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Walking the line on GFC times

Fabrice Tourre, a former trader for Goldman Sachs, walks out of the United States Federal Court after being found liable for defrauding investors. AAP

Echoes of the Global Financial Crisis resonate while debate continues on the best way of dealing with its consequences, including the actions taken by the Europeans and Americans to counter its effects. Last week’s The Economist contained two articles, adjacent to each other, that reflect this: one was on the conviction of Fabrice “Fabulous Fab” Tourre, an executive at Goldman Sachs, found guilty of six counts of securities fraud, including one of “aiding and abetting” his former employer. The other is sparked by debate over the best person to replace Ben Bernanke as chair of the US Federal Reserve: Larry Summers or Janet Yellen.

These events, their connection with the GFC past and their implications for the future evolution of international economic conditions, can be better understood by reference to a timeline I have recently published. This stretches from the South Sea Bubble of 1720 to the present (or, at any rate, to March 2013 when the Cypriot euro lost its convertibility with euros from any other “eurozone” country). I began compiling this timeline at the height of the Global Financial Crisis, in October 2008, when I realised that events were occurring too fast for me to remember accurately, and that the crisis was the biggest disruption to world credit markets and the economies of the advanced nations since the Great Depression of the 1930s.

Creating a timeline

For over four years, I recorded those “breaking” events I deemed significant to understanding the scope of the crisis and its antecedents. I also scoured the news media and academic journals for earlier events and decisions that might now be seen as significant forerunners of the crisis, such as calls for the US to repeal the laws that had kept US merchant banks and retail banks separate since the 1930s. I read the investigative reports in The New York Times, The Economist, and The Wall Street Journal, as well as minutes of the deliberations of the US Federal Reserve, when they became public.

Is it possible to distinguish those events that were sufficient for the GFC to occur (that is, those events that occurred before the GFC, which were correlated with the GFC, and which perhaps influenced it) and those events that were necessary for the GFC to have occurred (that is, those events without which the GFC would not have occurred)? This is one of the purposes of the timeline, which makes such analysis possible.

In the timeline paper, I conclude that three conditions were necessary for the financial crisis in the US, which, in turn, resulted in the GFC:

  • First, the repeal on November 12, 1999, of the Glass-Steagall Act (which led to a vast increase in the market dominance of the major banks)
  • Second, the Congressional decision of 2000 that explicitly exempted derivatives from government regulation
  • Third, the US Security and Exchange Commission 2004 decision to relax the capital adequacy of Wall Street banks (which allowed them to expand their leverage threefold or more).

Read Robert’s timeline of the global financial crisis here.

Milestone moments

But what of the past week’s news items? Tourre appears in the timeline four times: twice in early 2007, once in late 2007, and once in July 2010 (when Goldman Sachs paid $550 million as a penalty). The US Securities and Exchange Commission charged Tourre in April 2010 and found him guilty on six of seven counts of securities fraud in August 2013. He is the first, and perhaps only, Wall Street banker to be found guilty of any charges having to do with the GFC. But he is small fry: others survive and prosper. (On September 15 it will be five years since the collapse of Lehman Brothers, an event that triggered the GFC; for many potential offences the statute of limitations will then apply.)

While Tourre is obscure, Summers is a high-profile academic and government official: the nephew of two economics Nobel Laureates, he has worked for presidents Reagan, Clinton and Obama; he was chief economist at the World Bank and later president of Harvard. He argued strongly for repeal of parts of the Glass-Steagall Act and against the regulation of the trade in derivatives.

He was one of a group who dismissed the prescient 2005 warning of ex-IMF chief economist Raghuram Rajan (who has just been appointed head of the Reserve Bank of India) that financial innovation had made the world riskier. Summers appears in July 1998, in February and November 1999 (when his lobbying to repeal the Glass-Steagall Act succeeded), in 2008 and in 2009.

The debate over who will replace US Federal Reserve chairman Ben Bernanke echoes the global financial crisis. AAP

Yellen is married to an economics Nobel Laureate. She is Vice Chairwoman of the US Federal Reserve, was previously the president and CEO of the San Francisco Fed, and worked for president Clinton. She appears three times in 2006 (as the San Francisco Fed president in the Fed’s Open Market Committee meetings), discussing the adverse consequence of a downturn in the US housing market, which she underestimated. She would be the first female head of the Fed and appears eminently qualified for the job.

Yellen has been the subject of a strong campaign in The Wall Street Journal and elsewhere, some of it quite sexist, against the possibility of President Obama appointing her as Bernanke’s replacement. (Any appointment would still need to be ratified by the Senate.) Summers is apparently high on President Obama’s list as a replacement, but he has been the subject of criticism in left-wing publications (The Huffington Post, The Guardian) as well as a petition by 20 Democrat Senators who prefer another Fed chair. Even Bette Midler has tweeted against his appointment, although whether this will help or hinder his chances remains to be seen.

President Obama might nominate Summers, Yellen, or perhaps a third person to replace Bernanke. If the eventual replacement was influential in the GFC, the reader can learn more about him or her from the timeline, as amended. The timeline is also following the evolution of institutions and banks in Europe: will the Eurozone survive intact, or is Cyprus the first splinter? Again, time will tell - and the timeline might foretell.

The value of a good timeline

The value of a good timeline is that it can identify and list events that did not appear significant at the time, but with the wisdom of hindsight are judged by the timeline’s compiler as very important, even crucial. In doing this, the timeline can help the reader look for other minor events that in time might be seen as important in understanding future occurrences: the reader learns to be more sensitive to the possibility of events helping to forecast future outcomes.

While the media often focus on personalities, small changes in laws, regulations or routines can be equally or more significant. As I have compiled this timeline, I have tried to include such events, both current and past. Since other events might exist that are not yet public, or not yet obviously significant, I continue to update the timeline. Suggestions are welcome.

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