.
99. CHARLES P. KINDLEBERGER & ROBERT Z. ALIBER, MANIAS, PANICS, AND CRASHES: A HISTORY OF FINANCIAL CRISES (5th ed. 2005).
100. CARMEN M. REINHART & KENNETH S. ROGOFF, THIS TIME IS DIFFERENT: EIGHT CENTURIES OF FINANCIAL FOLLY (2009).
101. Floyd Norris, The Jobs News Get Worse, N.Y. TIMES, Oct. 4, 2009, at WK3.
102. See BD. OF GOVERNORS OF THE FED. RESERVE SYS. STUDY GROUP ON SUBORDINATED NOTES & DEBENTURES, USING SUBORDINATED DEBT AS AN INSTRUMENT OF MARKET DISCIPLINE 172 (1999) (analyzing thoroughly the subordinated debt proposal).
103. See Benoit Mandelbrot, The Variation of Certain Speculative Prices, 36 J. Bus. 394 (1963).