Origins of the Economic Crisis in One Chart 12 comments
December 07, 2008
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Every two years, Harvard Kennedy School hosts the newly elected Members of Congress for a three-day “briefing” on a wide variety of topics. We had an excellent turnout this week: 40 of the 50 new congresspeople, from both parties. I participated in a panel titled “Understanding the Economic Crisis,” along with Greg Mankiw, Elizabeth Warren and Robert Lawrence (on video).
Trying to explain the financial crisis and recession in ten minutes, even to the extent any of us understands it, was a tall order. But I tried to cram it all into a single slide. Here it is:
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This article has 12 comments:
It is certainly true that years of war have left the government impotent to address the problems.
> jack
You have done a remarkable job of cramming into a small place a credible explanation of a complex set of circumstances.
I think the Iraq war (or at least the financing of the war) should be put on top of the Federal Budget Deficit box as a major contributor, but I can see that this would have added a partisan note to your presentation. It would also have made your presentation less palatable to some of the members of Congress, so I can see good reasons to omit it.
My view is a simple quibble over an outstanding job. Thanks for the effort.
Best Wishes,
Ray Hendon
First, predatory lending is not complex. It is simply loansharking dressed up with a storefront. As we have learned from (the now shunned) Eliot Spitzer, the states were quite well aware of these abuses, but were barred federally from acting. Embarassing, but hardly complex.
Second, CDOs are not complex. They are merely insurance policies written (like all others) on assets. The only difference is that they were (again federally) barred from the oversight routine to other insurance products. Because of this, several mistakes were made and went unaddressed:
1) Inadequate reserves were kept to pay for future claims. This was not due to complexity however, but rather to the fact that there was insufficient experience data available from which to properly develop this component of their rates. As we have learned from Eliot Smith (Bloomberg News), this was a known fact when these rates were developed, and conscious decisions were made at the highest levels to ignore this problem. Again, not complex. Merely embarassing.
2) Thrid party policies were not only allowed but were written with abandon. (A third party policy, an insurance no-no, occurs when the purchaser of insurance does not own the underlying insured asset. These are shunned by insurance companies because they involve anti-selection, an anathema to all serious underwriters.) There is nothing complex about this either; it was a lack of insurance knowledge coupled with simple greed.
Otherwise, a good chart which I will keep handy.
> How about just one statement. Capitalism doesn't work.
Capitalism works just fine... but not in a socialistic society.
You did not actually use this "flowchart" in your presentation, did you? What a mess! Please, try to remember that you are an economist not a cartoonist - and, as well, that all of you laid end to end would not reach a conclusion (according to G.B. Shaw).
There was a guy at Harvard some years ago that did some really neat charts - way better than what you've got here. My memory will likely fail me on this, but - I think his name was Wassily Leontief... he held a position of ..... possibly... The Henry Lee Professor of Economics... chair.. or something like that. Did a single chart, as best I can recall, that had the entire Input/Output of the U.S. Economy! Now that was a chart! Probably too boring for the group you had last week - kind of like watching paint dry!
Speaking of dried paint, how did you make out with Tim? Was the phone call from the President Elect or, was it Hank Paulson?
For a moment imagine that I am standing on a box in the heart of Hyde Park in London England, as I shoot the breeze. America's problems are more deep-rooted. Historians generally believe, based on quantitative analysis, that this nation had peaked in around 1974, in terms of prestige, wealth, and power. America's strength lies in its upward mobility of the common people, democratic traditions, innovation, and business enterprising.
It is my believe that while we made tremendous strides after WWII, major mis-steps were made. We had become complacent, soft, and arrogant. Excessive greed had set in with (my view only) a general decline in moral values. In moving forward, perhaps Jeff needs to articulate how we could leverage our strengths against our weaknesses in his potential book hopefully a best seller.
Now I step down from my box.
Saw the cspan airing of your panel discussion last evening. I only wish I could have been there to conduct a "ratio delay" study of the participants during each of your individual presentations. I think that you & Greg desperately need work on your presentation skills. Elizabeth Warren was the only one among you who was able to present cogent & persuasive thoughts without stumbling & bumbling. It was quite clear as well that the group of attendees felt the same way regarding Ms. Warren, based upon their applause for her.
I thought it rather sad that only the very last question of the entire session (posed , I believe, by Rep. Steve Scalise) was with regard to the roles played by Fannie & Freddie in the financial mess. I thought that perhaps, at the very least, you would have included a "box" in your flow chart referencing that element.