Research summary
Research summary
Topic summary
Loose Fed policy and a global savings glut kept borrowing cheap and inflated the housing bubble.
Key research questions
- Investigate this contrarian claim about What caused the 2008 financial crisis?.
- Research this topic from public information: What caused the 2008 financial crisis?.
Important claims and supporting citations
Taylor's counterfactual model simulated housing starts rather than house prices, concluding that adhering to the Taylor rule from 2000 to 2006 would have prevented most of the 2002–2005 run-up in starts.
The only dissent at the June 2003 FOMC meeting came from Robert T. Parry, who advocated for a larger 50-basis-point rate cut rather than a tighter policy.
Ben Bernanke argued that the Taylor rule deviation disappears when using forecast inflation and output gap data instead of contemporaneous values, making policy appear appropriately calibrated.
The FOMC cut interest rates to 1 percent in June 2003 primarily as deflation insurance, noting concerns that core PCE had fallen from 1.78% in January 2003 to 1.47% nine months later.
Taylor estimated a statistically significant coefficient of 0.21 (s.e. 0.056) linking the US federal funds rate to foreign policy-rule deviations, suggesting an international monetary policy contagion channel.
A counterfactual study on monetary policy and the housing bubble indicates that Taylor's proposed counterfactual monetary policy would not have averted the housing market collapse.
Federal Reserve staff research (Dokko et al., 2009) found the 2003–2005 funds rate deviation was modest compared to pre-1987 standards and had a negligible impact on the rise in residential investment.
Between June 25, 2003, and June 29, 2006, the Federal Reserve raised the federal funds target rate 17 consecutive times, increasing it from 1.0% to 5.25%.
Competing explanations
A counterfactual study on monetary policy and the housing bubble indicates that Taylor's proposed counterfactual monetary policy would not have averted the housing market collapse.
The claim that the 2004 net capital rule change allowed investment banks to raise leverage from 12-15:1 to 30-40:1 is contested by the SEC, which argued the net capital rule applied to broker-dealers rather than holding companies.
Outstanding questions
- Loose Federal Reserve monetary policy and the global savings glut fueled the asset bubble
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Twierdzenia
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The SEC's 2004 Consolidated Supervised Entity (CSE) program brought the holding companies of Lehman Brothers,…
The SEC's 2004 Consolidated Supervised Entity (CSE) program brought the holding companies of Lehman Brothers, Bear Stearns, Goldman Sachs, Morgan Stanley, and Merrill Lynch under SEC supervision.
Labels: Source-linked, Low, known
Loose Federal Reserve monetary policy and the global savings glut fueled the asset bubble
The Federal Reserve kept the federal funds rate at 1.0 percent from June 2003 to June 2004, causing real short-term interest rates to remain negative and driving excessive credit expansion.
Labels: Inferred, High, investigate
AIG Liquidity Crisis and Derivatives Exposure
AIG Liquidity Crisis and Derivatives Exposure
Labels: Inferred, Low
FCIC Findings on Crisis Causes and Oversight
FCIC Findings on Crisis Causes and Oversight
Labels: Inferred, Low
Failure and Lending Practices of Washington Mutual
Failure and Lending Practices of Washington Mutual
Labels: Inferred, Low
Senate Levin-Coburn Investigation
Senate Levin-Coburn Investigation
Labels: Inferred, Low
The national US housing price boom commenced in 2000, approximately three years before the 1% federal funds r…
The national US housing price boom commenced in 2000, approximately three years before the 1% federal funds rate was implemented, rising almost 90% between 2000Q1 and 2006.
Labels: Inferred, Low
The only dissent at the June 2003 FOMC meeting came from Robert T.
The only dissent at the June 2003 FOMC meeting came from Robert T. Parry, who advocated for a larger 50-basis-point rate cut rather than a tighter policy.
Labels: Source-linked, Low
AIG's collapse was triggered by credit rating downgrades from S&P (to A-), Moody's, and Fitch following Lehma…
AIG's collapse was triggered by credit rating downgrades from S&P (to A-), Moody's, and Fitch following Lehman Brothers' bankruptcy, which required billions in cash collateral for AIG Financial Products' credit default swaps.
Labels: Inferred, Low, known
The ratio of US residential mortgage debt to GDP increased from roughly 45% in 2000 to 75% at its peak in 200…
The ratio of US residential mortgage debt to GDP increased from roughly 45% in 2000 to 75% at its peak in 2008, continuing to accumulate after housing prices started to fall in 2006.
Labels: Inferred, Low
Kahn (2010) found that when Taylor rule deviations are excluded from a housing price forecasting equation, th…
Kahn (2010) found that when Taylor rule deviations are excluded from a housing price forecasting equation, the housing bubble diminishes to a minor bump.
Labels: Inferred, Low
According to Taylor (1993), the actual federal funds rate deviated by as much as 3 percentage points below th…
According to Taylor (1993), the actual federal funds rate deviated by as much as 3 percentage points below the prescribed Taylor rule rate during the 2002–2005 period.
Labels: Inferred, Low
Peak subprime mortgage origination occurred in 2005 with approximately 2 to 3 million mortgages, more than a…
Peak subprime mortgage origination occurred in 2005 with approximately 2 to 3 million mortgages, more than a year after the Fed began raising interest rates.
Labels: Inferred, Low
Cross-country data from the Eurozone between 2001Q3 and 2006Q4 shows a strong positive correlation between Ta…
Cross-country data from the Eurozone between 2001Q3 and 2006Q4 shows a strong positive correlation between Taylor-rule deviations and housing booms, particularly in Greece, Ireland, and Spain.
Labels: Inferred, Low
Washington Mutual Bank was a $300 billion thrift institution that became the largest bank failure in United S…
Washington Mutual Bank was a $300 billion thrift institution that became the largest bank failure in United States history.
Labels: Inferred, Low, known
Taylor's counterfactual model simulated housing starts rather than house prices, concluding that adhering to…
Taylor's counterfactual model simulated housing starts rather than house prices, concluding that adhering to the Taylor rule from 2000 to 2006 would have prevented most of the 2002–2005 run-up in starts.
Labels: Source-linked, Low
The worst-performing subprime mortgage cohorts were originated in 2005 and 2006, when the federal funds targe…
The worst-performing subprime mortgage cohorts were originated in 2005 and 2006, when the federal funds target rate had already risen to between 2.25% and 5.25%.
Labels: Inferred, Low
The Senate Permanent Subcommittee on Investigations (PSI) Levin-Coburn inquiry attributed the crisis to four…
The Senate Permanent Subcommittee on Investigations (PSI) Levin-Coburn inquiry attributed the crisis to four specific causes through case studies of Washington Mutual, Moody's, S&P, Goldman Sachs, Deutsche Bank, and OTS.
Labels: Source-linked, Low, known
Taylor estimated a statistically significant coefficient of 0.21 (s.e.
Taylor estimated a statistically significant coefficient of 0.21 (s.e. 0.056) linking the US federal funds rate to foreign policy-rule deviations, suggesting an international monetary policy contagion channel.
Labels: Source-linked, Low
Year-over-year house price growth began decelerating in mid-2004 (notably in July 2004 on the Case-Shiller 10…
Year-over-year house price growth began decelerating in mid-2004 (notably in July 2004 on the Case-Shiller 10-city index), coincident with the conclusion of the 1% funds rate period.
Labels: Inferred, Low
A counterfactual study on monetary policy and the housing bubble indicates that Taylor's proposed counterfact…
A counterfactual study on monetary policy and the housing bubble indicates that Taylor's proposed counterfactual monetary policy would not have averted the housing market collapse.
Labels: Contested, Low
On March 16, 2011, the FDIC filed a lawsuit against three former Washington Mutual executives (Kerry K.
On March 16, 2011, the FDIC filed a lawsuit against three former Washington Mutual executives (Kerry K. Killinger, Stephen J. Rotella, and David C. Schneider) alleging extreme and historically unprecedented risk-taking in home loans.
Labels: Inferred, Medium, known
On June 25, 2003, the FOMC lowered its federal funds target rate by 25 basis points to 1.0 percent, holding i…
On June 25, 2003, the FOMC lowered its federal funds target rate by 25 basis points to 1.0 percent, holding it there for one full year until late June 2004.
Labels: Inferred, Low
Between June 25, 2003, and June 29, 2006, the Federal Reserve raised the federal funds target rate 17 consecu…
Between June 25, 2003, and June 29, 2006, the Federal Reserve raised the federal funds target rate 17 consecutive times, increasing it from 1.0% to 5.25%.
Labels: Source-linked, Low
The FCIC identified over-the-counter (OTC) derivatives as one of its nine primary conclusions, stating they f…
The FCIC identified over-the-counter (OTC) derivatives as one of its nine primary conclusions, stating they fueled mortgage securitization and expanded unchecked to trillions in notional value.
Labels: Source-linked, Low, known
The claim that the 2004 net capital rule change allowed investment banks to raise leverage from 12-15:1 to 30…
The claim that the 2004 net capital rule change allowed investment banks to raise leverage from 12-15:1 to 30-40:1 is contested by the SEC, which argued the net capital rule applied to broker-dealers rather than holding companies.
Labels: Contested, Low, known
The Financial Crisis Inquiry Commission (FCIC) concluded that the 2008 financial crisis was avoidable and res…
The Financial Crisis Inquiry Commission (FCIC) concluded that the 2008 financial crisis was avoidable and resulted from human action and inaction rather than natural causes or computer modeling failures.
Labels: Source-linked, Low, known
Ben Bernanke argued that the Taylor rule deviation disappears when using forecast inflation and output gap da…
Ben Bernanke argued that the Taylor rule deviation disappears when using forecast inflation and output gap data instead of contemporaneous values, making policy appear appropriately calibrated.
Labels: Source-linked, Low
The FOMC cut interest rates to 1 percent in June 2003 primarily as deflation insurance, noting concerns that…
The FOMC cut interest rates to 1 percent in June 2003 primarily as deflation insurance, noting concerns that core PCE had fallen from 1.78% in January 2003 to 1.47% nine months later.
Labels: Source-linked, Low
The FCIC found that several financial industry figures appeared to have acted illegally and referred individu…
The FCIC found that several financial industry figures appeared to have acted illegally and referred individuals for potential criminal prosecution.
Labels: Source-linked, High, known
Federal Reserve staff research (Dokko et al., 2009) found the 2003–2005 funds rate deviation was modest compa…
Federal Reserve staff research (Dokko et al., 2009) found the 2003–2005 funds rate deviation was modest compared to pre-1987 standards and had a negligible impact on the rise in residential investment.
Labels: Source-linked, Low
The SEC's 2004 regulatory amendments were implemented to comply with the European Parliament's Financial Cong…
The SEC's 2004 regulatory amendments were implemented to comply with the European Parliament's Financial Conglomerates Directive (2002/87/EC), which mandated global consolidated supervision for firms operating in Europe.
Labels: Source-linked, Low, known
The Levin-Coburn staff report released on April 13, 2011 was the only bipartisan congressional report on the…
The Levin-Coburn staff report released on April 13, 2011 was the only bipartisan congressional report on the financial crisis, as the FCIC divided along party lines.
Labels: Source-linked, Low, known
The FCIC explicitly identified five primary causal mechanisms: widespread regulatory failures, breakdowns in…
The FCIC explicitly identified five primary causal mechanisms: widespread regulatory failures, breakdowns in corporate governance, excessive borrowing and risk-taking, ill-prepared policymakers, and systemic breaches in accountability and ethics.
Labels: Source-linked, Low, known
The Office of Thrift Supervision (OTS) allowed Washington Mutual to issue hundreds of billions in high-risk O…
The Office of Thrift Supervision (OTS) allowed Washington Mutual to issue hundreds of billions in high-risk Option ARM mortgages knowing the bank used unsafe teaser rates and unrealistic borrower qualifications.
Labels: Inferred, Medium, known
The Levin-Coburn Senate investigation identified widespread conflicts of interest as the central driver of th…
The Levin-Coburn Senate investigation identified widespread conflicts of interest as the central driver of the crisis, detailing how firms exploited clients and credit rating agencies assigned AAA ratings to high-risk assets.
Labels: Source-linked, Low, known
AIG's collateral-call crisis began months before September 2008, with counterparties demanding billions by Ju…
AIG's collateral-call crisis began months before September 2008, with counterparties demanding billions by June, a large share of which was requested by Goldman Sachs.
Labels: Inferred, Low, known
Prior to the 2004 CSE rule change, Bear Stearns had already reported a gross leverage ratio of 28.0 with $226…
Prior to the 2004 CSE rule change, Bear Stearns had already reported a gross leverage ratio of 28.0 with $226.7 billion in total assets as of February 29, 2004.
Labels: Inferred, Low, known
The FCIC found that AIG senior management experienced severe governance breakdowns and did not understand the…
The FCIC found that AIG senior management experienced severe governance breakdowns and did not understand the terms and risks of the company's derivatives exposure.
Labels: Source-linked, Low, known
Bear Stearns operated under an internal financial statement guideline capping its net adjusted leverage ratio…
Bear Stearns operated under an internal financial statement guideline capping its net adjusted leverage ratio at no more than 15.0 rather than an explicit regulatory cap.
Labels: Inferred, Low, known
Republican Senator Tom Coburn concluded that unresolved and undisclosed conflicts of interest were at the hea…
Republican Senator Tom Coburn concluded that unresolved and undisclosed conflicts of interest were at the heart of the financial crisis rather than government housing policy.
Labels: Inferred, Low, known
The FCIC rejected claims that regulators lacked authority, noting that the SEC could have limited risky pract…
The FCIC rejected claims that regulators lacked authority, noting that the SEC could have limited risky practices and required more capital at major investment banks, and the New York Fed could have intervened in Citigroup's excesses.
Labels: Source-linked, Low, known