The Greenspan Era, Financial Crisis of 2008, and Coronavirus Panic of 2020 (HOM 36-B)

all right welcome to part b of lecture 36 got a big one coming up the greenspan era calm bubble housing bubble financial crisis of 2008 chronovirus panic of 2020 we're going to cover it we're going to survey it in part b of this lecture all right alan greenspan fed chairman from 1987 to 2006 probably the most important fed chairman in the history of the federal reserve okay at least the most well-known and and i would argue the most important of the fed chairman 19 years or almost 18 and a half years he was chairman of the federal reserve now you may ask how was that because you know governors of the federal reserve they have 14-year long terms how did how did he serve 18 and a half years well he completed another governor's term and then he was able to begin a fresh 14-year long term alan greenspan a proponent of well i think you could say the face of capitalism in the late 20th century is that fair to say the face of capitalism in the late 20th early 21st century alan greenspan that's it combined and easy relatively easy money easy credit policy with financial deregulation free markets free trade international commerce an example of deregulation that occurred under the greenspan regime or tenure at the federal reserve was the repeal of glass-steagall in 1999 which had glass steagle as you remember in in 1933 had separated commercial banking from investment banking that was repealed in 1999 under under greenspan's watch alan greenspan in the night back in the 1950s and in the 1960s was a a follower of ein rand and wrote several essays during that period championing objectivism if you're familiar with the objectivist philosophy at all [Music] one that championed the individual okay and put the individual up front and and was unapologetic about uh the virtue as ein rand called it the virtue of selfishness alan greenspan also championed in these essays the gold standard which was a minority a decidedly minority position by the 1960s greenspan abandons that after the 1960 but retains other elements of that philosophy he uh later before he became fed chairman chairman served on jp morgan's board of directors for 10 years comes fair fed chairman in august of 1987 and over the next 18 years becomes frankly a celebrity and a well-liked well-respected i remember at the time uh back in 2002 when i was an undergraduate in college i took a business class and and i remember here in green greenspan would be name dropped here and there in the class and it was spoken of almost like a god you know it just had so much power over the markets and and he was treated like that in in the press and in journals and uh looked up to as the uh as the man and controlled the lever and and he was and uh for 18 year long period you could not think of a more powerful figure in the u.s economy and i would argue that that greenspan was even more powerful than the president of the united states during this period you look at it you know who who really uh controls what's going on in in the the markets and in in the movement of the economy president bill clinton uh george w bush or alan greenspan and the answer was was alan greenspan during greenspan's tenure the financial industry grew uh and and the markets grew and and actually when he leaves office in 2006 you know he leaves with a lot of fanfare he's seen as a very successful fed chairman his reputation has taken a hit over the last 10 years as many people have questioned the long-term effect of his policies especially in light of the financial crisis in 2008 and so opinions are much more mixed on greenspan today than they were while greenspan was actually the chairman of the fed there's greenspan a bit later in his tenure in the mid 2000s so how does green how does greenspan run the fed relatively low interest rates okay now here here's a long-term graph i've i've placed it made it long-term as a by way of comparison this is volcker volcker's tenure ends around here okay and then greenspan takes over so you can see greenspan compared to volcker substantially lower interest rates and for much of the 90s it doesn't really exceed five percent and and and in fact quite frequently goes uh uh dips below five percent and then especially in the first half of the 2000s quite low quite low after 2000 uh you know you're talking [Music] well below two or two percent or even a point in half here's a more zoomed in graph of greenspan's tenure so greenspan becomes fed share here a little bit of a raising of rates as a result of the stock market dip in 1987 then a lowering of rates in the early 90s and a lowering of rates in the early 2000s nevertheless inflation is under control under greenspan here's a graph of inflation rates under greenspan never uh you know outside of of this short period here in the late 1980s inflation never exceeds four percent or even barely even three percent so fairly low inflation throughout greenspan's tenure and the price of gold was under control during greenspan's tenure as well um here we see a bit of a peak at 480 an ounce but for through most of the 1990s an ounce of gold sold between 250 and 350 dollars an ounce purchasing power of the us dollar has has lost a bit since 1980 but you know it's not enormous relatively stable but you add that two three four percent inflation every year and you have a little bit decline in the us dollar but nothing even approaching what you saw in the 1970s moreover the stock market was uh was quite spectacular through much of this period this is the dow jones and i i actually tailored this graph to cover greenspan's tenure from august of 1987. through january of 2006 and you look at it when greenspan became fed chair uh you know just over four thousand to dow and by the time he leaves it's at uh comfortably you know above 13 000 okay and at one point had hit eighteen thousand that is a vibrant stock market unemployment rate under control uh you saw a bit of a rise here in the in the early 1990s there was a slight recession which contributed to bill clinton's victory in the 1992 presidential election but then you know unemployment sit sitting pretty well here through most of the 90s below five percent takes a you know a bit of a climb here when the dot-com bubble burst get to that in a second in the early 2000s but you know begins to go under control again by the mid 2000s so you know greenspan leaves and insane is pretty successful nevertheless you do have some hiccups you have an early 1990s recession the economy recovers fairly well afterwards it's kind of a non-event has a big political impact in helping clinton become president but outside that a non-event nevertheless there was a a major bubble during greenspan's tenure as fed chairman and that was the dot-com bubble beginning in 1997 a bubble emerged in the internet sector this is a new sector in the economy a very exciting sector and and the price of stocks in so-called.coms went through the roof and and many new companies startups here's a a graph of the the nasdaq from the mid 90s all the way up to the peak just after 2000. look at that that's uh more than five times growth the nasdaq uh was particularly particularly reflective of this dot-com bubble and all sorts of new startups companies we've never heard of since because most of them went under bubble bubble bubble and and of course it bursts in early 2000 the bubble burst look at the nasdaq drops from five a peak of 5000 down to uh below 1500 by early or by summer of 2002 and the dow didn't do so well either either peak of 16 000 dropped down to to almost ten thousand by two thousand two so you know it's a pretty pretty big uh burst and a bubble 48 only 48 percent of dot com survived so more than half of dot coms went under and if you want to take a look at the entire economy as a whole there was a loss of five trillion dollars in the market value of companies five trillion dollar loss in a market value of companies so yeah it's a that's a pretty big that's a pretty big bursting uh bubble bursting and and you'll see here you know unemployment went from about four percent up to uh approaching six percent okay and then you know a little a little higher than that so a significant deal not depression level but uh a definite bubble and a definite burst how does greenspan respond greenspan responds by lowering interest rates well you've got to greenspan says we we've got to uh get that market going again we got to provide that liquidity and look at the results i mean it goes down 10 000 points by 2002 i remember at the time i was 18 years old and like oh is it going to keep going lower and but it didn't it climbed back up and by 2006 it's back to 16 000. well what was that fueled by well it was fueled in part by low interest rates look at what greenspan does here this is key very very critical in early 2000 in the early 2000s the fed reduces interest rates the federal funds rate down to between one and two percent and and by 2003 it's it's hovering at just over one percent that's extremely low those are very very low interest rates it succeeds in bringing the dow back up it succeeds in and causing an unemployment to go down a little bit but what greenspan does inadvertently is he lays the groundwork for a new bubble right look at all this easy credit here these are very very low rates one to two percent credit is flowing combined with deregulation repeal of glass-steagall and in other measures that deregulated the derivatives markets and it wasn't just greenspan greenspan works in tandem with treasury secretary robert rubin and larry summers who were bill clinton's treasury secretaries in the late 90s deregulated much of the derivatives markets easy credit plus deregulation equals bubble all right bubble housing bubble 2004 to 2007 and this is why greenspan's reputation has taken a bit of a hit because greenspan exits before the exits before the bubble bursts he exits actually at the peak of the bubble but his successor ben bernanke will have to pick up after him and one of the features of this housing bubble were so-called mortgage-backed securities in in subprime mortgages these were mortgages that had on the face of it a very very attractive rate of return right because they had a high interest rate they also had an adjustable rate meaning the rate could go up if market conditions warranted it [Music] why did it have a higher interest rate the subprime mortgage as well because there was a uh a lower credit quality so subprime mortgages were mortgages given to people who had lower credit quality who wouldn't have qualified necessarily for a loan in previous eras between 2004 and 2006 subprime mortgages rose from eight to twenty percent of mortgages eight to twenty percent of mortgages and in some parts of the us it was higher than twenty much higher actually than twenty percent now again these had an attractive rate of return and then mortgage-backed securities were were uh leveraged upon that based upon those those securities and were owned as assets by many of these financial institutions and the housing market is going up up up up now this is a graph of the median home price in the us between 1951 and 2020. now in the blue here you see the nominal price but we've had a lot of inflation so you know that can only tell us so much by the way look at that you could in the 1950s that's pretty wild you could buy a house purchase a house for under 25 000 okay now having 25 000 was a much bigger deal back then wasn't just something you could you know whip out uh but that's quite low so what really counts here is the the real what we call the real price which is adjusted for inflation look at this look at that that's from that movement is all in the early late 90s but really begins to pick up in early 2000s and it peaks in 2006 so it ends here november 2006 we have the peak the median home price alan greenspan begins to sense this housing bubble and and toward the end of his term alan greenspan is out in january of 2006. so alan greenspan leaves about here okay uh greenspan began to slowly raise rates okay so there are some raising rates after uh toward the second half of 2004. it's not that much i mean it's still the rates are still pretty low historically [Music] historically considered and then greenspan's out bernanke's in ben bernanke fed chairman from 2006 2006-2014 another very important fed chairman ben bernanke becomes fed chair and the housing market begins to to to show some signs of weakening and in early 2007 housing prices began to fall a bit bernanke replies you know responds to this by cutting interest rates so this is the beginning of bernanke's term tenure as fed chair a slight raising of rates in the first half of 2006 it's held fairly constant through the first half of 2007 and then after summer 2007 we see a a fairly rapid reduction in the federal funds rate by summer of 2008 that's where housing prices are okay by summer 2008 it's pretty clear this was a housing bubble and the problem for the financial system is the financial system had all of these mortgage-backed securities that were banking on speculating essentially on the hope on the expectation that these housing prices would continue to go up or at least would remain constant and now instead they are collapsing all right so by summer 2008 the housing market is collapsing you know perhaps this is why ben bernanke is trying to prop it up by lowering rates in the first half of 2008 and and after summer 2008 that's when the house of cards begins it begins to fall lehman brothers the fourth largest investment bank in the u.s collapses goes under it goes completely bankrupt in september lehman brothers was not bailed out they just went under okay and that was sort of the telltale sign whoa wait something's happening here okay fourth largest investment bank in the us goes completely under these were the top three goldman sachs morgan stanley merrill lynch merrill lynch is about to go under right at the last minute bank of america acquires merrill lynch but the dominoes are falling okay it's pretty darn clear this entire system is is collapsing let's see here subprime mortgages mortgage companies lenders home builders markets us economy world economy there goes the neighborhood and in october from october 2008 through february 2009 the stock market completely loses it look at this the peak so this was the the dot-com this is the dot-com bubble that's a dot-com burst this is the the stock market in the mid early to mid 2000s and then bam bam bam bam february 2009 the stock market hits 8 000. i remember this very well and it was a scary time like is this going to completely go under are we entering a new great depression well george w bush is president of the united states he's uh in his final months and uh he has a treasury secretary hank paulson and hank paulson um he's been treasury secretary since uh since 2006. hank paulson um he knows a bit about finance uh paulson has worked at goldman sachs since 1974 and in fact he was ceo of goldman sachs from 1999 through the year 2000 and while he was ceo of goldman sachs made millions and millions of dollars obviously okay now when he became treasury secretary he was required to liquidate his holdings in goldman sachs because that would be a conflict of interest and it was 600 million dollars worth so this is a man in the industry okay hank paulson swoops in at the peak of this crisis in october 2008 and tells congress you have you have no choice you've got to step in here and and bail out the banks and so this huge debate erupted and i remember i remember many of you remember this as well should the government bail out the banks and uh paulson hank paulson went to congress and said you have no choice if you don't do this if you don't do this the entire system is going to collapse and according to one congressman brad sherman he was told that that that the fear-mongering on this maybe maybe it was legit fear-mongering right the fear-mongering was so big that uh a few members of congress were told if you don't bail out the banks there will be martial law in america because the entire the stock market will crash to almost zero there will be civil unrest social unrest in the streets and the military will have to restore order like and you can look that up i should have had the video prepared it's okay not a big deal uh brad sherman look look that up it's crazy stuff um anyway huge debate interrupt i remember at the time i actually called my congressman in north carolina which is where i was living and i was like don't pass his bill reject this bill as a scam and uh the the congress passed it democrat control congress signed into law by a republican president george w bush and barack obama who was in the senate at the time who's running for president but he was in the senate also uh endorsed the the bailout but what was it a 700 billion dollar bailout of the u.s financial system the us treasury bought toxic assets okay especially mortgage-backed securities was a toxic asset basically an asset assets that were held by the banks that were junk okay total junk that were based upon uh just just faulty house of cards nothingness okay and and and and the veil had been lifted that this was that these assets were worth nothing they weren't assets at all and so that's why these banks were in financial institutions were were going under and if the bailout didn't happen in truth in fairness to hank paulsen it would have liquidated many of these companies not all of them but many of them this was called the troubled asset that's a nice way to put it yeah troubled asset troubled asset relief program oh relief program tart past pass of congress was signed by the president now even though allow for 700 billion by the end of it the treasury dispersed 426 billion 426 billion and eventually these financial institutions repaid so the treasury got all the money back but extraordinarily controversial not you know well one of the reasons why it was controversial look at this these are all the institutions that got tart money this is in millions of dollars millions of dollars you have citigroup all the big banks citigroup 50 billion dollars bank of america 45 billion dollars aig 40 billion dollars jp morgan 25 billion wells fargo 25 billion he had some non you know gm goldman sachs 10 billion whoa wait a second [Music] right seem to be a lot of conflict of interest here a lot of conflict of interest in uh in this in this uh in this debate and this uh bailout again it was all repaid but a lot of these companies have gone under not all of them but a lot of them moreover the new treasury secretary who oversaw the disbursement of many of these tarp funds under president obama who became president in january of 2009 was timothy geithner now timothy geithner was the president of the federal reserve bank of new york from 2003 to 2009 and while he was the head president of the new york fed he came very close to many of the wall street banks and hedge funds and was on record dining regularly with senior executives from citigroup goldman sachs morgan stanley jamie dimon he was very close to jamie dimon who was the uh and is the ceo of jpmorgan chase jamie dimon was also a member of the new york federal reserve board and uh actually while he was while geithner was head of the federal reserve bank in new york he was even approached about by citigroup about the possibility of becoming ceo and anyway a lot of just things that rub people the wrong way okay rub people the wrong way probably most infamous notorious case controversy was the bonus payments that aig paid out after receiving bailout money so aig was the american international group as a finance and insurance corporation and as you can see here from the chart they received 40 billion dollars of tarp funds so the taxpayer bailed them out 40 billion dollars in 2008 aig had posted a 62 billion dollar loss 62 billion dollar loss bailed out by a taxpayer 40 billion bucks nevertheless in march of 2009 aig paid out bonuses to their employees of 218 million dollars 218 million dollars bonuses to their to their top employees and oh man oh man that was that was a bit of a controversy if you all remember that back in 2009 when that happened and they weren't the only ones to be fair i mean a lot of these a lot of these firms paid out bonuses in 2009 despite taking taxpayer money so now did it succeed that was the stock market okay look at unemployment unemployment went up a lot unemployment was under five percent look at that bam by spring of 2009 it's and by summer 2009 it's hit double digits double digit unemployment how does bernanke respond remember benjamin bernanke is the uh chairman of the federal reserve cuts rates okay cuts rates now he had already started this as i noted before in order to prop up the system didn't work still collapsed anyway had to bail it out but look at that oh man from early 2009 through the rest of his term which ended in 2014 near zero interest rates and it wasn't just tarp that that was giving money to banks it was also federal reserve because to maintain these low interest rates the fed has is you know buying securities working on the open market open market operations and quantitative easing and so you know until we don't know because the federal reserve isn't audited ah audit the fed i'll make a video about that later federal reserve isn't audited so we don't know exactly what the fed does in its open market operations what we do know is that the big firms received a lot of money not just from tarp but also from the federal reserve okay to and but look at that those are very very low interest rates now bernanke's defense you might hear bernanke's defense look at the stock market look at the stock market there's the the low point early 2009 damn went right back up by by 2013 2014 it's where it was in 2007 2007. all right so stock market recovers what about inflation what about inflation oh actually not so bad look at that look at that actually a little bit of deflation in uh early 2009 but look at that not bad under three percent in and for part of bernanke's tenure under two percent bernanke actually argued that there you know maybe maybe he's been too hawkish on uh monetary expansion i remember at that time and i was one of them you know you looked at these low interest rates these are going to be major inflation in the value of the us dollar and it didn't happen the u.s dollar did not hyperinflate like many including yours truly to be fair thought might happen inflation remained under control now the price of gold went up a lot look at the price of gold 600 and just under 600 an ounce in 2006. by 2008 it was approaching a thousand and fell down to about seven hundred dollars an ounce in late 2008 and then look at that bam by uh 2012 we're looking at like 16 hundred dollars an ounce that's a big increase in price of gold what about unemployment how does bernanke and the fed do here well that's pretty bad okay so you know there's a dow it's good for your 401k uh unemployment though remained between 2009 and 2012 was over nine percent okay flirting with double digits that's quite a long time through through the end of 2011 housing market falls even further hits its low point by summer of 2011 but it needed to housing prices were inflated then after 2012 things began to stabilize okay and unemployment falls by the end of bernanke's term unemployment says below seven percent okay below seven percent and by the end of bernanke's term housing prices have begun to rise again look at that it's in 2014 and gdp growth took a big hit in 2009 no doubt about that and you know and that's not like spectacular growth nobody would look at that and be like oh wow the economy is like booming no but you know moderate growth modest growth and so bernanke especially by meaning in the media was portrayed as the hero the hero look at that save the economy ben bernanke saved the econ the global economy so why does everyone hate him not a bad headline pretty good headline it's actually an interesting article both of these articles you get he was made time person of the year by a lot of critics a lot of critics said that he mishandled it leading up to the crisis and and that bernanke had mishandled things by by not allowing these reckless banks to go under by essentially propping up the system okay and then a lot of people are also critical about his quantitative easing in his low interest rates saying hey he's creating is going to create another bubble or the value of the dollar is at risk can't have interest rates that low and and not cause inflation you can't have that much quantitative easing as it's called and and not have a severe fall in the value of the dollar moreover there were a lot of bank failures but they weren't any of the big banks they were smaller banks and so small banks community banks suffered a lot during bernanke's tenure and concentration among the big five banks asset concentration went up that by uh by 2010 the top five banks controlled something close to one half of all the bank assets in the united states it's jamie dimon well bernanke leaves in 2014 janet yellen becomes fed chair janet yellen was president of the new york excuse me president of the san francisco fed from 2004 to 2010 in a 2005 speech in san francisco yellen had uh had argued against deflating the housing bubble she said let's not mess with interest rates too much and the housing bubble is not too big of a deal she said the worst case scenario is that the housing bubble will be a quote bump in the road that was in 2005. a bit wrong about that she becomes fed chair in 2014 keeps interest rates very very low throughout the first half of her term but then in the second half slowly begins raising rates again now to keep in context it's still just a point and a half you know one and a half percent historically that's extremely low still but it was a bit of a an increase from bernanke yeah this is a long-term view so here's yellen from this point onward let's point over here's bernanke okay and under yellen's term uh look at the stock market right through through 2017 quite a lot of gains there gdp eh all right inflation under control under control through 2017 through 2018 under three percent under three percent inflation gold price look at the gold price went down after 2013. those warnings of inflation didn't turn out to be correct gold was still over a thousand dollars an ounce but but didn't exceed really thirteen hundred dollars an ounce now compared to what it used to be thirty five dollars an ounce that's a lot but but uh you know a bit of a fall from from the peak in 2018 jerome powell became the new fed chair nominated by donald trump and they've had a bit of a a testy relationship uh jerome powell by the way was uh before he joined the fed and he actually joined the board of governors in 2012 he was nominated to be chair by trump in uh in november 2017 during uh before he was before he joined the fed he was vice president at dillon reading company which is was an investment bank he also was a partner at the carlisle group which was another investment bank um powell and this is where him and trump got into some a bit of a public beef powell gradually raise raising rates all right now this is uh powell takes over around here so this is yellen this is yellen's raising rates and then powell and powell is raising rates pretty consistently through 2018 and uh trump was very very very critical and uh of this wanted telling pal it's time to lower rates we need the lower rates and uh caused quite a a a controversy about the role between the president and the fed chairman that i shall not go into here's the dow jones and you look at just going up up up flirting with thirty thousand a thirty thousand average there's home prices look at that we're back right where we were in 2006. gotta wonder is that a bubble is that a bubble or is that real it's all it's hard to tell a bubble it's hard to it's hard to know when you're in a bubble all right it's easier in hindsight but is that a bubble and yeah what was that that was a coronavirus panic the coronavirus panic of 2020 complete bottoming out because of the uh of worries about the virus from wuhan china stock market fell pretty rapidly from a peak of almost 29 000 points to 22 000 points pretty scary time obviously look at the unemployment rate just shot up from under 5 to almost 15 unemployment in the second quarter of 2020 gdp fell by 33 percent 33 fall in gdp has never seen anything like it now to be fair in the third quarter it went up about that much so it's been a wild year in 2020. look at how powell responded usually the fed now this is the target rate okay it's the upper limit the target rate because the fed will set rates and they'll do a range zero to zero point two five percent is what it currently is see uh this is so this is the upper limit usually the fed will change it by about a quarter of a percent look at it here just complete drop very very rapid unprecedented action by the fed and the fed to prevent liquidation just bought up all these assets now look at this this is total assets of the federal reserve federal reserve system so how much assets owned by the federal reserve when the federal reserve and open market operations purchases assets securities look at that from in early 2020 fed went from four and a half trillion dollars worth of assets which was historically very high up to over seven trillion dollars in assets we don't know what the impact of all of this is going to be between the super low interest rates because honestly this needed to happen interest rates were too low now we're back down to zero and a quarter and look at this balance sheet of the federal reserve we've never seen anything like this the dow jones recovered we're at 30 000 now okay but there are still real questions there's a more zoomed in graph of the long-term health of the economy the unemployment is what happened unemployment shot up and now it's been down back down again under seven percent there's gdp in the third quarter so pretty big rebound still for the year because of the first quarter still gdp was down about six percent this year gold price now exceeding exceeded at one point two thousand dollars an ounce but gold has gone up significantly look at gold at the beginning of twenty twenty sixteen hundred dollars an ounce and now between eighteen hundred and two thousand dollars an ounce yeah so uh those interest rates here's a long-term look at the federal funds rate this is from the uh the the early 90s okay to 2020 so this really is unprecedented just never seen anything like this these long term low interest rates started to rise here and then coronavirus came and just knocked it out but so currently purchasing power of the dollar a good that cost one dollar in 1945 now costs almost fifteen dollars okay if you compare 2020 to 2000 that's a big difference too 1447 and 950. i remember uh in 2000 when i was in high school my first job was at chick-fil-a and uh my my wage was five dollars and 25 cents and i remember the price of a number one combo a chicken sandwich large fry in a soda was 4.87 cents it's not 4.87 now it's like what like 8 bucks or something okay that's not huge inflation but it's noticeable it is noticeable inflation so we have had inflation in this early 21st century or less as it currently stands through 2017 the us dollar is still the majority reserve currency around the world you have the euro the pound sterling the yen but the us dollar is still dominant we'll see how long that lasts i i have real questions about about the uh about this the fed's balance sheet and these these low interest rate rates it will be interesting to see what happens to the u.s dollar in the 2020s maybe i'll make a video about it in 10 years we'll see but uh anyway i know this was a long video okay there was a lot to talk about but uh i hope you enjoyed it maybe in the in the description i'll make a little time stamp so people can skip to different sections but very good i'm going to record part c tomorrow it's getting late in the day i need to go home and uh but i'll record part c tomorrow i think you'll really like it just be a a bit of a look at the the trends uh since 1971 in the financial industry and in the us economy so we'll take a look at that uh until then uh god bless and uh thanks for watching bye

Channel: Professor Barth

Views: 2,905

Keywords: mortgage-backed securities, boom-bust cycle, Keynes, Hayek, Austrian school, Austrian economics, Lehman Brothers, Goldman Sachs, subprime mortgages, bailout, TARP, Troubled Asset Relief Program, bank bailout, toxic assets, AIG, American International Group, Timothy Geithner, Hank Paulson, Henry Paulson, Larry Summers, Lawrence Summers, Robert Rubin, Bill Clinton, George W. Bush, Barack Obama, Janet Yellen, junk asset, Morgan Stanley, Merrill Lynch

Id: OAq6-fxEsxc

Length: 45min 56sec (2756 seconds)

Published: Wed Dec 02 2020