I think it is important to reflect back upon the events preceding and during The Financial Crisis, and the actions taken during those periods, as they have had, and will have, substantial ramifications for our future economic situation.
I have found comments made by former President George W. Bush to be interesting and notable, although I don’t agree with many of his comments or interpretations. His interpretation of The Financial Crisis and its causes are largely “in line” with what I call the “conventional view” – i.e. that which is most commonly believed among economics and financial professionals.
In my November 29, 2010 post I highlighted some notable quotes from a George W. Bush interview concerning The Financial Crisis.
Recently, I read Chapter 14 of his Decision Points book, titled “Financial Crisis.” While, from an overall viewpoint, nothing in this chapter is necessarily “new” or revelatory in nature, there are nonetheless various notable aspects. Much of his writings in the chapter echo statements he made during The Financial Crisis, such as those seen in his September 28, 2008 “President’s Address to the Nation.”
Here are excerpts of some of the material I found most interesting:
On page 440, it starts with his conversation with Ben Bernanke during The Financial Crisis:
“Is this the worst crisis since the Great Depression?” I asked.
“Yes,” Ben replied. “In terms of the financial system, we have not seen anything like this since the 1930s, and it could get worse.”
His answer clarified the decision I faced: Did I want to be the president overseeing an economic calamity that could be worse than the Great Depression?
I was furious the situation had reached this point. A relatively small group of people – many on Wall Street, some not – had gambled that the housing market would keep booming forever. It didn’t. In a normal environment, the free market would render its judgment and they could fail. I would have been happy to let them do so.
But this was not a normal environment. The market had ceased to function. And as Ben had explained, the consequences of inaction would be catastrophic. As unfair as it was to use the American people’s money to prevent a collapse for which they weren’t responsible, it would be even more unfair to do nothing and leave them to suffer the consequences.
On page 449, he talks about the unforeseen risks proliferating during the housing bubble:
But the exuberance of the moment masked the underlying risk. Together, the global pool of cash, easy monetary policy, booming housing market, insatiable appetite for mortgage-backed assets, complexity of Wall Street engineering, and leverage of financial institutions created a house of cards. This precarious structure was fated to collapse as soon as the underlying card – the nonstop growth in housing prices – was pulled out. That was clear in retrospect. But very few saw it at the time, including me.
On page 453, he briefly discusses Moral Hazard issues, in the context of the decision regarding Bear Stearns:
My first instinct was not to save Bear. In a a free market economy, firms that fail should go out of business. If the government stepped in, we would create a problem known as moral hazard: Other firms would assume they would be bailed out, too, which would embolden them to take more risks.
And, near the back of the chapter:
One of the questions I’m asked most often is how to avoid another financial crisis. My first answer is that I’m not sure we’re out of the woods on this one yet….”
The Special Note summarizes my overall thoughts about our economic situation
SPX at 1341.33 as this post is written