Commentary on Timeline of the Global Financial Crisis
Link to Detailed Timeline
The events of the past three years are unprecedented in almost all of our lifetimes. One needs to go back and look at how much was happening in such a short time to get an appreciation of how difficult it must have been to be in the hot seats of government, central banks and regulators, especially during the fall of 2008.
On the other hand, it is pretty easy, with 20-20 hindsight, to point to events that should have made it clear that something bad was on its way.
The timeline that is posted here on Riskviews is an amalgam from 5 or 6 different sources, including the BBC, Federal Reserve and Wikipedia. None of them seemed to be very complete. Not that this one is. My personal biases left out some items from all of the sources.
Let us know what was left out that is important. This timeline was created over a one year period and there was little effort to go back and pick up items that did not seem important at the time, but that later were found to be early signals of later big problems.
The reaction that I have had when I used this timeline to make a presentation about the Financial Crisis is that it is pretty unfair to go pointing fingers about actions taken during the fall of 2008. When you look at the daily earth shaking events that were happening, it is really totally overwhelming, even a year later. If the events that occured daily were spread out one per month, then perhaps a case could be made that “they” should ahve done better.
Going back much further, I am not willing to be quite so kind. This crisis was manufactured by collision of two deliberate government policies – home-ownership for all and deregulation of financial markets. That collision was preventable. Neither policy had to be taken to the extreme that it was taken – to what looks now like an absurd extreme in both cases.
And in addition, the financial firms themselves are far from blameless. Greenspan’s belief that the bankers were capable of looking out for their shareholder’s best interest was correct. They were capable.
Read the history. See what happened. Decide for yourself. Let me know what I missed.
Link to Detailed Timeline
Tags: Financial Crisis
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December 4, 2009 at 11:22 am
From Cliff Angstman
I think that you need to go back further in time than 2007 to get at the
ultimate causes of the recession. I contend that there were two underlying
causes:
1) The Fed raising real interest rates, knowing that this would create
defaults among adjustable rate mortgage holders, and especially for those
with subprime mortgages.
2) The increase in energy prices, along with the related increase in food
prices that also limited the ability of people to pay their mortgages.
With regards to the first item, I believe that the following .25 % FED
discount rate increases were unnecessary and contributed significantly to
the crisis:
Dec 13, 2005
Jan 31, 2006
Mar 28, 2006
May 10, 2006
June 29, 2006
There was no reason to raise interest rates further after the 5 major
hurricanes in the Gulf in the Fall of 2005.
Remember that many people took out adjustable rate mortgages in 2001-2003
when rates were decreased after 9/11. There was also a lot of relocation
after 9/11 as people moved from areas that had lost jobs to other areas to
find employment. Subprime mortgages were available at 6 % rates. By 2007
many had rates that were 12 % or higher. Projections of defaults on these
were widely reported in the financial press in 2005 and 2006, and the Fed
should have been aware at least of the risk of raising interest rates on
these mortgages.
From my notes of the time, subprime defaults became a problem in late 2006.
In September Ohio announced 10 % default rates; in December W. Virginia had
20 % default rates, Michigan 15 %, Alabama 12 %, and Missouri 10 %.
On the energy side, you have to consider that the Energy Policy Act of 2005
that was signed on August 8, 2005 was a very significant event. This caused
an increase in the planting of corn for ethanol which increased the demand
for diesel fuel to plant and harvest the corn starting in 2006. Midwest
diesel was at $2.34 a gallon when the bill was signed. It rose to $3.05 by
the following August, and to $4.62 by July of 2008. This in turn raised
both the cost of home heating and food prices significantly. Stocks of both
diesel and heating oil were very low, although gasoline was plentiful.
Refineries were not redesigned to produce enough diesel for several years.
The resulting change in crops produced and food prices were also significant
changes for the consumer. Corn for ethanol went from 6 % of the crop to 23
% in 2 short years. Soybean planting decreased by 11 % and was changed over
to corn. Fertilizer prices doubled in a few months in late 2007. Corn
prices rose from $2 per bushel until they peaked around $7.50 per bushel in
June of 2008. Heating oil peaked one month after corn prices. A drought
in Australia in 2006 may have contributed to the rising worldwide food
prices.
Both the rising costs of mortgage payments and the rising costs of food and
energy were taking place at the same time, squeezing excess cash flow from
the US consumer. Perhaps the FED missed the impact of the 30 % increases in
energy costs at the time they were raising interest rates in 2006.
A complete description of the crisis environment would include reference to
the food and fuel riots that took place in the developing world in late 2007
and early 2008.
February 08: Mozambique, Cameroon, Burkina Faso
March: Senegal, Cote d’Ivoire, Yemen
April: Egypt, Haiti
May: Somalia
How about adding Hurricane Katrina that caused $800 million of losses to
FNMA in Sept of 2005. It also shut down 2 million bpd of refinery capacity
and contributed to the shortage of diesel fuel.
On the later dates, the September 16, 2008 AIG downgrade really happened on
September 15. On September 16 (not Sept 17), the Federal Reserve agreed to
provide an $85 billion credit line in exchange for an 80 % ownership stake
in the company. Also, January 2007 headlines were that manufacturing jobs
fell for the seventh straight month.