In the spring of 2008, Pat and I met with our financial advisor at the Royal Trust Corporation of Canada in the downtown core of Calgary. I will never forget my argument with her. Looking at her computer screen and taking direction from the corporate model, she advised us that we were not taking enough risk and thereby not achieving optimal returns on our investments. I wanted to invest Pat’s Registered Retirement Savings Plan funds into a Guaranteed Investment Certificate which had very little risk. After some discussion, I ordered the advisor to do what I wanted and she did.
By the fall of 2008 many people, me included, were watching their retirement savings shrink at an alarming speed. Each account statement received in the mail was a horror story. One day Pat asked me, “So, tell me, how much money am I losing?” I replied that she might be the only person in Calgary not losing money. Contrary to professional advice, her funds, to the best of my memory, were sitting in a two year GIC paying 3.5% interest.
By telling this story I am not trying to make myself look like a financial genius. Although as a professional accountant I was quite knowledgeable about these matters, I had not made my decision based on any foresight. I simply made an ethical decision. Pat trusted me totally with her retirement funds and I did not feel that it would be right for me to take risks with her money. But I was invested in a balanced mutual fund and I paid the price. My memory is not clear on the hit I took during the Great Recession, but I think I lost around 35% of book value. I do remember that I was losing less than many of my colleagues who had invested more aggressively than I had.
Also, very fortunately, in February, 2008 I started a new job, the best job of my mediocre career. I was the first Chief Financial Officer of the newly formed Mental Health Commission of Canada. The organization’s financial situation was rock solid due to the Government of Canada providing the MHCC with $240 million of funding, transferred in cash in advance. Pat also had secure employment. The Great Recession took an enormous toll on many people, but not on us directly.
As part of the story of my life, I had been thinking about writing about the Great Recession for some time. I have now been motivated to do so at this time because of reading Lies My Teacher Told Me: Everything Your American History Textbook Got Wrong, the Ajijic Book Club selection for January, 2021. I want to express some thoughts I have about history using the Great Recession to illustrate my points.
I agree with much that James W. Loewen writes in Lies My Teacher Told Me. I agree with his basic thesis, that history textbooks are terrible and boring. I agree with his solution, make history textbooks much better, and make them interesting for students. And I agree with him that one way to do that is to link history with current events. But there is much more that I would like to say than this simple problem/solution approach.
Granted, significant improvements can and should be made. But my thesis is that history, including recent history, is something complex that cannot be reduced to its constituent parts, although try we must. And we live in an age of an overwhelming volume of information that is extremely difficult to condense in a meaningful way. And there is a subjective element in all history that cannot be eliminated but should be addressed. And there are value judgments that must be made, but cannot be made, and this paradox is unresolvable.
What many of us have learned about the Great Recession has probably come from watching films. I watched Too Big To Fail and The Big Short. I think they were well done, although I lack the expertise to make a definitive judgment.
I have read no books about the Great Recession. The publisher Penguin Random House offers “16 books… multiple viewpoints and inside looks that will help you understand the financial crisis of 2007-2008. Now 10 years after the crash, these books still offer valuable insight into a dark and confusing time.” Reading a little bit about these books reminds me of how little I know.
Wikipedia’s article on the Causes of the Great Recession includes a very interesting statement.
Economists surveyed by the University of Chicago rated the factors that caused the crisis in order of importance. The results included: 1) Flawed financial sector regulation and supervision; 2) Underestimating risks in financial engineering (e.g., CDOs); 3) Mortgage fraud and bad incentives; 4) Short-term funding decisions and corresponding runs in those markets (e.g., repo); and 5) Credit rating agency failures.
Most ordinary people will not read this article because it is beyond their ability to comprehend. These are matters which require experts, in this case economists. Consequently, most people will never perceive a problem with the above statement. But I do.
Economists have biases, as does everyone, which makes it very difficult for them to look at their own area of expertise critically. It is my assertion that an important factor, perhaps even the most important one, is missing from the above list. But it is easy to understand why economists failed to note this factor.
It was not just the Royal Trust model that failed in the spring of 2008. Every major economic model everywhere failed. No major player anywhere forecasted the Great Recession. In 2010 and 2011 I was reading articles that faced this grim reality. But such articles became increasingly more difficult to find in subsequent years. But the models were never fixed, possibly because they cannot be fixed. Economists have not found a way to accurately capture human behavior in economic models, yet that is a vital factor.
Economic theory itself has, rightly, been questioned in the aftermath of The Great Recession. There are impressive efforts to make improvements but they remain inadequate. And there remain significant unresolved controversies.
Human emotions are important and fearfulness and boldness play an important role in this story. In the year leading up to 2007 there was little fear and much boldness. The economy roared but behind the scenes shifts were occurring. In 2008 fear grew and by the fall of that year there was panic. In a coordinated effort, the G-20 intervened massively and quelled the fear. But it cannot be determined whether or not such actions actually prevented a Great Depression, although intuitively I think so.
It is not possible to determine who all the key players in this story were but any credible list would include Henry Paulson, Ben Bernanke, Timothy Geithner, Lehman Brothers CEO Richard Fuld, Goldman Sachs CEO Lloyd Blankfein, JPMorgan Chase CEO Jamie Dimon and, of course, President George W. Bush. We have access to their public actions and public statements but we have no access to their private thoughts and emotions which, surely, were significant. The objective facts do not tell the whole story. But the subjective experience of key players is inaccessible to us. There is no solution to this dilemma yet ignoring this problem seems problematic.
How fearful were these men? Can we ever imagine the President of the United States saying that he was scared shitless? I felt the fear in 2008. I felt it when watching the news and I felt it when talking with colleagues. But that fear faded away surprisingly quickly. Even the coronavirus crisis has not brought back a 2008 level of fear as we now see the Dow Jones Industrial Average soar to record levels.
If honest economic historians were to talk about the Great Recession today, the story would include something like this.
During the Great Recession there was great fear of a Great Depression, but it was prevented. However, solutions to the problems which caused the Great Recession were modest. The biggest single factor that ended the recession was the restoration of confidence. Ten years later, economic theory and economic models were little improved. The economic system continues to operate in a very fragile state. At any time, a cascade of unforeseen events could trigger an economic crisis which could lead to another recession or depression.
But it is important to not expose the fragility of the economic system. Doing so could trigger fear and that in turn could trigger another crisis. Honesty does not seem to be the best policy in this case. Of course, it seems that many economists are not being honest with themselves. Most have incentives to protect the status quo and their own place in the world.
The recent history of the Great Recession is incomplete, very incomplete. It seems to me that all history is necessarily incomplete. It seems to me that we should be informed by history but also aware of its limitations.