The Last Financial Crisis of the Nineteenth Century: Hoisted from the Grasping Reality Archives from Ten Years Ago
The slides from my “Macroeconomic Situation and Outlook” talk as it stood ten years ago, in June 2008. The subtitle and the conceit of the talk was that what we were then going through was an eruption into the twenty-first century of the kind of financial crisis that was typical of the pre-Great Depression period.
What did I get right and what did I miss? The main thing I missed was that I misunderstood what Bernanke, Paulson, and Geithner were doing. I thought that they were following the now century and a half-old Bagehot rule from Lombard Street for how to handle a financial crisis:
- Lend freely
- On collateral that is good in normal tomes
- At a penalty rate
Most of the talk is therefore devoted to explaining what the Bagehot Rule is, why it is a good thing, and how it is all likely to work out.
But when Lehman hit the wall in the fall they refused to follow (2) in evaluating its collateral, and so they did not do (1). And they never showed any interest in doing (3). And so here we are...