10 Years After: Reflections on the Great Financial Crisis

In late July 2007, I dropped my completed economics dissertation off at the Yale University Hall of Graduate Studies, jumped into a car full of my belongings, and drove down to Charlotte, North Carolina - where I was starting my first ever full-time job, as an economist in Bank of America's Corporate Treasury. On paper, the team I was joining was responsible for tracking and forecasting economic indicators on behalf of core corporate functions: Corporate Investments, Corporate Funding, Balance Sheet Management, Corporate Risk, and others.

While that job description did end up being a key element of what I did during my 4 years at BofA, it was quickly overtaken by events. Understanding the economy was not, in the near term, as important as understanding what the heck was going on with financial markets.

Memory tends to blur distinct events. The pop of the housing bubble, the financial crisis, the Great Recession, and the stubbornly slow recovery have all blended together in the public mind, but I recall them as quite separate (albeit interrelated). The housing bubble was already 18 months in the rear-view mirror by the time I started at BofA, but the recession hadn't started yet. While the housing sector was shedding tons of jobs, the rest of the economy was growing at a decent clip - the kind of thing that economists typically expect when an overheated sector cools off and labor/capital shift to more productive sectors of the economy. Corners of the financial market (like the ABX index, which allowed investors to short subprime-backed mortgage bonds) were already flashing red, but most intelligent commentators agreed with Fed Chairman Ben Bernanke:

[W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.

During my few weeks on the job, that near-consensus started to fracture. On July 31 (my first day!), two Bear Stearns hedge funds which had invested in "high-quality" mortgage-backed assets declared bankruptcy. On August 6, a major mortgage originator (American Home Mortgage Insurance Corporation) followed suit. And most significantly, early on the morning of August 9, credit spreads in money markets (a fundamental element of financial market plumbing) widened dramatically. Distress had spread from a few obscure corners of the financial market into its heart. The great financial crisis had started.

The Great Recession wouldn't start until 5 months later. Layoffs were very low, job gains were ongoing (albeit at a slowing pace), and the economy grew at a moderate 2%. You still had plenty of respectable commentators arguing that the US economy could withstand financial distress. After all, a lot of them remembered the economy sailing through Black Monday (1987) and the EM financial crises of the mid- and late 1990s; the massive dot-com implosion of 2000 had resulted in only a mild recession. But a recession no longer seemed like an outlandish risk.

Of course, even among pessimists who thought an economic downturn was more likely than not, not many anticipated the depth of the Great Recession - much less the sustained spell of elevated unemployment and underemployment that persists (albeit much diminished) to this present day.

I'm setting a goal for myself to write more of these reflections during the next few years. If you have your own experiences of this period, please share them in the comments!