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: Course Themes
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From the course by Yale University
The Global Financial Crisis
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Meet the Instructors
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
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There are four important themes that will recur often in this course.
The first theme is that of asset bubbles.
Reinhart and Rogoff in a book in 2008 called This Time Is Different,
point out the important role of asset bubbles in financial crisis.
Prior to all financial crisis,
you will see a large increase in the price of at least one asset class.
When this price later falls,
we retroactively label that original increase to be a bubble.
We don't know whether or not it's a bubble in advance, but
we certainly can see that the price has been increasing very rapidly.
In modern financial crises, that is those that we have had in developed countries
since World War II, housing has always been implicated
as an asset that has been increasing prior to the bubble.
Sometimes, it's not the only asset, but
it has always been an asset that's been increasing in value.
In the global financial crisis, this bubble was indeed in housing.
And we will see that this is a crucial part, and following through and
understanding what exactly the dynamics of that housing market were, will
be a crucial part of understanding the buildup to the global financial crisis.
A second theme is that in each successive generation we
seem to have an uncanny ability based on need to invent new kinds of money.
So when giving the conceptual framework for
financial crisis, I talked about how you would need to convert some of the value
that we have in long live assets into something safe that we can transact with.
The way that has worked in history has changed.
Through most of the history of civilization,
our monetary needs were met primarily by metal based currencies, gold and silver.
The rise of the modern state has allowed for sovereign backed fiat money,
called fiat because it's not actually backed by gold or silver or
any other metal or commodity.
Instead, it's just a promise of the government.
It is effectively backed by the human capital of the citizens of a country and
the belief that the government in the future will be able to tax that
human capital to pay off any debts that it has.
At some point gold and
silver by themselves really weren't efficient ways to transact.
And had we not come up with fiat money,
we would've been very limited in our ability to have economic growth.
If you think about how difficult it would be to carry gold around if you wanted to
buy a very, very large building in London, or to carry enough silver around and
silver, of course, now being worth, in American dollars, $15 an ounce.
So you would need tiny, tiny, little pieces of silver if you wanted to buy
a lot of things that were worth less than $15.
This is not a very efficient way to transact.
So instead, what we have is a form of paper currency, or fiat money.
And that was developed and through fits and starts over the last few centuries and
became really, much more of a success into the 20th century, but
even stable governments have limits.
And the demand for
money can exceed the supply of metal, plus sustainable fiat money.
Additional monies are then manufactured by the financial system,
using private debt backed by collateral.
When you have a demand deposit in a bank that demand deposit
is first principals backed by the assets of the bank.
When you go and take money out of your checking account and someone else accepts
that check they're doing that because they believe that the bank is solvent.
Now up to some limit you also get in the United States and
in many other countries, deposit insurance when you have your money in the bank, but
in the end that's just the government backing them again.
If we don't have enough belief that the government is truly able to back all of
the money that's in the economy, we're going to need some form of private assets.
In this case, houses, or small business loans to back it.
The history of financial crisis,
is a tour through sad stories of new types of money gone bad.
The global financial crisis is no exception to that.
So what we will see is that the traditional ways to produce money
that the financial system had really insufficient to meet the demands for
safe assets and for things that we could transact with in the economy
going into the early part of the 21st century.
At that point, the financial system did what it always does, and
began to manufacture new forms of safe assets,
using the collateral that was available and embodied in other long lived assets.
In this case, housing.
The third theme is understanding the anatomy of a modern financial panic.
For hundreds of years, panics were easy to spot.
Depositors would literally run to their banks to exchange their bank notes,
their currency at the time, for gold.
Or to remove the deposits that they had in their checking or savings accounts and
take them out so that they weren't relying just on the bank's promise but
they actually had legal tender.
The goal with financial crisis was different.
With the panics occurring out of public sight, in the non-bank part of
the financial sector, often called Shadow Banking, or the Parallel Banking System.
To fully understand the global financial crisis, and the efforts required to fight
the panic, it is important to understand the mechanics of this modern system, and
we will cover that at length in this course.
Finally, the fourth theme of the course is fighting the panic and
the things that need to be done in the midst of a meltdown in order to prevent it
from getting even worse.
Going into the global financial crisis,
governments from all over the world were under prepared.
With the available tools that already existed that were built for fighting, just
an old-fashioned bank run, where people would run to the bank to take out gold, or
run to the bank to take out their deposits.
But not a modern crisis that is taking place in the shadow banking system, or
the parallel banking system.
To fight this particular crisis, the tools that were needed,
forms of emergency lending by the central bank.
Guarantees and capital injections by the fiscal authority were extended to creative
new uses that were not anticipated when those rules were originally written down.
The evidence shows that this panic fighting was a success, but
the success came at the cost of some political backlash and
in some cases reduced our firefighting capabilities for the next crisis.
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