The 2008 Financial Crisis: Crash Course Economics #12


Jacob: Welcome to Crash Course Economics.
My name is Jacob Clifford. Adrienne: And I’m Adrienne Hill. And today
we’re going to do something a little different. We’re going to explore one moment in history
in depth. We’re going to talk about how the 2008 Financial Crisis happened and the government
response to it in the United States. Jacob: So let’s get started. [Theme Music] Jacob: The 2008 Financial Crisis was a big
deal. Ben Bernanke said it could have resulted in a 1930s style global financial and economic
meltdown with catastrophic implications. But what happened? Why did it happen? And why
aren’t we all huddled around burning trash cans forming a raiding party to go steal gas
from other tribes in the wasteland? By the way, if you’re actually doing that,
you probably didn’t hear we survived the financial crisis. Things got better. Seriously. Put
down your crossbows. Adrienne: To explain what happened, first
we have to do a quick explainer about mortgages. And you might already know this, but basically
someone that wants to buy a house will often borrow hundreds of thousands of dollars from
a bank. In return, the bank gets a piece of paper, called a mortgage. Every month, the homeowner has to pay back
a portion of the principle, plus interest, to whomever holds the piece of paper. If they
stop paying, that’s called a default. And whomever holds that piece of paper gets the
house. The reason I’m saying whomever holds the paper,
rather than the bank, is because the bank, the original lender, often sells that mortgage
to some third party. And the reason I say often is because this happens all the time.
I’ve had my house for nine months, and three different banks have had the mortgage. Traditionally, it was pretty hard to get a
mortgage if you had bad credit or didn’t have a steady job. Lenders just didn’t want to
take the risk that you might “default” on your loan, but all that started to change
in the 2000s. And before we go further, a quick aside here.
The story gets complicated fast, and it’s a fascinating story. But we’re trying to keep
it relatively simple. So, I’ve asked Stan if we could put some additional resources in the YouTube
description. And Stan said “Yes.” Thanks Stan! Anyway, back to our story. In the 2000s, investors
in the U.S. and abroad looking for a low risk, high return investment started throwing their
money at the U.S. housing market. The thinking was they could get a better return from the
interest rates home owners paid on mortgages, than they could by investing in things like Treasury
Bonds, which were paying very, very low interest. But big money, global investors didn’t want
to just buy up my mortgage, and Stan’s mortgage. It’s too much hassle to deal with us as individuals.
I mean, we’re pains. Instead, they bought investments called mortgage backed-securities.
Mortgage backed-securities are created when large financial institutions securitize mortgages.
Basically, they buy up thousands of individual mortgages, bundle them together, and sell
shares of that pool to investors. Investors gobbled these mortgage backed-securities
up. Again, they paid a higher rate of return than investors could get in other places and
they looked like really safe bets. For one, home prices were going up and up. So lenders
thought, worse case scenario, the borrower defaults on the mortgage, we can just sell
the house for more money. At the same time, credit ratings agencies
were telling investors these mortgage backed-securities were safe investments. They gave a lot of
these mortgage backed-securities AAA Ratings–the best of the best. And back when mortgages
were only for borrowers with good credit, mortgage debt was a good investment. Anyway, investors were desperate to buy more
and more and more of these securities. So, lenders did their best to help create more
of them. But to create more of them, they needed more mortgages. So lenders loosened
their standards and made loans to people with low income and poor credit. You’ll hear these
called sub-prime mortgages. Eventually, some institutions even started
using what are called predatory ending practices to generate mortgages. They made loans without
verifying income and offered absurd, adjustable rate mortgages with payments people could afford
at first, but quickly ballooned beyond their means. But these new sub-prime lending practices
were brand new. That meant credit agencies could still point to historical data that
indicated mortgage debt was a safe bet. But it wasn’t. These investments were becoming
less and less safe all the time. But investors trusted the ratings, and kept
pouring in their money. Traders also started selling an even riskier
product, called collateralized debt obligations, or CDOs. And again, some of these investments
were given the highest credit ratings from the ratings agencies, even though many of
them were made up of these incredibly risky loans. While, the investors and traders and bankers
were throwing money into the U.S. housing market, the U.S. price of homes was going
up and up and up. The new lax lending requirements and low interest rates drove housing prices
higher, which only made the mortgage backed securities and CDOs seem like an even better
investment. If the borrowers defaulted, the bank would still have this super valuable house, right?
No. Wrong. Let’s go to the Thought Bubble. Actually, let’s go to the Housing Bubble.
You remember bubbles, right? Rapid increases, driven by irrational decisions. Well, this
was a bubble, and bubbles have an annoying tendency to burst. And this one did. People
just couldn’t pay for their incredibly expensive houses, or keep up with their ballooning mortgage
payments. Borrowers started defaulting, which put more
houses back on the market for sale. But there weren’t buyers. So supply was up, demand was
down, and home prices started collapsing. As prices fell, some borrowers suddenly had
a mortgage for way more than their home was currently worth. Some stopped paying. That
led to more defaults, pushing prices down further. As this was happening, the big financial institutions
stopped buying sub-prime mortgages and sub-prime lenders were getting stuck with bad loans.
By 2007, some really big lenders had declared bankruptcy. The problems spread to the big
investors, who’d poured money into these mortgage backed securities and CDOs. And they started
losing money on their investments. A bunch of money. But wait. There’s more. There was another financial instrument that
financial institutions had on their books that exacerbated all of these problems–unregulated,
over-the-counter derivatives, including something called credit default swaps, that were basically
sold as insurance against mortgage backed securities. Does AIG ring a bell? It sold tens of millions
of dollars of these insurance policies, without money to back them up when things went wrong.
And as we mentioned, things went terribly wrong. These credit default swaps were also
turned into other securities — that essentially allowed traders to bet huge amounts of money on whether
the values of mortgage securities would go up or down. All these bets, these financial instruments,
resulted in an incredibly complicated web of assets, liabilities, and risks. So that
when things went bad, they went bad for the entire financial system. Thanks Thought Bubble. Some major financial players declared bankruptcy,
like Lehman Brothers. Others were forced into mergers, or needed to be bailed out by the
government. No one knew exactly how bad the balance sheets at some of these financial
institutions really were–these complicated, unregulated assets made it hard to tell. Panic set in. Trading and the credit markets
froze. The stock market crashed. And the U.S. economy suddenly found itself in a disastrous
recession. Jacob: So what did the government do? Well,
it did a lot. The Federal Reserve stepped in and offered to make emergency loans to
banks. The idea was to prevent fundamentally sound banks from collapsing just because their
lenders were panicking. The government enacted a program called TARP, the troubled assets
relief program, and which the rest of us call the bank bailout. This initially earmarked
$700 billion to shore up the banks. It actually ended up spending $250 billion bailing out
the banks, and was later expanded to help auto makers, AIG, and homeowners. In combination with lending by The Fed, this
helped stop the cascade of panic in the financial system. The treasury also conducted stress
tests on the largest Wall Street banks. Government accountants swarmed over bank balance sheets
and publicly announced which ones were sound and which ones needed to raise more money.
This eliminated some of the uncertainties that had paralyzed lending among institutions. Congress also passed a huge stimulus package
in January 2009. This pumped over $800 billion into the economy, through new spending and
tax cuts. This helped slow the free fall of spending, output and employment. Adrienne: In 2010, Congress passed a financial
reform, called the Dodd-Frank law. It took steps to increase transparency and prevent
banks from taking on so much risk. Dodd-Frank did a lot of things. It set up a consumer
protection bureau to reduce predatory lending. It required that financial derivatives be
traded in exchanges that all market participants can observe. And it put mechanisms in place for
large banks to fail in a controlled predictable manor. But, there’s no consensus on whether this
regulation is enough to prevent future crises. Jacob: So, what have we learned from all this?
Well, one key factor that led to the 2008 financial crisis was perverse incentives.
A perverse incentive is when a policy ends up having a negative effect, opposite of what
was intended. Like, mortgages brokers got bonuses for lending out more money, but that encouraged
them to make risky loans, which hurt profits in the end. That leads us to moral hazard. This is when
one person takes on more risk, because someone else bears the burden of that risk. Banks and lenders
were willing to lend to sub-prime borrowers because they planned to sell mortgages to somebody else.
Everyone thought they could pass the risk up the line. The phrase “too big to fail” is a perfect example
of moral hazard. If banks know that they’re going to be bailed out by the government, they
have incentive to make risky, or perhaps unwise bets. Former Fed Chairman, Alan Greenspan
summed it up really nicely when he said, “If they’re too big to fail, they’re too big.” Adrienne: When something terrible happens,
people naturally look for someone to blame. In the case of the 2008 financial crisis,
no one had to look very far because the blame and the pain was spread throughout
the U.S. economy. The government failed to regulate and supervise
the financial system. To quote the bi-partisan, financial crisis inquiry commission report,
“the sentries were not at their posts, in no small part due to the widely accepted faith
in the self-correcting nature of the markets, and the ability of financial institutions
to effectively police themselves.” The report placed some of the blame on the
years of deregulation in the financial industry. And blamed regulators themselves for not doing
more. The financial industry failed. Everyone in the system was borrowing too much money
and taking too much risk, from the big financial institutions to individual borrowers. The
institutions were taking on huge debt loads to invest in risky assets. And huge numbers of home
owners were taking on mortgages they couldn’t afford. But the thing to remember about this massive
systemic failure, is that it happened in a system made up of humans, with human failing.
Some didn’t understand what was happening. Some willfully ignored the problems. And some
were simply unethical, motivated by the massive amounts of money involved. I think we should give the last word today
to the financial crisis inquiry commission report. To paraphrase Shakespeare, they wrote,
“The fault lies not in the stars, but in us.” Thanks for watching. Crash Course Economics is made with the help
of all of these nice people. We’re able to stave off our own financial crisis each month,
thanks to your support at Patreon. You can help keep Crash Course free for everyone,
forever, and get great rewards at patreon.com. And given today’s subject, be exuberant, but
keep it rational.

Corprorate Governance bei der Zürcher Kantonalbank



Corporate Governance, das sind – allgemein gesagt – die wichtigsten
Grundsätze und Regeln, nach denen ein Unternehmen geführt wird. Und wie ist das bei der Zürcher Kantonalbank? Für sie werden diese Grundsätze vorgegeben: Einerseits von ihrem Eigentümer – dem Kanton Zürich.
Und zwar im Kantonalbankgesetz. Andererseits vom Bankrat und dem Bankpräsidium –
den wichtigsten Trägern der Corporate Governance der Bank. Aber auch die Aufsichtsbehörde FINMA und
der nationale Gesetzgeber machen Vorgaben. Doch schauen wir uns das genauer an: Die Grundlage der Bank sind ihre Mitarbeitenden. Sie betreiben das Geschäft in den verschiedenen Geschäftseinheiten,
die von der Generaldirektion geführt werden. Und der Bankrat wiederum leitet und beaufsichtigt die Generaldirektion. Der Bankrat hat 13 Mitglieder, die vom Kantonsrat gewählt werden. Drei von ihnen bilden das Bankpräsidium. Sie beaufsichtigen die Bank nach innen und vertreten sie nach aussen. Das Audit unterstützt sie in dieser Aufsichtsfunktion. Eine der wichtigsten Aufgaben des Bankrats ist es, Strategie und
Organisation der Zürcher Kantonalbank festzulegen. Der Bankrat ist aber unter anderem auch verantwortlich für
die Umsetzung des gesetzlichen Leistungsauftrags … … die Risikopolitik … … das Budget, den Geschäftsbericht und die Ausgestaltung des Rechnungswesens. Bankrat und Bankpräsidium sind ausserdem zuständig für
die Ernennung und Entlassung … … der Mitglieder der Direktion, der Generaldirektion und des Leiters Audit. Nach aussen wird der Bankrat vom Bankpräsidium vertreten, das auch
die unmittelbare Aufsicht ausübt und die Geschäfte des Bankrats vorbereitet. Doch wer beaufsichtigt Bankrat und Bankpräsidium? Das machen der Kantonsrat und seine Kommission für die Aufsicht
über die wirtschaftlichen Unternehmen – die AWU … … die Eidgenössische Finanzmarktaufsicht FINMA … … die Schweizerische Nationalbank SNB … … und die Revisionsstelle. Dieses Zusammenwirken und die gegenseitige Beaufsichtigung
der Träger der Corporate Governance … … sollen die Einhaltung des Rechts und die Wahrung
der berechtigten Interessen der Beteiligten sicherstellen. Und damit ist die Zürcher Kantonalbank gut für die
Herausforderungen der Zukunft vorbereitet.