Former U.S. Secretary of the Treasury Timothy F. Geithner and Professor Andrew Metrick survey the causes, events, policy responses, and aftermath of the recent global financial crisis.
Lecture: Phase 4: Resolution - Market Developments
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Andrew MetrickMichael H. Jordan Professor of Finance and Management
Yale School of Management
Timothy GeithnerLecturer in Management, Yale SOM, Former U.S. Secretary of the Treasury
Yale School of Management
>> [MUSIC]
>> Phase four, the crisis begins in early 2009.
I met with the president the week after he was Sworn into office,
and I explained to him that at that point, despite all the things that had
been done in the fall, all the things that caused so much outrage and anger.
The trillions of dollars we'd put into the financial system,
the unprecedented injections of capital into the banking system.
Despite all those things, we still had an economy that was collapsing.
And we still had a financial system that was frozen.
And we had five huge financial bombs that were still fundamentally unstable, and
it was gonna take a bunch of additional action, very unpopular action,
to reduce the risk that they collapsed, adding to the damage facing the economy.
Those five were AIG, Fanny and Freddy, Citi, and B of A.
Still.
Fragile.
Still very unstable.
Symptoms of the fact that the system was still fundamentally frozen, and dangerous.
Why was the economy still so terrible even after all those actions?
It was probably, because of the lags In impact.
Take some time after you do things that have some effect on confidence,
on behavior.
It's probably, because we hadn't used fiscal policy yet, in any meaningful way.
That was the tool left really unaddressed in those first few months of escalation.
But it's also because the strategy we adopted left a lot of uncertainty in
markets amongst investors about how strong was our commitment to protect the system,
and that uncertainty was partly caused by the policy zig zags of the preceding fall.
So, if you just look at the scale of the zig zag in policies,
again I just wanna go through it.
There's a set of places where we acted to prevent failure, and to protect creditors.
That's the list on the left.
And there's a set of institutions where we allowed failure.
And we allowed losses to happen.
Why did that matter?
It meant that people who were exposed to risk in financial institutions
couldn't tell, what strategy was guiding our response.
They couldn't tell, what was the perimeter of the fire break.
Who was gonna be protected?
How broad would the failures be allowed to happen?
And what that meant is, despite the massive injection of trillions of dollars
of financial support, people couldn't be sure that it was safe to stay.
And they were left still with the incentive to run, or to cut credit lines,
or to stop investing, to prepare for the risk of a broader collapse.
They were not confident about the quality of the money that we put in the window.
So, how did the economy look at that time,
you can see that house price decline continues through late in 08.
The price of those financial securities,
again, now at this point they're sort of moving sideways,
showing some initial traction from the policy interventions we took.
The economy's getting weaker.
Still job losses, you know, are at a pace of about
750,000 people in the early part of 09.
And the economy is shrinking in the early part of that thing at an appalling rate.
But things turn relatively, quickly.
>> With that late stage of crisis response.
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