It's been ten years since the Great
Recession and financial crisis, and three
lessons stand out. First, in the 21st
century, recessions are caused by asset
bubbles. The dot-com bubble produced one
in around 2000, and then a huge credit
bubble burst causing the recession in
2007 and 2008. Number two, the Fed is our
most potent weapon against these kinds
of recessions. The Fed flooded markets
with liquidity which produced trading,
and trading allows you to value
securities, whether they're mortgages or
bonds or stocks. And once you know that,
you know which financial institutions
are safe, which are dangerous and should
be avoided. Markets stabilized and the
recovery began. The Fed was our most
potent weapon. And number three, all roads
lead to housing. In every one of these
crises, housing markets are important, and
so it's important to have good housing
policy, but we haven't got that right. Too
much of our efforts are devoted to getting
people into homes when they're not
financially prepared to own those homes.
When they can't make the payments, the
mortgages are no good. When the mortgages
are no good, the mortgage-backed
securities are no good, and the financial
house of cards begins to tumble down.
Three lessons after 10 years: Recessions
are caused by bubbles, the Fed knows how
to fight them, but the housing market
starts them, and we don't need anymore.
