What Caused the 2008 Financial Crisis? (w/ Richard Sylla) | Expert View | Real Vision™

In this second part of a two-part piece, Richard Sylla, Professor Emeritus of Economics at New York University, shares his idiosyncratic view about the factors that led to the credit crisis. He also provides a historian’s perspective about the potential pre-crisis signs that investors might want to look out for. And he discusses the extent to which history has or has not prepared us to deal with the next crisis.

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What Caused the 2008 Financial Crisis? (w/ Richard Sylla) | Expert View | Real Vision™

Transcript:
The Federal Reserve had added a huge amount of liquidity to the market in 1999. The Federal Reserve increased liquidity by buying up government bonds which increased the reserves of the ban king system, and then because it thought the ATMs might fail because they run on computers, they actually printed up huge amounts of cash and had trucks taking currency to the banks, so the banks would have the currency. The banks would pay for the currency by using the liquidity that the Federal Reserve had given them by buying government bonds. They would just convert the deposit at the Federal Reserve into vault cash, which is considered part of the monetary base. And so there was a huge amount of currency in all of the major financial institutions just in case the computers failed. So you know you might not be able to get your money out of the ATM, but you just go through the door of the bank and you can take your money out in cash by going up to the counter and saying I would like to withdraw a thousand or 10,000 or something like that. So the Federal Reserve actually loosened quite a bit in late 1999, and this seemed to make the stock market go up rapidly to new highs. You may not remember but the last thousand points on NASDAQ sort of occurred in October, November, December of 1999 when money was really loose because the Federal Reserve was preparing us for the Y2K disaster that didn't happen. And then when Y2K didn't happen in December and January 1st the year 2000, the Federal Reserve said OK, we’ve got to take away that liquidity we put in. And so they started taking the liquidity the Y2K liquidity back and sure enough the Dow Jones Average peaked in the middle of January 2000. I think the NASDAQ went on for a couple of months. But a lot of the gains of the dot com bubble were in the last few months. And I think they were fuelled by the Y2K injections of liquidity by the Federal Reserve. And when Y2K didn't happen the Federal Reserve removed its injections of liquidity, and that caused the stock market, which had been pushed up by the injections, to start going down. Markets turned down in January 2000. They didn't stop turning down until October 2002. So that was a big speculative movement and the market crashed about around 50 percent I think in 2000, 2002, but we didn't cause a recession. While there was a recession in 2001, it was one of the mildest on record -- it lasted for six months. So it wasn't a major damage to the economy from the dot com bubble, and that tells us something about the context. 1907 was bad, 1930-33. Those were bad times, because a lot of banks failed. But banks didn't fail at all after the dot com bubble crash. So one thing we learned about crises, is that they're much worse when the banks have problems. If the stock market crashes you know the market has its own life it goes up a lot and falls flat.

[ocgmbeverlyhills]

I really enjoy Real Vision. This interview doesn’t measure up to what I’ve come to expect from RV.
I tried to withdraw $10, 000 from my bank right after 2008 crisis and I was told that I needed to request it 1 month in advance. Luckily I have a Private Bank Account so my private banker had to intervene.

[jessem]

Real Vision has done some amazing interviews in the past, I always learn something. This is not one of those interviews. I have never heard anyone say anything about cash causing the dotcom bust which had nothing to do with the 2008 Financial Crisis.

[NIPSZ]

If we crashed 50% from where we are today, we would still be up 55.84% from where we were at the bottom of the 2002 crash if you would have held on. So basically, the 50% crash in 2002 was a moot point now that we are in the future and we are 211% higher than we were just 16 years ago!

[JajobaGasoil]

amazing! a short 3mins just change my view on whole thing!