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  • Translator: Queenie Lee Reviewer: Peter van de Ven

  • I'm about to tell you some unconventional wisdom, alright?

  • I called my talk today "The real truth about the 2008 financial crisis."

  • So, I guess what I ask you to do this morning

  • is to think about what you believe

  • what the conventional wisdom is about 2008,

  • and I'm going to put some words in your mind or describe it this way,

  • and that is most people believe

  • that the free-market capitalist system, especially bankers, are greedy,

  • they go through periods of excess speculation,

  • and then the world collapses

  • and the government has to come in and save us.

  • By the way, this is the story that was told about the Great Depression,

  • and it is also the story that is told about the 2008 financial crisis.

  • Now, before I get into the meat of my presentation,

  • I want you to think about something else,

  • and that is that the Federal Reserve

  • controls the level of short-term interest rates in our economy.

  • Everybody knows that today,

  • they're holding those interest rates at 0%,

  • trying to get the economy moving again.

  • What lots of people don't remember is that back in 2001, 2002 and 2003

  • the Federal Reserve dropped interest rates to 1%.

  • I want you to think about this.

  • Because when you make a decision to take out a loan,

  • when you make a decision to buy a house,

  • what is the most important ingredient of that decision?

  • I mean, obviously, whether you have income,

  • whether you like the house,

  • but one of the most important ingredients of that

  • is the level of interest rates.

  • Alan Greenspan pushed interest rates

  • down to 1% in 2003 and 2004.

  • In fact, interest rates were below inflation

  • for almost three years - below the rate of inflation.

  • Now, how do you think about this?

  • So, when you're looking at a house - can I afford this house, the payment?

  • Obviously,

  • those payment streams are determined by the level of interest rates,

  • and when interest rates are low,

  • you're going to buy a bigger house,

  • you're going to buy in a better neighborhood,

  • buy cherry cabinets and granite counter tops

  • because you can afford it.

  • So, let me put this into a story that I know you can understand.

  • And that is, when you come to a green light in your car -

  • you're driving along, there's a green light -

  • how many people in here actually have ever stopped at a green light?

  • I'm not talking about senior moments.

  • (Laughter)

  • I'm talking about stopping at a green light,

  • getting out of your car and walking around to the other side,

  • just to make sure the other one really is red

  • Because, obviously, if it was green too,

  • it'd be dangerous to go through that intersection.

  • So what happens when Alan Greenspan or the Federal Reserve

  • holds interest rates all the way down at 1%?

  • You get a green light.

  • You get a green light to make a purchase

  • that's bigger than probably you should,

  • and by the way, the financial system is no different than you.

  • Bankers, they're no different than individuals.

  • They would say, "Hey, with interest rates so low,

  • leverage, borrowing doesn't matter as much, it's cheap.

  • So, why don't we lever up a little bit more?

  • After all, it's Alan Greenspan, the smartest man in the world,

  • that tells us interest rates are 1%;

  • in other words, all the lights are green."

  • And, so what happens when you hold interest rates down like this?

  • You cause people to make decisions that they wouldn't otherwise make.

  • Now, let me put this in a different perspective.

  • House prices went up 8% in 2001.

  • By 2004, 2005

  • they went up 14% in 2004, 15% in 2005.

  • So you could borrow at 1%, especially with those teaser loans,

  • and you could have a house that was appreciating at 14%:

  • what a great deal!

  • And, so what happened is we encouraged more people to buy homes,

  • bigger homes than they should have at the time.

  • We also encouraged bankers to take on more leverage,

  • and make more risky bets than they would have

  • if interest rates were higher.

  • In fact, if interest rates would have been 4 or 5%,

  • I don't believe we would have had the housing bubble at all.

  • Now, let's go back in time just a little bit,

  • because this has happened before.

  • The last time the Federal Reserve really held interest rates too low for too long

  • was back in the 1970s.

  • In the 1970s, farmers bought too much land,

  • we drilled too many oil wells,

  • we were betting on oil prices going up forever,

  • and in the 1980s, when farmland prices collapsed and oil collapsed,

  • banks collapsed too.

  • By the way, the entire savings and loan industry

  • also collapsed in the 1980s

  • because of the same reason:

  • they made too many loans when interest rates were low,

  • and then, when interest rates went up, they collapsed.

  • At the same time,

  • we made big banks make huge loans to the Latin and South America.

  • And so, if you go back and look at the 1970s, banks expanded,

  • they made loans to farming, housing, oil, Latin and South America,

  • and all of those parts of the economy collapsed

  • in the late of 70s, early 80s,

  • and the banking system was in monster trouble.

  • In fact, the eight biggest banks in America in 1983 had no capital -

  • zero capital -

  • because they had lent too much to Latin and South American countries

  • that all collapsed.

  • And here's my point of going back to that.

  • That is if you go back and look at the 1980s,

  • the problems of the 1980s - the banking problems -

  • did not take down the entire economy.

  • This time, they did.

  • And so, the question is why,

  • and we're going to deal with that in just a minute.

  • And so one of the things that I want to do

  • is tell you something I just did, right?

  • This is the picture of the S&P 500 -

  • the 500 largest companies in the US stock market.

  • It's a picture from 2008 all the way through the first half of 2009.

  • What I just recently did is I went back,

  • and I read the verbatim transcripts

  • of all the Federal Reserve meetings during 2008.

  • Now, the reason I just did this

  • is because they only come out with a five-year lag.

  • The Fed they released little statements,

  • and then minutes,

  • and then five years later,

  • they give us the full transcripts of what they've talked about, right?

  • All of those red dots, there's 14 of them, are a Fed meeting.

  • Normally, the Fed has six or seven meetings,

  • but that was a crisis year, right?

  • And so the Fed had 14 meetings that year.

  • Just to put this in perspective,

  • it's 18 or 20 people sitting around a table,

  • and the verbatim transcripts are each of them talking

  • for three or four minutes

  • if they go around and they vote and they go around again; they vote.

  • These transcripts were 1,865 pages long,

  • 559,000 words.

  • Now, I read these for you, just so you know.

  • (Laughter)

  • And some people have a hard time, like, what is 559,000 words?

  • Well, the Old Testament is 593,000 words.

  • I mean think about that,

  • we've built the universe,

  • wandered around the desert for 40 years, 50 years,

  • built an ark ...

  • There is a lot of stuff that happened in the Old Testament.

  • (Laughter)

  • The Fed used that many words

  • for one year of US economic history.

  • Now, I could head down this road -

  • maybe that's another TED talk - because that's one of our problems.

  • Nonetheless, one of the things I want to point to

  • is this huge decline in the market

  • that happened in September and October of 2008.

  • You know what happened in September and October of 2008?

  • Well, first of all, the bloody weekend, September 13th, 14th, I think it was,

  • when Lehman Brothers failed, AIG, Fannie Mae, and Freddie Mac,

  • and all of those things happened,

  • and the Federal Reserve started a program called quantitative easing;

  • that's where they started to buy bonds and inject cash into the economy

  • in an attempt to save us.

  • At the same time, in fact, just a few weeks later,

  • on October 8th of 2008, Hank Paulson, the Treasury secretary,

  • President Bush, the Bush White House, Congress passed TARP:

  • the Troubled Asset Relief Plan,

  • and it was 700 billion dollars of government spending

  • to save our banking system, okay?

  • I want you to take a look at this chart a little more closely.

  • Quantitative easing started right here, TARP was passed right there.

  • Did it help?

  • In fact, the worst part of the crisis was after TARP was passed.

  • The stock market fell 40%;

  • financial-company stocks fell 80% after TARP was passed.

  • In fact, if I look at this chart and kind of squint at it,

  • look at all those red dots,

  • I would say the more the Fed met, the more the Fed did, the worse it got.

  • So, something else must have been going on, right?

  • In my opinion,

  • the government did not save us,

  • and in fact, this is one of the problems that people have

  • when they're trying to understand the economy.

  • You see, there's an interesting fact about our world, and that is

  • the free market - capitalism -

  • does not have a press agent;

  • the government does.

  • The Federal Reserve does.

  • In fact, there are about 2,000 books about the financial crisis,

  • but there are three main ones that have just come out.

  • One is by Timothy Geithner,

  • former Secretary of the Treasury under President Obama.

  • He was the head of the New York Federal Reserve Bank during 2008.

  • He'd written a book about the crisis;

  • who do you think he says

  • saved the world?

  • (Laughter)

  • Timothy Geithner, of course.

  • Ben Bernanke.

  • He doesn't have a book out - he has a book of speeches out -

  • who do you think he says

  • saved the world?

  • Ben Bernanke.

  • Hank Paulson has a book out,

  • and who do you think he says saved the world?

  • Hank Paulson.

  • In fact, it's not really that they take credit themselves,

  • but they credit TARP

  • and quantitative easing and stress tests;

  • that's what Timothy Geithner takes credit for:

  • stress testing banks, so that everybody can trust them, right?

  • This is where I want to shift gears, just a little bit,

  • because what I want to tell you is why - or explain -

  • is why I believe this banking crisis

  • turned into a true overall economic crisis,

  • while if you look back in the early 1980s,

  • where banks had more losses than they did in 2008,

  • the economy did not collapse,

  • and in fact started to accelerate without TARP,

  • without quantitative easing.

  • In fact, Paul Volcker was raising interest rates in the early 1980s,

  • and the economy recovered.

  • Here we cut interest rates to zero,

  • and the economy has grown relatively slowly.

  • So, what caused this problem?

  • By the way, in those transcripts that I said that I read,

  • Ben Bernanke asks his staff to go out and find out how big the problem is,

  • how many subprime loans were made,

  • how many losses could we face,

  • and he has a staff of about 200 Ph.D. economists,

  • and they came back with a number of 228 billion dollars.

  • Now, don't get me wrong,

  • I'd love 228 billion dollars, right?

  • But 228 billion dollars is small compared to a 15 trillion dollar economy.

  • So, how did that small problem turn into a problem

  • that almost took down a 15 trillion dollar economy,

  • and the answer is mark-to-market accounting.

  • It's a little-known accounting rule

  • that most people know nothing about, right?

  • It was put into place in November 2007

  • after being out of place, not enforced, since 1938.

  • Now, let me give you a little bit of background on an accounting.

  • In the 1800s, bookkeepers,

  • they were bookkeepers.

  • They weren't the accounting profession yet.

  • They were getting more and more sophisticated,

  • but they usually marked everything to market.

  • So, if you think about this,

  • if the farmland goes up in value, if your machinery goes up in value,

  • if your inventory, if loans go up in value,

  • you get to mark those up.