For the five year anniversary of the 2008 financial crisis, Ed Lazear and I have released a paper titled “Observations on the Financial Crisis,” published through the Hoover Institution. It’s just over 25 pages and also has a fairly detailed timeline of events as an appendix.

Ed was chairman of President Bush’s Council of Economic Advisers when I was director of the National Economic Council.

Here are the 19 observation headlines. I urge you to read our supporting arguments, especially if you’re going to comment on or respond to them.  Each argument takes only about a page.

  1. “The recession that began in late 2007” conflates two distinct time frames.
  2. The financial panic began in September 2008. The financial crisis began long before, and first showed significant signs in August 2007.
  3. The shock and panic of September 2008 were triggered by a sequence of events, not just by the Lehman failure.
  4. Putting Fannie Mae and Freddie Mac into conservatorship likely averted larger shocks.
  5. The “deregulatory cause” hypothesis is flawed.
  6. The financial crisis was caused principally by unprecedented capital flows into the United States.
  7. Dominoes vs. popcorn
  8. TARP was a shift to a systemic solution from a case-by-case approach and was possible only when Congress accepted that inaction would lead to a catastrophic failure. Policy makers traded false negative errors for false positive errors.
  9. TARP is the most successful financial policy for which no member of Congress will admit having voted “aye.”
  10. Capital investment was indeed better policy than buying “toxic assets.”
  11. The financial crisis was largely resolved by the time President Obama took office in late January 2009. President Obama’s task was not to address the financial crisis, but instead to handle the ensuing financial cleanup, financial policy reforms, and the severe macroeconomic recession that resulted from the late-2008 financial crisis.
  12. The financial rescue continuity should not be surprising, since two of the three key players were unchanged.
  13. Some conservatives mistakenly assumed that Chapter 11 restructuring was a viable option for GM and Chrysler.
  14. President Bush’s decision to extend auto loans was in part influenced by the timing of the Presidential transition.
  15. While both were heavily involved in crisis management, Presidents Bush and Obama took different approaches to firm-level decisions.
  16. “The deepest recession since the Great Depression” does not mean the two are comparable in size.
  17. At best, the fiscal stimulus offset about a quarter of lost output in the past five years.
  18. The exceptionally slow recovery has magnified the economic losses of the 2008-09 recession.
  19. While the U.S. economy is growing, it is not returning quickly to its prior level.

If you find this paper interesting I have two other reading suggestions to offer.

  1. As a member of the Financial Crisis Inquiry Commission I wrote a dissent to the main report with Bill Thomas and Doug Holtz-Eakin.  Where the Hennessey/Lazear paper makes a collection of arguments on frequently discussed topics about the crisis, the Hennessey/Holtz-Eakin/Thomas dissent attempts to describe the causes of the 2008 crisis.
  2. I think this paper by Brookings’ Martin Baily and Doug Elliott, Telling the Narrative of the Financial Crisis, does the best job of framing the overall debate about what caused the 2008 crisis.  At a minimum it’s good to read their short blog post about the paper.  The Financial Crisis Inquiry Commission debate fit perfectly into these three narratives: the majority report tracked Narrative 2, Peter Wallison’s dissent tracked Narrative 1, and our dissent tracked Narrative 3 (where Baily and Elliott are).

Two sharp-eyed readers (who are better than I am at proofreading) found our typo.  On page 2 it should read “… steadily worsening to 830,000 jobs lost in March of 2009.”  The printed text says March of 2008.